On April 29, 2015, the United States Securities and Exchange Commission (SEC) voted three-to-two to propose new rules that would prescribe new mandatory Pay versus Performance disclosure. The new disclosure would include specific information showing the relationship between executive compensation “actually paid” and financial performance of the registrant. Public companies (other than emerging growth companies, foreign private issuers and registered investment companies) would be covered by the proposed rules.

Covered issuers would not be allowed to use their existing pay for performance disclosure approaches to meet the requirements under the proposed rules. Instead, covered issuers would be required to include specific types of pay and performance information using the following new table:

Pay versus Performance

The SEC indicated that its “proposal is designed, in part, to enhance comparability across registrants.”

The proposed rules, issued under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would add a new Item 402(v) to Regulation S-K. Set forth below is a brief summary of the key elements of proposed Item 402(v):

• “Pay” under the Pay versus Performance table would be reported both as the total from the Summary Compensation Table (SCT) and as “executive compensation actually paid,” which is defined as the SCT total compensation with adjustments to exclude certain pension costs and the unvested amounts reported in the “Stock Awards” and “Option Awards” columns of the SCT, and to include the fair value of equity awards on the vesting date (as opposed to when granted).

• Pay would be reported separately for both the principal executive officer (i.e., the chief executive officer), individually, and as an average for the remaining named executive officers (NEOs) listed in the SCT.

• "Performance” under the Pay versus Performance table would be reported using cumulative total shareholder return (TSR) using the same rules that apply when preparing stock performance graphs disclosed in annual reports.

• TSR would be reported for both the issuer and a peer group.  The peer group would either be (1) the same peer group used for the stock performance graph, or, if applicable, (2) the peer group reported in the issuer’s Compensation Discussion and Analysis (CD&A).

• A transition period would apply so that, in the first year, only three years’ worth of data would be reflected in the Pay versus Performance table, with an additional year of pay and performance data being added in the following two years.

• Smaller reporting companies would be subject to these reporting requirements on a modified basis (e.g., three year cumulative reporting (two years during transition period), no peer group TSR, and no reporting of pension amounts).

• All data elements in the Pay versus Performance table (including footnotes) would be required to be tagged using XBRL format (eXtensible Business Reporting Language) to facilitate investor analysis of reported data.

Using the information in the Pay versus Performance table, companies would then be required to provide “a clear description” of the relationship of the named executive officer compensation actually paid and the company’s TSR, and the relationship between the company’s TSR and the TSR of its selected peer group.  Covered issuers would be permitted to present supplemental pay for performance information to stockholders, so long as it is not misleading or presented more prominently than the required disclosure.

The proposed rules raise many questions. We have provided a list of the specific questions to which the SEC requested comments. Further, there are possibilities for unintended consequences, particularly in terms of how this disclosure might impact the design of compensation packages (e.g., tying performance-based incentives to TSR) and how this disclosure might impact internal pay equity between the principal executive officer and the other NEOs. In this regard, Commission Gallagher stated his objection to the proposed rules.

The proposed rules are subject to a sixty-day comment period. We anticipate that comments will be made regarding (1) the added complexity and lack of flexibility raised by this disclosure approach, and (2) the value of comparability across covered issuers in light of those disadvantages.