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Yesterday, the Securities and Exchange Commission voted to propose rules to require companies to disclose the relationship between executive compensation and the financial performance of a company. The SEC believes that the proposed rules would provide greater transparency and allow shareholders to be better informed when they vote to elect directors, and in connection with advisory votes on executive compensation.

SEC Chair Mary Jo White said: "These proposed rules would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance ... The proposal would require enhanced disclosure that can be compared across companies.”

The proposed rules would implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and would require companies to disclose the following:

  • Executive compensation actually paid for the principal executive officer, which would be the total compensation as disclosed in the summary compensation table already required in the proxy statement with adjustments to the amounts included for pensions and equity awards; the amount disclosed for the remaining named executive officers identified in the summary compensation table would be the average compensation actually paid to those executives
  • The total executive compensation reported in the summary compensation table for the principal executive officer and an average of the reported amounts for the remaining named executive officers
  • The company’s total shareholder return on an annual basis, using the definition of total shareholder return (TSR) included in Item 201(e) of Regulation S-K, which sets forth an existing requirement for a stock performance graph
  • The TSR on an annual basis of the companies in a peer group, using the peer group identified by the company in its stock performance graph or in its compensation discussion and analysis

The disclosure would be required for the last five fiscal years, except that smaller reporting companies would only be required to provide disclosure for the last three fiscal years. The proposed rules would apply to all reporting companies except for foreign private issuers, registered investment companies and emerging growth companies, which are exempt from the statutory requirement.

Read more about the SEC's proposed rules such as the executives and companies covered as well as the SEC's plan to determine executive compensation actually paid here.

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