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Statement at an Open Meeting on Pay Versus Performance Disclosures

Commissioner Luis A. Aguilar

April 29, 2015

Today, as part of a series of Congressionally-mandated rules to promote corporate accountability, we consider proposed rules to put a spotlight on the relationship between executive compensation and a company’s financial performance.[1] It is well known that the compensation of corporate executives has grown exponentially over the last several decades, and continues to do so today.[2] It is also commonly accepted that much of that growth reflects the trend towards equity-based and other incentive compensation, which is thought to align the interests of corporate management with the company’s shareholders.[3] Specifically, the idea is that stock options, restricted stock, and other incentive-based compensation encourages management to work hard to improve their company’s performance, because managers will share in the wealth along with shareholders when stock prices rise.[4]

Nonetheless, we’ve now seen too many instances where managers have received outsized compensation even when companies experience large losses and shareholders suffered. Indeed, one 2013 study found that of the 25 highest-paid CEOs for each year in a twenty-year period ending in 2012, 38% 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.[5] Other studies have found a significant disconnect between the financial performance of companies in the S&P 1500 and the incentive compensation of their executives.[6] In fact, a recent study found that in a three-year period after the 2008 financial crisis, while overall stock-based performance declined for companies in the S&P 1500, total CEO compensation during this same period increased.[7]

Today’s proposed rules, as required by Section 953(a) of the Dodd-Frank Act, are designed to shed light on the relationship between executive pay and company performance by providing shareholders with additional information to enable them to better determine whether their companies are appropriately and responsibly setting executive pay.[8] These rules attempt to fulfill this goal by requiring companies to provide shareholders with a clear description of the relationship between compensation actually paid to the companies’ senior officers — the so-called “named executive officers” — and the financial performance of the issuers.[9]

Although the Commission’s current disclosure rules already require certain summary executive compensation information to be disclosed to shareholders,[10] today’s proposal will supplement this disclosure by providing for executive compensation information to be calculated and presented in different ways — so as to highlight the relationship between a company’s executive compensation practices and its financial performance.[11] More specifically, the proposed rules will require that registrants present in a proxy or information statement a table that includes, for each of the company’s last five years,[12] the following:

  • First, the executive compensation actually paid to the company’s principal executive officer and separately, as an average, the compensation paid to the other named executive officers;[13]
  • Second, the financial performance of the company and, in addition, either a recognizable industry or line-of-business index and/or an identified peer group, calculated by using cumulative total shareholder return;[14] and
  • Third, for comparison purposes, the summary compensation data that is already disclosed under current rules for the principal executive officer and the other named executive officers.[15]

In addition, the proposed rules require registrants to provide a clear description of the relationship between the executive compensation actually paid and the financial performance of the company. However, registrants are provided flexibility to choose how best to present this relationship, such as in a narrative form, a graphic form, or both.[16]

Today’s rules also take an important step forward in furthering the usability and comparability of executive compensation disclosures by requiring that “pay versus performance” information be provided in an interactive data format using XBRL.[17] This is a new development in the corporate governance context that has long been discussed. Indeed, in its 2010 Concept Release on the U.S. Proxy System, the Commission stated that if issuers provided reportable items in interactive data format, “shareholders may be able to more easily obtain specific information about issuers, compare information across different issuers, and observe how issuer-specific information changes over time as the same issuer continues to file in an interactive data format.”[18] More recently, in 2013, the Commission’s Investor Advisory Committee recommended that the Commission prioritize tagging of data that would provide increased transparency with respect to corporate governance issues, including portions of the proxy statement that relate to executive compensation.[19] Although data tagging is already required in other contexts, today’s proposed rules would, for the first time, implement an interactive data format into a Commission rulemaking involving the proxy process and corporate governance.[20]

It is important to note what today’s proposed rules do not do: they do not attempt to direct or otherwise define what an executive should earn.[21] That is left to a company’s board of directors and senior management. Instead, today’s proposed rules focus on providing increased transparency on the linkage between executive compensation and the company’s performance.[22]

Today’s pay versus performance proposed rules go to the heart of good corporate governance. Indeed, one of the principal elements of effective corporate governance is accountability. Accountability means that actions have consequences, and good corporate governance demands that boards and company management be held accountable for the decisions they make. A company’s executive compensation practices can demonstrate whether senior management will be held accountable for their performance. When it comes to executive pay, shareholders benefit when good performance is rewarded, and when poor performance is not.

