Over the past few years, executive compensation has become a hot button topic in corporate governance. Concerns that CEOs were not responsible to shareholders nor compensated according to real performance led to new Securities Exchange Commission (SEC) rules to require disclosures of this information, as well as shareholder input on such compensation. Because this area of corporate law is constantly changing, it’s important to have a corporate securities lawyer who can make sure that your company is complying with the most up-to-date regulations. Priori is committed to helping you find the right corporate securities lawyer to ensure your company is in compliance with current rules and stays abreast of ones coming down the pike.
The first SEC rule imposed to regulate executive compensation and related disclosures is the say-on-pay rule. Under this regulation, companies must disclose executive pay packages and give shareholders the chance to vote on whether or not they approve on the current package. The idea behind the say-on-pay vote is that executives will be more beholden to the shareholders and that executive pay will correlate more strongly with increases in shareholder value.
Since its institution, the say-on-pay policy has had a mixed reaction. Many people praise the rule, saying that it strengthens the checks between the board of directors and shareholders, ensuring that board members fulfill their fiduciary duty to determine fair executive pay. Critics, on the other hand, argue that this is simply a reactionary policy that does not effectively nor comprehensibly monitor compensation.
Pay Ratio Disclosure Rule
In August 2015, the SEC issued a final pay ratio disclosure rule that requires a public companies to disclose the median compensation of employees at the company, total CEO compensation, and ratio between CEO compensation and the median compensation of its employees. This rule brings SEC regulations on executive compensation disclosure in compliance with Section 953(b) of the Dodd-Frank Wall Street Reform and the Consumer Protection Act.
While emerging growth companies, smaller reporting companies, foreign private issuers will be exempt from this rule, other companies will be required to comply by fiscal year 2017. The intent of this new rule is to provide investors with more information to consider when exercising say-on-pay votes. Critics have argued that this rule will place undue burden on companies having to comply with this requirement and provide little real guidance to shareholders.
Pay-for-Performance Disclosure Rules
A new SEC rule has been proposed that will require even more disclosures on executive compensation. This pay-for-performance rule would require that public companies disclose the “actual pay” of its principal executive officer, the average “actual pay” of other named executive officers (like the CEO, CMO, etc), the company’s total shareholder return and total shareholder return for peer companies or competitors. The proposed rule has been suggested with the hopes of providing even more information on the relationship between executive compensation and actual performance.
Who Must Disclose
Not all companies must disclose executive compensation, of course, but these regulations will apply to most companies issuing stocks. Any company that is listed on a public exchange or issuing securities regulated by the SEC is required to submit relevant disclosures. As far as whose compensation must be disclosed, the SEC is very specific. The amount and type of compensation paid to its chief executive officer, chief financial officer and the three other most highly compensated executive officers must be made available.
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Do all employees have to be included to calculate median pay used in these disclosures?
No. There are some exceptions. Companies can exclude up to 5% of non-U.S. employees and any foreign employees whose compensation is protected by privacy laws from median pay calculations. In addition, these calculations only have to be redone every three years unless there has been a significant change in the employee population or compensation arrangements, so new employees can hypothetically be excluded.
On what date is the data for these disclosures collected?
The data can be collected on any date during the last three months of a company’s fiscal year.