SEC's Proposed Pay for Performance Rules - NACD BoardVision
Deborah Lifshey, managing director with the New York office of Pearl Meyer & Partners, and Martin Coyne II, chairman and CEO of NACD’s New Jersey Chapter, take a close look at the SEC’s proposed rules on pay-for-performance disclosures and the possible ramifications of those mandates. Pearl Meyer & Partners provides their commentary to the SEC in the latest edition of, As We See It, their series of publications on executive compensation trends and issues. Click here to download the PDF.
Chris Clark: Part of the proposed rules by the SEC on disclosure and compensation seem praiseworthy, but I've got to tell you the truth, some of them sound, and are, downright confusing. I'm Chris Clark, and this is BoardVision. I'm joined today by Marty Coyne, experience director and president of NACD's chapter in New Jersey, and Deb Lifshey from Pearl Meyer & Partners. Welcome. I'm going to dive right in with Deb. The mandates are proposed. Who do they cover?
Deborah Lifshey: Any company that's currently filing a proxy statement that includes executive compensation. So if when you pick a proxy statement out and there's an election of the board, in there, you'll have executive compensation disclosures and now you'll have a new item 402V where you will have to include very specific information about company pay versus performance.
Chris Clark: Boards and companies will have to supply information for a five-year timeframe. Is that really a fair slice?
Deborah Lifshey: I think there's pros and cons of using five years. As you know in the summary compensation table right now we see three years' worth of historical data for your CEO and your CFO and you next three highest paid people. However, five years is probably a better long-term look at compensation as it compares to performance. Many performance cycles are now three years, so if we have a few overlapping three-year cycles in the five-year plan, some would say that it covers a longer-term view of compensation and performance.
Chris Clark: Marty, as that experience director in knowing about these proposed mandates, knowing that the CDNAs are already a bit of a bear and they're fairly bloated, what do you think's going to really happen? Are they going to get even more bloated, more difficult, and less effective?
Martin Coyne: Chris, the CDNAs have expanded dramatically over the past several years as companies have reported more and more information. And this will increase the amount of information, obviously. Now, there's a tremendous tension between making something simple and being totally clear and transparent with investors. And so there's dynamic tension is occurring right now, and this will just add some more tension into the mix. And so I would expect that initially they'll get longer and then is the urge to simplify, takes to get some traction that it will actually probably back down to where it's at today, maybe a little bit longer.
Chris Clark: Is it actually going to affect directors next year, 2016 or 2017?
Deborah Lifshey: I wish I had a crystal ball. Right now, the SEC has a timeline out. And under that timeline it appears that the rules are going to be pushed forward a little bit, and we could see them finalized possibly by 2017 filings. But I really think that would be a stretch.
Chris Clark: Marty, do you agree? Are you thinking 2018?
Martin Coyne: They can go slow, but I don't know how slow they can really go. I think 2016 is probably low probability. But I do think all boards and comp committees ought to be prepared just in case. Because of the extra work that Deb mentioned earlier, you don't want to be caught with limited amount of time to get all of this data and analyze it and format.
Chris Clark: What should boards that are proactive, leading boards be doing now in the second half of 2015 to prepare, plan, or address this? And I'd like you both to talk to it.
Martin Coyne: So as a comp committee chair, what I would do is assume that the regulations will be instituted and effective for next year. And I would want to run the data to see a couple of things. What'd it look like to be able to format it, make sure we could get all of the information that we needed to, and run the numbers so we could see what the implications are. When companies have gotten that ahead and looked at the ramifications of reporting out the data what additional explanations they would need, et cetera, they get out ahead of the issue and then are less reactive and more proactive. And it might actually adjust some comp plans.
Chris Clark: Deb, do you have some attitude insights to what Marty just said?
Deborah Lifshey: Absolutely, historically the final rules have differed very little from the proposed rules. So it will probably be in basically the same format that we've seen already, but I think the more important piece is, I think the narrative to the pay-for-performance table will also have to include the real story. So how is your company really compensating its employees and what were the real performance measures? And then the company will need to be prepared to discuss, okay, how does this differ from the relationship between pay and solely TSR? And that's where the real work and the real thinking is coming in, and that's what we're starting to discuss with our clients today.
Chris Clark: We have a wide ranging viewing audience. What companies and boards are exempt from these proposed mandates?
Deborah Lifshey: Foreign private issuers are exempted and emerging growth companies, so companies that are very recently public.
Chris Clark: Deb, what's next in director compensation?
Deborah Lifshey: Well, I could tell you where there will be a limit. I think that due to recent course cases, what we've been seeing is equity plans that are submitted to shareholders really need now to have a lower non-employee director sublimit on the number of equity shares that can be issued per year. So boards will have to sit down in committees and figure out what's the maximum number they think that they actual need for non-employee directors for the year.
Chris Clark: Marty and Deb, I just want to thank you for participating today. I think our audience really got a lot out of the proposed mandates. Thank you again.
Martin Coyne: Thank you.
Chris Clark: Hopefully you found today's conversation helpful and useful. If you'd like more information, one, NACD did a great compensation report with Pearl Meyer & Partners. It's available on our site as well as theirs. We have this magazine called "NACD Directorship" for further information, and I'd like to thank you again. I'm Chris Clark and this is BoardVision.
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