Tags: sec | chief executive | pay | financial performance

SEC's CEO Pay-For-Performance Rule Said to Omit Unvested Stock

Wednesday, 29 April 2015 12:25 PM

U.S. regulators are poised to roll out a long-awaited rule requiring companies to tell shareholders how much top executives earn relative to the performance of their shares.

But the new yardstick lays out only part of executives’ compensation. It excludes unvested stock grants and options that can form the biggest chunk of pay years down the road, according to two people familiar with the matter, who asked not to be named because the proposal hasn’t been made public.

The Securities and Exchange Commission has struggled for five years to issue the pay-for-performance provision, which was mandated in the 2010 Dodd-Frank Act amid public outrage over executive payouts that were awarded even as stocks tanked. Many companies have pushed for the narrower formula for defining compensation that paints a more modest picture of how much they pay their top executives.

“For more companies, it will end up being a lower number,” said Mark Borges, a principal at San Francisco-based Compensia, a compensation consultant. “You’re indicating how much that individual has pocketed during the year regardless of when those amounts were awarded.”

The plan would require companies to report in their proxy statements the trend in executive pay over several years, while also showing charts and possibly a narrative that lays out how the compensation compares with investment returns. Proxies are sent out ahead of company’s annual meetings, where shareholders get to vote on directors and weigh in on pay.

‘Actually Paid’

The SEC’s proposal hews closely to models used by companies such as General Electric Co., Exxon Mobil Corp. and the Coca-Cola Company, which for years have given investors supplemental disclosures with pay totals that strip out unvested stock and options as well as changes in pension value.

The law requires the SEC to develop a formula for the pay- for-performance comparison based on compensation “actually paid.” The SEC measure will focus on cash compensation and stock and options that have already vested or are available to be sold, according to the people.

Some pay consultants, including Farient Advisors LLC, have said that approach misses the mark, arguing that the current value of stock and options should be included because they would have been awarded for recent performance.

Companies will still make a total compensation disclosure in their proxies, tallying all the cash, stock, pensions and perks that an executive is awarded in the past year. Corporations have long complained that this disclosure overstates actual pay because it includes values that could change before they’re realized.

‘Big Proponents’

“We have been big proponents of realized pay because it shows the amounts that were actually turned into pay when stock options were exercised or restricted stock vests,” said Timothy Bartl, president of the Center on Executive Compensation, whose members include corporations such as McDonald’s Corp. and Exxon.

Exxon’s filings show that CEO Rex Tillerson made $18.3 million in “realized pay” in 2014, compared with total pay of $33 million. The lower figure excludes $21.4 million in restricted stock that he was awarded in 2014. Those shares aren’t available to Tillerson until 2019 at the earliest.

“The CEO will not actually receive the stock for many years in the future, and until such time the award remains at risk of forfeiture,” Exxon said in the proxy.

General Electric reported in its latest report that CEO Jeffrey Immelt’s realized pay in 2014 was $9.6 million, which it described as the amount of wages reported for taxes. Immelt’s total pay in 2014 was $37.3 million, according to the company’s proxy.

“We include realized pay and other information in our proxy that our investors have indicated is useful to them in making a say-on-pay voting decision,” Dominic McMullan, a GE spokesman, said in an e-mail.

Standardized Numbers

In some years, actual pay could be higher than total pay, depending on how many shares were awarded and how much the firm’s share price has appreciated, Borges said.

The SEC’s vote on Wednesday will open a comment period that will last at least 30 days. If the SEC later votes to adopt the rule, companies will have to standardize the pay figures they show in the proxy, said Carol Bowie, head of Americas research at Institutional Shareholder Services, which advises shareholders on executive pay and other matters.

“Right now we have just a jumble of companies’ individual approaches to this — how they calculate it and how they represent it graphically,” Bowie said. “So there is really no way for investors to make use of the information they are seeing in proxies in any kind of a systematic way.”

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U.S. regulators are poised to roll out a long-awaited rule requiring companies to tell shareholders how much top executives earn relative to the performance of their shares.
sec, chief executive, pay, financial performance
Wednesday, 29 April 2015 12:25 PM
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