In an era where TikTok stars outearn scores of CEOs of top earning publicly traded companies, executive compensation is no less important to the investing public or to companies striving to attract and retain top talent. Indeed, just this year the CEO of Starbucks received a 39% pay increase. Such soaring executive compensation has not escaped the notice of the SEC.

On January 27, the SEC once again raised the prospect of a “pay versus performance” rule. The rule, which was first proposed back in 2015 as required by Section 953(a) of the 2010 Dodd-Frank financial reform, would require public companies to report various executive compensation metrics for executive officers, including their CEO, in their proxy statements.  Though the rule never came to fruition in 2015, it has been reopened for comment in connection with “certain developments since 2015 when the proposing release was issued,” including “developments in executive compensation practices.”

The resurfacing of the rule accompanies complaints by investor advocates of mismatches between company performance and executive compensation. Proponents of the re-proposed rule hope it will facilitate more straightforward peer-to-peer comparison of compensation practices at public companies. On the other hand, opponents worry the rule could confuse investors and unnecessarily complicate disclosures.

To calculate executive compensation under the rule, companies would report in their proxy statements the amount “actually paid” to their executives. This amount would include equity awards when they are vested, as opposed to when they are granted. Further, it would exclude any changes in the present value of benefits from defined benefit and pension plans. The rule, as currently proposed, would also require companies to include charts in their proxy statements that compare executive compensation with total shareholder return, a metric that the SEC has lauded as consistently calculated, objectively determinable, and already required in securities filings.

The SEC’s supplemental release for this rule, however, expands the 2015 version of the rule’s disclosures to include three additional financial metrics and a separate chart listing key incentive plan metrics that drive compensation outcomes. To that end, the SEC is seeking comment on other performance and compensation metrics that should be utilized in these disclosures – including those linked to companies’ ESG-related goals.  Indeed, in connection with the reopening of comment on the rule, Commissioner Crenshaw stated that the SEC was “encourag[ing] commenters to provide insight into how ESG measures are utilized in executive pay packages” in order to “let the Commission know whether there is sufficient insight into the methodologies behind the measures on which ESG compensation targets are based.” The SEC is also requesting comment on whether smaller reporting companies, or SRCs, should be required to provide this information in their proxy statements.

The rule will be open to comments from the public for 30 days of its publishing in the Federal Register. In the meantime, publicly traded companies should consider preparing for the potential of heightened disclosure around executive compensation, as well as evaluating how they use performance on ESG-related achievements to set executive compensation levels.

Posted in Labor & Employment, Securities Law, Securities Regulatory
Tags: disclosure requirements, Dodd-Frank, Environmental_social and corporate governance, ESG, executive compensation, pay versus performance, publicly traded companies, SEC, securities filings
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Photo of Julia Alonzo Julia Alonzo

Julia Alonzo is a senior counsel in the Litigation Department with a focus on securities and corporate governance litigation. She is experienced in complex civil securities matters and parallel proceedings, including federal securities class actions, shareholder derivative lawsuits, internal investigations, and SEC investigations.

Julia Alonzo is a senior counsel in the Litigation Department with a focus on securities and corporate governance litigation. She is experienced in complex civil securities matters and parallel proceedings, including federal securities class actions, shareholder derivative lawsuits, internal investigations, and SEC investigations. In addition, Julia has represented numerous companies facing litigation relating to pending M&A transactions. Julia is also a member of Proskauer’s Asset Management Litigation team.

Julia writes on topics relating to all aspects of civil securities litigation. She regularly updates a definitive treatise on shareholder derivative law, Shareholder Derivative Litigation: Besieging the Board. She is also the co-editor of Proskauer’s Corporate Defense & Disputes blog, which focuses on federal securities litigation, as well as the Minding Your Business blog on commercial litigation.

Julia maintains an active pro bono practice, with a focus on asylum, child welfare issues, and housing law.

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Photo of Erica T. Jones Erica T. Jones

Erica Jones is an associate in the firm’s Litigation Department, where her practice encompasses a range of business, regulatory, and corporate governance matters. She has worked extensively in defense of securities class actions, derivative suits, and white collar criminal matters involving investigations by…

Erica Jones is an associate in the firm’s Litigation Department, where her practice encompasses a range of business, regulatory, and corporate governance matters. She has worked extensively in defense of securities class actions, derivative suits, and white collar criminal matters involving investigations by the SEC, DOJ, and state attorneys’ offices. In addition, Erica has advised on antitrust matters involving allegations of price fixing, restraint of supply, monopolization, group boycott, bid rigging, and collusion across industries that include agriculture and health care. She is also a member of the litigation team representing the Financial Oversight and Management Board in the Commonwealth of Puerto Rico’s bankruptcy proceedings.

Erica maintains an active, diverse pro bono practice, with a focus on immigration law, compassionate release and habeas corpus, and racial justice. She is an associate trustee with the Washington Lawyers’ Committee for Civil Rights and Urban Affairs and has been recognized by the District of Columbia Courts’ Capital Pro Bono Honor Roll. Erica was also one of a few women selected to be a Protégée for Proskauer’s Women Sponsorship Program, an initiative for high performing midlevel lawyers that champions emerging leaders.

Erica strives to stay on the cutting edge of developing areas of law through her membership in Proskauer’s COVID-19 Task Force, ESG Working Group, and Private Credit Litigation Group.  Erica’s ability to advocate for her clients is further bolstered by her recent Master’s Degree in Accounting from the University of North Carolina’s Kenan-Flagler Business School with a concentration in Financial Reporting and Analysis.

Prior to joining Proskauer, Erica was an intern with the Department of Justice in the Constitutional and Specialized Tort Litigation Section. Outside of her career in the law, Erica has been featured on Fox’s So You Think You Can Dance, teaching ballroom dance to students at Lighthouse for the Blind.

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