SEC Addresses Rulemaking Mandates on Compensation

The past year has seen its fair share of U.S. Securities and Exchange Commission rulemaking initiatives, in particular with respect to rules relating to compensation matters. During 2015, the SEC issued rules on three significant and highly anticipated compensation-related matters. The rules, two of which are proposed and one of which is final, address pay-for-performance disclosure, the clawback of erroneously awarded incentive-based compensation, and, perhaps most significantly, pay-ratio disclosure. Each of these rules was issued pursuant to outstanding rulemaking mandates imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Such rulemaking mandates were enacted in response to the economic recession in order to address excessive executive compensation. The rules require public companies to provide additional disclosure in their securities filings and to implement a new written clawback policy. Some of the underlying requirements of the rules have been met with fierce criticism. This article reviews the SEC’s rules on these major compensation matters and summarizes their likely impact on public companies.

Pay-Ratio Disclosure

The most controversial of the SEC’s compensation rules from 2015 was clearly the rule on pay-ratio disclosure. The final pay-ratio rule was adopted Aug. 5 by a 3-2 vote. The rule requires disclosure under new Item 402(u) of Regulation S-K of: the median of annual total compensation of all employees (other than the CEO); the annual total compensation of the CEO; and the ratio of these two amounts. The rule specifies how to determine the median employee and the annual total compensation. Disclosure of the ratio must be included in a public company’s annual reports, proxy and information statements and registration statements filed for its first full fiscal year commencing on or after Jan. 1, 2017. Accordingly, calendar year companies must provide the disclosure in their annual reports and proxy statements beginning in 2018 for their 2017 fiscal year. Emerging growth companies, smaller reporting companies and foreign private issuers are exempt from pay-ratio disclosure.