Good corporate governance also reminds a company’s directors that they do not answer to management, but rather work for the true owners of the public corporation — the company’s shareholders. To that end, the disclosure proposed today can better inform shareholders and give them information needed to hold directors accountable for the executive compensation decisions that they make.[23] In this context, company boards must be vigilant in ensuring that corporate pay practices adequately reflect the performance of their executives.

Many boards have already adopted strong corporate governance measures and do a good job in representing the interests of shareholders. Others can do better — much better. For those boards in particular, the public disclosure of “pay versus performance” information should serve to dissuade them from being complacent and simply rubberstamping the salaries of their executives.[24] This concept of motivating boards to action is critical to good corporate governance, because when boards allow themselves to be dictated to by management, the harm to shareholders can be devastating.[25]

Ultimately, this proposing release is a positive step in the direction of better corporate governance — through increased transparency and greater accountability — and is a step forward in ensuring that a company’s management and directors are acting in the best interests of shareholders.


In conclusion, I will support today’s rules as proposed. As with all proposing releases, this proposing release includes many requests for comment regarding the approach that the Commission has decided to take to implement the statutory mandate.[26] Public comments are an important part of the rulemaking process, and I especially encourage investors to review and submit their thoughts on the proposed release.

Lastly, I would like to thank the staff from the Division of Corporation Finance, the Division of Economic Research and Analysis, and the Office of the General Counsel for their hard work on this rulemaking. I appreciate the important work you do to protect investors.

[1] See Pay Versus Performance, SEC Release No. 34-74835 (Apr. 29, 2015), available at (hereinafter “Pay Versus Performance Proposing Release”). Today’s proposed rules are another step forward within a series of Congressionally-mandated rules that are intended to promote corporate accountability by making executive compensation decisions more transparent to shareholders. The Commission has already adopted some of these rules. For example, on January 25, 2011, the Commission adopted rules concerning shareholder approval of executive compensation and "golden parachute" compensation arrangements to implement Section 951 of the Dodd-Frank Act (known as “say-on-pay” rules). See Shareholder Approval of Executive Compensation and Golden Parachute Compensation, SEC Release No. 33-9178 (Jan. 25, 2011), available at On June 20, 2012, the Commission adopted rules directing the national securities exchanges to adopt certain listing standards related to the compensation committee of a company's board of directors as well as its compensation advisers, as required by Section 952 of the Dodd-Frank Act. See Listing Standards for Compensation Committees, SEC Release No. 33-9330 (June 20, 2012), available at Other significant executive compensation disclosure rules have yet to be adopted. These include, for example, the ratio between the compensation of the chief executive officer and the total annual compensation of its average worker (known as “pay ratio”). See Dodd-Frank Act Section 953(a), 124 Stat. at 1903-04; and reports by large investment managers of their advisory shareholder votes about executive compensation and golden parachutes (known as “say-on-pay” votes). See Dodd-Frank Act Section 953(b), 124 Stat. at 1904. Just this past February 2015, the Commission proposed rules to require companies to disclose whether they permit employees and directors to hedge their companies’ securities. See Disclosure of Hedging by Employees, Officers and Directors, SEC Release No. 33-9723 (Feb. 9, 2015), available at I hope that the Commission will move promptly to adopt these additional disclosure rules to provide maximum transparency to investors about companies’ executive compensation decisions.

