U.S. regulators tell companies to justify CEO pay
Pay for performance rules passed by Securities and Exchange Commission
It soon won't be enough for U.S. corporations to state how much they pay their CEOs. The Securities and Exchange Commission is also demanding that companies justify the levels of compensation their top executives receive.
In rules passed today the SEC asks every listed company to reveal the relationship between executive pay and the financial performance of the company.
The SEC suggests either a narrative or a graph to explain to shareholders the relationship between company performance and CEO pay.
This is an enhancement of existing rules that already demand details of how much the top five executives earn.
In addition, companies must reveal:
- Compensation paid to other executives as an average of CEO pay.
- Shareholder return at the company compared to an industry index.
- A pay and performance chart giving data from the past five years
The rules are an outgrowth of the 2010 Dodd-Frank financial overhaul, which called for public companies to disclose the relationship between executive compensation and financial performance. Dodd-Frank was meant to address some of the excesses that led to the 2008 financial meltdown.
Although some companies report carefully on the revenue and performance goals they set for their CEOs, there is no uniform reporting to shareholders on how the top leaders earn their pay.
The 3-2 vote Wednesday by the SEC on the so-called "pay for performance" rules follows a 2013 proposal that would require companies to disclose the pay gap between CEOs and ordinary employees.
In a release supporting the new rules, SEC commissioner Luis Aguilar noted the rapid increases in CEO pay in the past decade.
"We've now seen too many instances where managers have received outsized compensation even when companies experience large losses and shareholders suffered," Aguilar wrote.
"Indeed, one 2013 study found that of the 25 highest-paid CEOs for each year in a 20-year period ending in 2012, 38 per cent were held by CEOs who led firms that were bailed out or crashed during the 2008 financial crisis, were fired by their firms, or had to pay settlements or fines related to fraud charges," he continued.
In recent months, there have been attempts by pension funds in Canada, who hold large blocks of stock and are influential investors, to rein in CEO pay.
At CIBC, shareholders voted against a $25-million retirement package for two senior executives.
At Barrick Gold, shareholders voted against a proposed executive compensation plan.
With files from the Associated Press