SEC advances executive pay rules

The Securities and Exchange Commission proposed rules Wednesday that would require companies to connect top executive pay with its overall performance.

The regulator agreed, by a vote of three to two, to propose a set of rules that would require companies to publicly disclose, in detail, how much money their top executives make. And in turn, the company would have to compare those paychecks with the company’s overall performance.

The so-called “pay for performance” proposal is the latest in a long-running campaign from the SEC to address executive pay, driven in large part by a host of new requirements mandated by the 2010 Dodd-Frank financial reform law. A major criticism that emerged from the financial crisis was that top executives were receiving excessive pay, or pay structured in such a way as to encourage short-term risk-taking over long-term building.

The new proposal would require companies to adopt a standardized form of disclosing executive pay and comparing it to company performance, including shareholder returns and a comparison to industry competitors.

The thinking behind the rules is that a standardized disclosure would make it easier for investors to determine if executives are being appropriately compensated, and in turn give shareholders more information and leverage when discussing executive pay in the future.

Commissioner Luis Aguilar, a Democrat, said the proposed rules will help curb cases where executives reap massive paydays while their companies flounder. He cited one 2013 study that found that 38 percent of the 25 highest-paid CEOs over the last 20 years were either in charge of companies that collapsed or were bailed out, were fired, or had to pay to address fraud charges.

He said establishing the new rules would discourage boards from “rubberstamping” salaries for executives.

“Many boards have already adopted strong corporate governance measures and do a good job in representing the interests of shareholders,” he said. “Others can do better — much better.”

SEC Chairwoman Mary Jo White said Wednesday the rules would give investors better information, but emphasized she wanted public feedback on how best to hone the rules before they are finalized.

For example, she wants to know whether overall shareholder return is the best way to depict company performance, and how smaller companies might navigate the new requirement.

Early on, it appeared that the new set of rules will be less contentious than other executive pay initiatives sought by the SEC. Major business groups have pushed back against another Dodd-Frank initiative that requires companies to publish a ratio comparing the pay earned by top executives with a company’s average worker.

That rule, heavily backed by labor unions, has stalled after being proposed back in  2013.