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Neither Pay nor Performance

Aug. 25, 2022

Section 953(a) of the Dodd-Frank Act[1] requires the Commission to adopt rules mandating public companies to describe clearly the relationship between compensation the company actually paid to its executives and the company’s financial performance.[2] Today’s rulemaking will elicit costly, complicated, disclosure of questionable utility. Accordingly, I am unable to support this rule.

Unprincipled prescription

The Commission should engage in principles-based rulemaking to efficiently implement Congress’s directive without unnecessary additions. Rather than following the statute to craft a workable, practical rule, the Commission instead adopts an unnecessarily complicated rule.

Dodd-Frank § 953(a) anticipates a principles-based approach to eliciting disclosure about the relationship between actual executive compensation and company performance, as multiple commenters recognized.[3] The statute mandates a “clear description” of executive compensation’s relationship to performance. A principles-based approach would have allowed companies to provide a “clear description” of the pay-performance relationship tailored to their circumstances. Even the Commission’s 2015 Pay Versus Performance Proposal acknowledged that this requirement was not supposed to be “overly-prescriptive” and that the requirement could be met in “many ways.”[4] The Commission has not chosen a sensible way.

Today, the Commission adopts a sweeping and complex prescriptive approach that is not required under the statute. The Commission’s rule is a mish-mash of prescribed elements, including:

  • five years of executive compensation and company performance data;[5]
  • a complicated formula for determining compensation “actually paid” to the executive officers, including some metrics that most companies ordinarily would not calculate;
  • average compensation paid to all other named executive officers, regardless of whether their pay is tied to performance;
  • the company’s total shareholder return (“TSR”), peer group TSR, the company’s net income, and a company-selected financial performance measure; and
  • a separate tabular list of at least three (unless the company uses fewer than three) and up to seven performance measures, which may include non-financial performance measures.

Before adding on to what Congress required, the Commission should have done the analysis to show that the benefits generated by the add-ons would outweigh the costs. We did not do that here.

Unclear benefits

The Commission acknowledges that today’s rulemaking will not produce major benefits. The adopting release predicts that the new mandate will generate “incremental information” with “limited” added value compared to already available information.[6] Thus, the rulemaking’s primary benefit is in changing how “the information is presented,” not in requiring disclosure of “any significant new underlying informational content.”[7] As commenters have noted,[8] most public companies (but not small issuers) already have a detailed Compensation Discussion and Analysis in their proxy statement, which covers “all material elements” of the company’s executive compensation.[9]

The primary benefit of the rulemaking is in the new presentation of information that generally is already disclosed elsewhere and the comparability the Commission hopes the tabular presentation will produce. But, the fundamental variation across companies’ compensation practices and the underlying assumptions some of the disclosures necessitate will render the new presentation anything but clear and comparable.

The Commission’s tabular approach masks the variety of approaches companies take to linking pay and performance. As one commenter argued, over-standardization could “mislead shareholders by providing an artificial comparison of pay with performance that does not match a company’s actual business model or the structure of its compensation program.”[10] Moreover, the table includes measures that may not be relevant for a particular company, which will be useless at best and confusing at worst for investors.[11]

The Commission admits that, among companies and investors, there “continues to be no consensus around the best approach to analyzing the alignment of pay and performance. . . .”[12] The variety is evident in the comments, which advocate a wide range of approaches to capturing the relationship between compensation and performance. Comment letters questioned the relevance of TSR, peer group TSR, and net income as measures of performance, and suggested other measures. As mentioned in the reopening release, a staff review of 20 Fortune 500 companies identified “over 100 unique [company] performance measures, almost all of which were company-specific or adjusted measures.”[13]

In addition to different approaches to measuring company performance, the rule will require companies to make a number of assumptions in calculating executive compensation. Specifically, calculations around fair value of equity awards and pension-based compensation involve assumptions that will reduce the clarity and comparability of the table.

Clear costs

While not providing meaningful benefits, the Commission’s rulemaking will be costly for public companies and their shareholders. The repackaged compensation metrics, SEC-prescribed performance calculations, and the added Inline XBRL tagging requirements will cost companies time, attention, and money. These costs will inevitably get passed on to shareholders. Small companies, whose unique concerns the Commission could have better accommodated, likely will face disproportionate costs. Other drivers of cost include the need to:

  • engage in complex calculations to determine executive compensation “actually paid,” such as for equity and options awards;
  • implement the rule quickly; the rulemaking is effective for any fiscal years ending December 16, 2022, or later;
  • supplement the overly simplistic mandated disclosures with corrective disclosures; and
  • identify the company’s “most important” performance measure, a difficult task for many companies that take nuanced approaches to compensation.[14]

Of greater concern than the specific compliance costs, this rulemaking could distort how public companies compensate executives and how investors evaluate companies’ compensation decisions. Shining a spotlight on specific performance measures could drive compensation decisions instead of simply informing investors about how companies make those decisions. Companies may feel compelled to tie their executive pay to the prescribed financial performance measures or to incorporate non-financial performance measures, such as environmental, social, and governance metrics. The highlighting of particular metrics also might influence how investors analyze the relationship between pay and performance. A principles-based approach would have enabled us to follow one commenter’s wise counsel to “leave judgments as to how to incentivize executives to compensation committees and how to evaluate company performance to investors.”[15]


When Congress instructs the Commission to act, we should do so. Congress told us over a decade ago to adopt a pay versus performance rule. I would have supported a principles-based rulemaking that efficiently implemented Congress’s directive without unnecessary additions. A simple rule would have accomplished what Congress asked us to do, but with each iteration of this rule, it has gotten more complicated and less useful to the investors it is supposed to serve. In response to commenters’ concerns about our originally proposed prescriptive, one-size-fits-all approach, the Commission added new mandated elements.