[2] See Lucian Bebchuk and Yaniv Grinstein, The Growth of Executive Pay, Harvard John M. Olin Center for Law, Economics, and Business (Apr. 2005), available at; Lawrence Mishel and Natalie Sabadish, CEO Pay in 2012 Was Extraordinarily High Relative to Typical Workers and Other High Earners, Economic Policy Institute (June 26, 2013), available at; Executive and director compensation 2014, HayGroup, available at

[3] See Lucian Bebchuk and Yaniv Grinstein, The Growth of Executive Pay, Harvard John M. Olin Center for Law, Economics, and Business (Apr. 2005), available at; Institutional Shareholder Services Inc., 2013 Corporate Governance Policy Updates and Process: Executive Summary (Nov. 16, 2012), available at (“Stock-based compensation or open market purchases of company stock are intended to align executives' or directors' interests with shareholders.”).

[4] See Jean Tirole, The Theory of Corporate Finance, at 23 (2006) (“Another aspect of the design of incentive compensation is the (non)linearity of the reward as a function of performance. Managers may be offered stock options, i.e., the right to purchase at specified dates at some ‘exercise price’ or ‘strike price.’” Whereas “[s]traight shares provide management with a rent even when their performance is poor, while stock options do not.”)

[5] Sarah Anderson, Scott Klinger, and Sam Pizzigati, Executive Excess 2013: Bailed Out, Booted, and Busted, Institute for Policy Studies (Aug. 28, 2013), available at In addition, the development of the golden parachute has often meant that, in practice, certain executives have been rewarded for outright failure. Eric Dash, Outsize Severance Continues for Executives, Even After Failed Tenures, The New York Times (Sept. 29, 2011) at B1, available at To give just a few examples, in 2006, Viacom gave roughly $85 million in severance pay to its then CEO after just nine months in the top job. See Jeff Green, Jumbo Severance Packages for Top CEOs Are Growing, BloombergBusinessweek (June 6,2013), available at; Andy Fixmer, Viacom to Pay Ousted Chief Tom Freston $84.8 Million, Bloomberg (Oct. 18, 2006), available at In addition, the former CEO of CVS received a severance package worth $185 million when he left in early 2011, even though his company’s net earnings had declined the prior year. See Nathaniel Parish Flannery, Executive Compensation: The True Cost of the 10 Largest CEO Severance Packages of the Past Decade, Forbes (Jan. 19, 2012), available at, As many commenters have observed, safety nets of these sizes can undermine management incentives from the moment they are granted. See, Paul Hodgson and Greg Ruel, Twenty-One U.S. CEOs with Golden Parachutes of More Than $100 Million, GMI (Jan. 2012), available at; Lucian A. Bebchuk, Alma Cohen, and Charles C.Y. Wang, Golden Parachutes and the Wealth of Shareholders, 25 J. Corp. Fin. 140-154 (Apr. 2014), available at (“Our findings raise the possibility that, despite their positive effect on facilitating some value-increasing acquisitions, [golden parachutes] have, on average, an overall negative effect on shareholder wealth. This average negative effect could be due to GPs increasing managerial slack and/or by GPs providing executives with incentives to go along also with some acquisitions that do not serve shareholder interest.”). See, also, Sanjay Sanghoee, Golden Parachutes: Why it’s bad business, Fortune (Apr. 11, 2014), available at

[6] See Eric Chemi and Ariana Giorgi, The Pay-for-Performance Myth, Bloomberg Business (July 22, 2014), available at . See also Ron Ashkenas, Rethinking the Assumptions Behind Executive Pay, Harvard Business Review (June 22, 2010), available at (citing to a study that by Graef Crystal that found that “there is no relationship whatsoever between CEO compensation and shareholder returns: The compensation of some CEOs went up while their stock performance went down and vice versa.”). Even though this study also suggests that in some cases shareholder returns could go up while CEO compensation does not follow, the overall trend is that executive compensation has increased exponentially relative to stock market gains and the pay of the average worker. See Lawrence Mishel and Alyssa Davis, CEO Pay Continues to Rise as Typical Workers are Paid Less, Economic Policy Institute (June 12, 2014), available at (noting that “[f]rom 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period.”). A separate 2014 study found that companies in the S&P 1500 Index whose CEOs were in the top ten percent of those CEOs who received higher incentive pay relative to their peers had experienced significant negative returns in the year following their receipt of such compensation. See Michael J. Cooper, Huseyin Gulen, P. Raghavendra Rau, Performance for pay? The relation between CEO incentive compensation and future stock price performance (Oct. 2014).

