Under a Securities and Exchange Commission rule announced on Thursday, public firms in the United States would be compelled to report how the compensation of their top executives compares to their overall performance.
Pay vs. performance
According to Reuters, based on a 2015 SEC proposal mandated by the Dodd-Frank financial reform law, the pay-versus-performance measure requires companies to disclose performance measures higher than total shareholder return, as well as the five most important performance measures utilized to determine actual executive compensation.
The rule, which must first go through a public consultation process before it can be implemented, also asks whether corporations should specify whether pretax net income and net income are helpful extra financial measures and whether they should disclose whether they are not.
As per the report, the action also coincides with an effort by President Joe Biden’s administration to compel publicly traded firms to assess their working conditions, pay fairness, hiring, and retention policies, among other aspects of the business.
Advocating how listed companies incentivize labor force
U.S. News and World Report stated that it comes as a result of complaints from investors and employee advocates who have long sought greater information on how publicly traded firms incentivize their labor force at all levels, even at the highest levels of management.
The best-paid CEOs, according to some, do not necessarily oversee the best-performing companies. Others disagree. Industry groups have expressed concern that the SEC’s approach may lead to confusion among investors in the long run.
The report also mentioned that as part of Wednesday’s measure, the SEC will also solicit additional feedback on its 2015 proposal, which asked companies to include in their proxy statements a table that summarizes the total compensation actually paid to their CEOs, the total shareholder return per year, and the company return per year compared with peer groups.