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SEC Sets New Rules

“You have to learn the rules of the game. And then you have to play better than anyone else.” – Albert Einstein

SEC SETS NEW RULES: This new rule will require companies to disclose the relationship between executive pay and the company’s financial performance.

On April 29th,  the Securities and Exchange Commission voted to propose rules requiring companies to disclose the relationship between executive compensation and the financial performance of a company. The proposed rules, which would implement a requirement mandated by the Dodd-Frank Act, are intended to  provide greater corporate transparency. The rule also allows shareholders to be better informed when electing directors, and in connection with advisory votes on executive compensation.

“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,” said SEC Chair Mary Jo White. “The proposal would require enhanced disclosure that can be compared across companies.” Commissioner White has stated repeatedly, that she is determined to curb excessive executive pay.

We believe this disclosure of pay for performance metrics will encourage boards to look at alternative and comparative compensation metrics, especially if their executive’s pay differentiates greatly from their peers.

One of the key provisions included is the disclosure, centers around the actual pay received by named executive officers. This provision is significantly different than the previous accounting disclosures which typically had no correlation to what the executive truly received. Under the proposal, executive compensation actually paid would be calculated using compensation reported in the summary compensation table already required in a company’s proxy statement. This served as a starting point with adjustments relating to pension amounts and equity awards. Companies would now be required to disclose the adjustments to the compensation as reported in the summary compensation table. Pension amounts would be adjusted by deducting the change in pension value reflected in that table and adding back the actuarially determined service cost for services rendered by the executive during the applicable year. Smaller reporting companies would not be required to make adjustments in pension amounts because they are subject to scaled compensation disclosure requirements that do not include disclosure of pension plans.

Under the proposal, equity awards would be considered actually paid on the date of vesting and at fair value on that date, rather than fair value on the grant date as required in the summary compensation table. Both amounts would be disclosed in the new table.  A company would be required to disclose the vesting date valuation assumptions if they are materially different from those disclosed in its financial statements as of the grant date.

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We believe this new set of rules will actually be seen as some of the better provision as of late and will help companies further differentiate themselves. Here is a link to the new rules.

Written by Brent Longnecker (Chairman & CEO) and Cameron Boswell (Senior Consultant) of Longnecker & Associates.

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