[7] See Fang Yang, Burak Dolar and Lun Mo, CEO Compensation and Firm Performance: Did the 2007-2008 Financial Crisis Matter? J. of Acct. & Fin. (2014), available at (looking at data from 2008 to 2011, this study found “a significantly negative relationship between total compensation and stock-based performance, indicating that in the period after the crisis while overall stock-based firm performance declined, total CEO compensation (which includes cash payments and stock options), in fact, increased.”). See also Stanford GSB Staff, When CEOs Are Paid for Bad Performance, Insights by Stanford Business (Feb. 1, 2005), available at

[8] In fact, a Senate Committee report to the Dodd-Frank Act describes the following about Section 953(a): “Transparency of executive pay enables shareowners to evaluate the performance of the compensation committee and board in setting executive pay, to assess pay-for-performance links and to optimize their role of overseeing executive compensation through such means as proxy voting.” See The Restoring American Financial Stability Act of 2010, Sen. Rep. 111-176, at 135, available at

[9] A company’s “named executive officers” (“NEOs”), include the following (i) principal executive officer or someone acting in a similar capacity (“PEO”); (ii) principal financial officer or someone acting in a similar capacity (“PFO”); (iii) the registrant’s three most highly compensated executive officers other than the PEO or PFO who were serving as executive officers during the last completed fiscal year; and (iv) up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not service as an executive officer of the registrant at the end of the last completed fiscal year. See Item 402(a)(3) of Regulation S-K.

[10] See e.g., Item 402 of Regulation S-K, which contains requirements for the disclosure of executive compensation.

[11] See Pay Versus Performance Proposing Release, at Section IV.A. Economic Analysis/Background.

[12] For smaller reporting companies, this table will only include three years of data. See Instructions to Item 402(v)8.

[13] The proposed rules define executive compensation that is “actually paid” as total compensation as disclosed in the Summary Compensation Table, with modifications to the amounts disclosed for pension benefits and equity awards. See Pay Versus Performance Proposing Release, at Section 229.402(v)(2)(iv) Executive Compensation.

[14] See Pay Versus Performance Proposing Release, at Section 229.402(v).Instructions to Item 402(v)7.Peer Group (stating that “[f]or purposes of determining the total shareholder return of the registrant’s peer group, the registrant shall use the same index or issuers used for purposes of Item 201(e)(1)(ii) or, if applicable, the companies it uses as a peer group for purposes of Item 402(b). If the peer group is not a published industry or line-of-business index, the identity of the issuers comprising the group must be disclosed.”) See also Cumulative total shareholder return is defined in Item 201(e) of Regulation S-K.

[15] See Pay Versus Performance Proposing Release, at Section 229.402(v)(2)(iv) Executive Compensation. See also Summary Compensation Table disclosure at Item 402(c)(2) of Regulation S-K.

[16] See Pay Versus Performance Proposing Release, at Section II.B.2.Proposed Amendment/New Item 402(v) of Regulation S-K/Format and Location of Proposed Disclosure (stating, for example, that the “disclosure about the relationship would follow the table and could be described as a narrative, graphically, or in a combination of the two.”)