I thank the staff across the Commission that worked on this rulemaking. As my comments reflect, implementing the Commission’s desire for a prescriptive mandate was no easy task. In completing that task, the staff was not afforded the benefit of the depth of analysis and discussion a reproposal would have generated.[16] I particularly thank Jennifer Zepralka and her staff in the Office of Small Business Policy in the Division of Corporation Finance for volunteering for this difficult job. I greatly appreciate the conversations my staff and I had with the rulemaking team, including Tara Bhandari, who has a gift for explaining economics to non-economists.

[1] Pub. L. No. 111-203, 124 Stat. 1376 (2010) (Section 953(a)).

[2] 15 U.S.C. §78n(i) (“The Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders of the issuer a clear description of any compensation required to be disclosed by the issuer . . . .”) (emphasis added).

[3] See Comment Letter of American Securities Association at 3, March 14, 2022, (“Adopting a principles-based standard that allows issuers to explain – in their own words and based upon their unique profile – how they align executive pay with performance will benefit investors. . . . This type of approach aligns with the explicit language and the intent of Section 953(a), which does not mandate the type of prescriptive tabular disclosure included in the 2015 Proposal and re-introduced in the Release.”); Comment Letter of the Center on Executive Compensation at 5, March 4, 2022, (hereinafter “CEC 2022”) (“The Commission acknowledged in the 2015 Proposal that Congress did not intend for the pay for performance rules to be ‘overly-prescriptive and . . . Congress recognized that there could be many ways to disclose the relationship between executive compensation and financial performance of the registrant.’”) (quoting Pay Versus Performance, Exchange Act Release No. 34- 74835, 80 Fed. Reg. 26,329, 26,330, May 7, 2015); Comment Letter of Davis Polk & Wardwell at 2-3, March 4, 2022, (hereinafter “Davis Polk 2022”); Comment letter of PNC Financial Services Group, Inc. at 2, July 6, 2015, (“The statutory language of Section 953(a) itself seems to favor a principles-based disclosure approach making it clear that the disclosure should compare pay to overall financial performance. The statute requires the SEC to establish disclosure rules for issuers that will provide a “clear description” of compensation required to be disclosed under Item 402 of Regulation S-K. . . .). See also Pay Versus Performance at 10, August 25, 2022 (hereinafter “Release”) (“Section 14(i) did not expressly prescribe the manner in which issuers would disclose the required information. . . .”).

[4] 80 Fed. Reg. at 26,330 (quoted by CEC 2022 at 5).

[5] Smaller reporting companies need only provide three years of data.

[6] Release at 162 (“Lastly, we note that the required pay-versus-performance disclosure will provide some incremental information relative to the underlying informational content already available to the public in other formats, but that the extent of this information is limited.”).

[7] Release at 165. See also Release at 9 (“Existing disclosures generally provide the necessary components to make these comparisons, including data required for calculations that aid in these comparisons, but doing so may be time-consuming and costly.”).

[8] See, e.g., Comment letter from National Investor Relations Institute at 3, March 4, 2022, (hereinafter “NIRI 2022”); Comment Letter from Society for Corporate Governance at 7, March 10, 2022, (hereinafter “SCG 2022”).

[9] 17 CFR § 229.402.

[10] See Comment Letter of Exxon Mobil Corporation at 3, June 23, 2015, See also NIRI 2022 at 2 (“The SEC’s attempt at promulgating a ‘one-size-fits-all’ approach is likely to be ineffective, given the vastly different market and industry circumstances that shape the design of executive pay plans at U.S. public companies. Imposing very detailed requirements and a standardized data table that will force all companies to report their pay versus performance relationship using the same methodology will only obscure, rather than illuminate, executive pay design and practice.”).

[11] See, e.g., Comment Letter of FedEx at 1, March 4, 2022, (“[R]equiring the disclosure of performance metrics other than those companies actually use in crafting their compensation programs fails to provide investors with any useful information regarding compensation or performance”).

[12] Release at 129 (“As was the case at the time of the Proposing Release, there continues to be no consensus around the best approach to analyzing the alignment of pay and performance, and we do not have complete information about the approaches used by all investors.”).

[13] Reopening of Comment Period for Pay Versus Performance, Exchange Act Release No. 34–94074 (Jan. 27, 2022), [87 FR 5751(Feb. 2, 2022)] at n. 14.

[14] See, e.g., Comment Letter of National Assoc. of Manufacturers at 3, March 4, 2022 (“[I]t may not be straightforward for companies to isolate which performance measure is the ‘most’ important given the diversity of metrics utilized and the often-complex way in which they impact executive compensation”),; Davis Polk 2022 at 4 (“Requiring registrants to identify one ‘most important’ measure may put companies in a very difficult position as they attempt to oversimplify complex compensation strategy. Companies will also face heightened and unwarranted scrutiny from investors and other stakeholders on only one, somewhat arbitrary, piece of the company’s overall strategy.”).

[15] SCG 2022 at 4.

[16] See, e.g., Comment Letter of U.S. Senators Richard Shelby and Patrick Toomey, February 1, 2022,

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