Pay for top executives at U.S. companies is about to get a lot more scrutiny under a new Securities and Exchange Commission rule.
Publicly traded firms will have to disclose more details about how senior managers are paid, including performance incentives, the SEC said on Thursday. The rule, which has been delayed for years, aims to clarify how a company’s financial performance impacts an executive’s pay, according to the agency.
Shareholder advocates have for years sought greater disclosure around executive pay, arguing that it should correspond to how well a firm is performing financially. Current disclosures, they say, don’t provide enough detail for investors about the incentives that often make up a large chunk of top managers’ overall compensation.
In one key change, companies will have to start detailing the link between executive compensation and the returns that their investors, and competitors’ shareholders make from holding stock. The metric, known as total shareholder return, would help investors determine a company’s performance, the SEC said.
“Today’s rule makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies,” SEC Chair Gary Gensler said in a statement.
Companies have expressed concerns that the new disclosures would give investors the wrong impression of their pay practices by misconstruing the links between company performance and executive compensation. About 30 compensation-related proposals went to a shareholder vote during the 2022 proxy season, according to Bloomberg Intelligence data.
The rule, which was required in 2010 by the Dodd-Frank Act and last proposed in January, would make companies put in financial filings:
- Metrics to quantify the relationship between financial performance and CEO pay;
- How a firm’s net income relates to top executive compensation; and
- Other financial performance factors.