[17] The proposing release requires data tagging of information provided in the table of pay versus performance data, including footnotes to the table, and also of the description to disclose the relationship between executive compensation actually paid and registrant performance. See Pay Versus Performance Proposing Release, at Section II.B.2 Proposed Amendment/ New Item 402(v) of Regulation S-K/Format and Location of Proposed Disclosure. As today’s proposing release notes, “[d]ata becomes interactive when it is labeled or ‘tagged’ using a computer markup language such as XBRL that software can process for analysis.” See Pay Versus Performance Proposing Release, at Section II.B.2. Proposed Amendment/New Item 402(v) of Regulation S-K/Format and Location of Proposed Disclosure. For these purposes, XBRL refers to eXtensible Business Reporting Language. The proposing release also notes that “[a]nother possible alternative for providing the information in interactive data format would be Inline XBRL, which would allow registrants to file the required information and data tags in one document rather than requiring a separate exhibit for the interactive data. Commission rules and the EDGAR system do not currently allow for the use of Inline XBRL. To the extent that a determination is made in the future to accept Inline XBRL submissions, we may consider revisiting the format in which this disclosure requirement is provided.” See Pay Versus Performance Proposing Release, at Section II.B. Proposed Amendment/ New Item 402(v) of Regulation S-K.

[18] See Concept Release on the U.S. Proxy System, SEC Release No. 34-62495 (July 14, 2010) at 99, available at

[19] See SEC Investor Advisory Committee, Recommendations of the Investor as Owner Subcommittee

Regarding the SEC and the Need for the Cost Effective Retrieval of Information by Investors (July 25, 2013), available at (describing recommendations to include tagging revisions in the proxy statement on Schedule 14A, among other forms, to provide for increased transparency with respect to corporate governance). The Investor Advisory Committee took the position that tagging executive compensation data would facilitate comparisons among public companies, which has “grown in importance in the era of Say-on-Pay.” See id.

[20] While the Commission has previously required (or proposed to be required) data tagging of registrants’ financial statements and with certain offerings of securities, this is the first time that the Commission is proposing to require data tagging of certain registrant information in the proxy process. See, e.g., Asset-Backed Securities Disclosure and Registration, SEC Release No. 33-9638 (Sept. 4, 2014), available at; Crowdfunding, SEC Release No. 33-9470 (Oct. 23, 2013), available at; Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), SEC Release No. 33-9741 (Mar. 25, 2015), available at .

[21] The proposed rules should be contrasted with prior legislative reforms that tried to affect executive pay through tax reform or other means. For example, in 1993, in response to clamor over what was perceived as high executive compensation, Congress changed the tax laws to ban the deductibility of CEO salaries of more than $1 million unless performance targets were met. As a case study in unintended consequences, the result was that boards raised CEO salaries to at least the $1 million mark, and began to make substantial grants of incentive stock options a larger component of executive compensation packages. Data has since shown that, led in part by the increase in equity-based compensation, there has been explosive growth in overall executive compensation. See Lucian Bebchuk and Yaniv Grinstein, The Growth of Executive Pay, Harvard John M. Olin Center for Law, Economics, and Business (Apr. 2005) , available at (“During [the period from 1993 to 2003], [executive] pay has grown much beyond the increase that could be explained by changes in firm size, performance and industry classification. Had the relationship of compensation to size, performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size. During the 1993-2003 period, equity-based compensation has increased considerably in both new economy and old economy firms, but this growth has not been accompanied by a substitution effect, i.e., a reduction in non-equity compensation.”); see alsoJohn Gillespie and David Zweig, Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions (2010), at 35 (“Boards also began the gigantic grants of stock options that became, by far, the largest component of CEO pay, with their stunning transfer of market profits to just a few individuals and all the new abuses that options have entailed.”). In fact, over the last 20 years, CEO pay has grown more than 16 times as fast as the average worker’s. See id. at 35-36. In addition, in 2009, Congress set express limits on the executive compensation that could be received by senior executives at companies receiving money under Treasury’s Troubled Asset Relief Program (known as “TARP”). See The American Recovery and Reinvestment Act (Feb. 13, 2009), available at

[22] In addition, these disclosures are also intended to arm shareholders with information that may inform their proxy voting, such as “say-on-pay” advisory voting under Section 14A of the Exchange Act. See Pay Versus Performance Proposing Release, at Section I.Introduction.

