The SEC proposed rules today to overhaul compensation disclosures for top executives in annual proxy statements. By a 3-2 vote, the SEC opened the comment period on requirements for disclosure of pay versus performance.
Companies have disclosed executive compensation for decades but the new rules required by the Dodd-Frank Act would require greater detail in a format that could be compared across companies. The proposal calls for tables disclosing total compensation, annual shareholder return and a peer group comparison for the principal executive officer. Companies are able to disclose average pay for other executives.
It is expected to take at least another year before companies must change their disclosures. After the public comment period, the Commissioners at the SEC must vote on the rules again in order for them to take effect.
Dodd-Frank has already changed executive compensation in one way: The SEC now requires companies to put the pay packages of their top executives up for a nonbinding shareholder vote regularly – at least every three years.
The SEC is also discussing rules to require clawback for top employees of financial institutions when they engage in fraud or other misconduct. Congress required them as part of Dodd-Frank but the SEC has yet to issue the regulations implementing them. Most companies have implemented clawback provisions at this point, but few go as far as the regulations might go.
Section 304 of the Sarbanes-Oxley Act included a clawback provision for Chief Executive Officers and Chief Financial Officers. The law requires them to disgorge bonuses, profits from stock sales and other incentive or equity-based compensation for the prior 12 months if there are accounting irregularities. The SEC has received clawbacks because of enforcement actions against individuals in more than 30 companies on the basis of this law.