In August, the U.S. Securities and Exchange Commission (SEC) released new rules for executive compensation and performance disclosures from reporting companies. These rules were issued in accordance with the Dodd-Frank Act. The agency issued proposed rules in 2015 and reopened the public comment period in January. It announced the final rule in August.
Here are the basics of what reporting companies should know regarding the new requirements.
The new disclosure requirements
Under the new rule, SEC registrants must provide a table disclosing the most recent five years of executive compensation and performance. The table includes:
- Total shareholder returns (TSRs)
- TSRs for peer groups
- Net income
- One other performance measure of the company’s choosing
Additionally, registrants must describe the relationship between executive compensation and various performance measures. They must also provide a list of three to seven additional performance measures that they deem most important.
Which registrants are exempt?
These new disclosure requirements don’t apply to:
- Emerging growth companies
- Registered investment companies
- Smaller reporting companies
- Foreign private issuers
These companies may have different disclosure requirements.
The goal of these new requirements
According to the SEC chairman, the goal of the new disclosure requirements is to provide transparency for shareholders and potential investors while also giving the reporting companies flexibility in selecting the performance measures they deem most relevant. Companies can be more strategic in disclosing pay and performance measures. The requirements also provide investors with a more consistent basis for comparison amongst executive compensation policies in relevant peer groups.
The new requirements go into effect in December.