[23] Clearly, one of the potent benefits of the enhanced transparency is the added information that will be provided to shareholders as to how the boards of directors themselves are performing when it comes to their oversight of the company’s management. See Pay Versus Performance Proposing Release, at Section I. Introduction (“By helping to inform a shareholder’s assessment of a registrant’s executive compensation, the new disclosure may help shareholders evaluate the directors’ oversight of this important area”). As observers have noted, executive pay may also provide a barometer into whether a company is masking other, less obvious, corporate governance problems. For example, where a company provides excessive executive compensation to its officers, especially when such compensation is not in line with the company’s performance, this could suggest that the company’s board is unable to properly supervise, oversee, or stand up to the company’s management with respect to significant decision-making. See John Gillespie and David Zweig, Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions (2010), at 126 (citing to the compensation of the CEO of Countrywide as an indicator that he “ran roughshod over his board.”)

[24] Moreover, in those circumstances where the disclosures reveal that executive pay has been disconnected from the company’s performance, this information could help shareholders to prod a board into taking action with respect to executive compensation. That is, public exposure of executive compensation practices could provide the tipping point at which negative reactions by company outsiders, including shareholders, become intense enough to will a board to take action. Professors Lucian Bebchuk and Jesse Fried referred to this phenomenon as the “outrage constraint.” See Professors Lucian Arye Bebchuk and Jesse M. Fried, Pay without Performance, The Unfulfilled Promise of Executive Compensation, Part II: Power and Pay (Feb. 2004), at 5, available at This appears to have happened a year ago when investors, including billionaire Warren Buffett, criticized Coca-Cola Co. over the company’s outsized employee share awards, and subsequently the company made amendments to its equity pay plan and renewed its commitment to dialogue with shareholders over compensation matters. See Devika Krishna Kumar and Anjali Athavaley, Coca-Cola, bowing to pressure, amends employee equity plan, Reuters (Oct. 1, 2014), available at

[25] Over the years, the Commission has brought many enforcement actions against public companies and their senior management for violations relating to undisclosed executive perquisites and other examples of management overreaching. See, e.g., SEC Charges Former Polycom CEO With Hiding Perks From Investors: Company Settles Charges for Disclosure and Controls Failures, SEC Press Rel. No. 2015-53 (Mar. 31, 2015), available at; SEC v. L. Dennis Kozlowski, et al., SEC Lit. Rel. No. 17722 (Sep. 12, 2002), available at; SEC v. Tyson Foods, Inc and Donald Tyson., SEC Lit. Rel. No. 19208 (Apr. 28, 2005), available at; In the Matter of infoUSA Inc., Sec. Exch. Act Rel. No. 61708 (Mar. 15, 2010), available at; and SEC v. NIC, Inc., et al., SEC Lit. Rel. No. 21809 (Jan. 12, 2011), available at

[26] For example, today’s proposing release requests commenters to weigh in on to what extent smaller reporting companies will incur additional costs as a result of being required to provide pay versus performance information in interactive data format using XBRL. See Pay Versus Performance Proposing Release, at Section II.B.2.Proposed Amendment/New Item 402(v) of Regulation S-K/Request for Comment. The proposing release discusses this issue and states that the Commission “anticipate[s] that these expenses would be relatively lower than what [smaller reporting companies] currently incur in producing interactive data for other purposes given the limited disclosures that would be required to be tagged.” See Pay Versus Performance Proposing Release, at Section II.H. Proposed Amendment/Smaller Reporting Companies. As a result, the Commission’s preliminary understanding is that the incremental costs to smaller reporting companies of providing this information in interactive data format is not prohibitive. Nonetheless, the proposing release requests comment on this topic at this time.

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