WASHINGTON — Federal regulators have taken a step toward requiring public companies to show the relationship between the compensation of their top executives and the company’s financial performance.
The 3-2 vote Wednesday by the Securities and Exchange Commission on the so-called “pay for performance” rules follows a 2013 proposal that would require companies to disclose the pay gap between CEOs and ordinary employees. The hot-button issue of executive compensation took on greater prominence during the 2008 financial crisis. Outsize pay packages were blamed for encouraging disastrous risk-taking and short-term gain at companies at the expense of long-term performance.
The new rules would require companies to report compensation, including stock options and other benefits, for their top executives for the last five years in most cases. That would be compared in a table with the company’s annual return to shareholders during the same period, defined as the percentage change in the stock price.
In addition, the company’s annual return to shareholders would be compared with those of other companies of similar size and type, called a “peer group.”
For smaller companies, the information would have to be reported for the last three years rather than five. The new table would be provided in the company material that goes out to shareholders each year ahead of their votes at annual meetings. The information would be provided in an interactive data format.
The rules were mandated by the 2010 law overhauling the system of financial regulation, enacted in response to the crisis. They are designed to make shareholders better informed when they vote to elect company directors or in a vote on executives’ compensation, SEC officials said. The agency in 2011 gave shareholders at public companies the right to register their opinions on executives’ pay at least once every three years, in a non-binding vote.
“When it comes to executive pay, shareholders benefit when good performance is rewarded and poor performance is not,” Commissioner Luis Aguilar said before the vote. The new information should dissuade boards of directors who need to strengthen their oversight from “simply rubber-stamping” executives’ pay packages, he said.
The SEC sent out the proposal for public comment for 60 days. It could be finally adopted sometime after that, possibly with revisions to its current form.
As they did with the 2013 proposed requirement on the CEO-employee pay ratio, the two Republican SEC commissioners, Daniel Gallagher and Michael Piwowar, opposed the action Wednesday. They said it was the latest example of federal government intrusion into how companies govern themselves, imposing a “one-size-fits-all” standard of calculating a company’s performance.
The agency has yet to formally adopt the rule on the CEO-employee pay ratio, proposed by a divided SEC in September 2013 and touching off fierce controversy. That rule would require companies to disclose the ratio between their chief executive’s annual compensation and the median, or midpoint, pay of employees. Business groups like the U.S. Chamber of Commerce have vocally opposed the requirement, saying it would be costly and time-consuming for companies to gather the pay information on their employees. The mandate also could put U.S. companies at a disadvantage relative to their foreign competitors, business interests say.
Big pay packages must be offered to attract talented men and women who can run multibillion-dollar businesses, they maintain.
The issue of executive compensation strikes a populist chord among the public and critics of corporate America, especially in the wake of the excesses and risk-taking that fueled the financial crisis. Investor advocates, shareholder groups and union pension funds have pushed for reporting of the CEO-employee pay gap.
Critics say the pay gap between CEOs and workers has widened sharply in recent decades.
CEOs still are getting much fatter raises than the average U.S. worker. The average 8.8 percent increase in total pay that CEOs got in 2013 dwarfed the average raise that U.S. workers received. The federal Bureau of Labor Statistics has reported that average weekly wages for U.S. workers rose 1.3 percent in 2013. At that rate, an employee would have to work 257 years to make what a typical S&P 500 CEO makes in a year.