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Dissenting Statement at an Open Meeting on Pay Versus Performance Disclosures

Commissioner Michael S. Piwowar

April 29, 2015

Thank you, Chair White, and a special thank you to Mike Walker of the San Francisco Regional Office for getting in early to set up the video conference.

It has been nearly five years since the enactment of the Dodd-Frank Act, which required the Commission to promulgate nearly a hundred different rules, some of which were actually related to the causes of the financial crisis.  I do not question the fact that we will ultimately need to implement all of our obligations under that law.  I do question, however, the order in which we are considering them.  Instead of prioritizing those rules related to the causes of the financial crisis, we have repeatedly seen the agenda for Dodd-Frank Act implementation filled with rulemakings not related to the financial crisis, such as conflict minerals, mine safety, and resource extraction.  Unfortunately, this proposal represents another questionable and imprudent use of agency resources, which I cannot support while other important rulemakings remain outstanding.

That being said, I had indicated my willingness to consider supporting, at an appropriate time, the implementation of Section 953(a) of the Dodd-Frank Act using a principles-based approach requiring a clear description of the relationship between executive compensation actually paid and the financial performance of the issuer.  Indeed, the approach initially circulated by the staff to the Commissioners, after obtaining approval from the Chair’s office, was one that I might have been able to support.  I thank the staff in the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their efforts on crafting that principles-based approach.

Unfortunately, the revised document being considered today has been changed to be a highly prescriptive measure.  It focuses particular attention on a single metric of financial performance – one-year total shareholder return (TSR).  This one-size-fits-all approach assumes that, for all companies and all shareholders, one-year TSR is the only metric that matters.  Although the proposal points out that issuers may include additional disclosures and different metrics, the proposal would only provide specific tags for one-year TSR.  Other metrics and disclosures would be relegated to block-tagging in a form not conducive to comparative analysis.

As one paper from the National Association of Corporate Directors observed, “an isolated emphasis on TSR can result in excessive focus on quarterly financial numbers and encourage short-term thinking.”[1]  To the extent that the prescribed measure of TSR may be less meaningful at particular companies, a principles-based approach could reduce shareholder confusion in understanding the relationship between pay and performance. 

The majority of the Commission is pushing forward with the focus on one-year TSR, despite the economic analysis performed by our economists in the Division of Economic and Risk Analysis.  The analysis observes that which performance metrics should be considered, and how much compensation should vary with these metrics, is difficult to ascertain and will vary with a company’s individual circumstances.  Our economic analysis further notes that the available performance statistics may not adequately measure a given executive’s contribution to a registrant’s performance, such as when registrant performance is strongly related to market moves, sector opportunities, commodity prices, or other factors unrelated to managerial effort or skill.

I am greatly disappointed that the proposal does not exclude smaller reporting companies from the disclosure requirement.  Shares of smaller reporting companies are generally less liquid than shares of larger reporting companies.  Thus, estimates of one-year TSR for smaller reporting companies may be less precise and less readily available, potentially making pay-versus-performance comparisons based on this metric less meaningful.

Trying to limit executive compensation through regulation has a habit of backfiring; one need only look at Section 162(m) of the Internal Revenue Code and its attempt to limit executive compensation that, some have argued, had the unintended consequence of increasing executive pay.[2]

Finally, the singular focus on one-year TSR may make corporate executives more likely to engage in efforts such as increasing debt, cutting research and development, and engaging in stock buy-backs to increase stock prices in the short-term to the detriment of long-term performance.  On the other hand, a principles-based approach would reduce the risk that the disclosure requirements could lead registrants to game their compensation structures. 

For these reasons, I cannot support the current proposal to implement pay-versus-performance disclosure.

I have no questions.

[1] NACD Perspectives Paper: Pay for Performance and Supplemental Pay Definitions (Dec. 2013) at 3, available at

[2] See, e.g., Max Ehrenfreund, “Why Elizabeth Warren thinks Bill Clinton made CEO pay even worse,” The Washington Post (Apr. 27, 2015); “Speech by SEC Staff: Financial Regulation: Economic Margins and Unintended Consequences,” by Chester S. Spatt (Mar. 17, 2006), available at

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