Pay for performance is a term used to define the expectation that executive pay in the form of annual bonus and long term incentives should correspond to company operating performance and also result in superior shareholder returns relative to company peers. The analysis of pay for performance has gained considerable prominence over the past decade as executive pay has attracted political, regulatory and economic attention and is a key element in shareholder say on pay vote determinations. In addition, the Dodd-Frank Act has mandated the SEC to amend its executive compensation disclosure rules to more clearly demonstrate the “relationship between compensation actually paid and the financial performance of the issuer.” When analyzing pay for performance, the key is how pay and performance are defined, and over what time period the pay and performance are measured. Several executive compensation issues are directly related to or touch on pay for performance, including:
In 2015, the Securities and Exchange Commission proposed rules implementing the Dodd-Frank Pay for Performance Requirements. The Center believes the proposed rules are inherently broken through how the rule requires comapnies to calcualte and disclose compensation "actually paid" as well as the proposal's sole reliance on total shareholder return as the measure of company performance. The econonic analysis of the proposed rule admitted that the proposed disclosure has the potential to be misleading, and suggests the use of additional disclosure to clarify any misleading information. The Center does not believe this provides a sound and rationale basis for a securities disclosure and has urged the SEC to revisit the proposed rule and replace it with a principles-based approach which provides companies with the ability to actually explain the link between pay and performance.