Monday, February 9, 2015

SEC Announces New Congressionally-mandated Dodd-Frank Rule Regarding Executive Compensation

On February 9, Commissioner Luis A. Aguilar issued a press release about a new rule proposed by the SEC, as proposed by Section 955 of the Dodd-Frank Act, which adds a new paragraph to Reg. S-K. It requires companies to disclose employee and director level hedging activities. The rule is an attempt to better align executive pay, in particular stock-based compensation, with the shareholders of a company. Here's an excerpt from the announcement discussing market growth: 
Much of that growth reflects the trend towards equity-based and other incentive compensation, which intends to meet the worthy goal of aligning the interests of the corporate overseers of public companies with their shareholders.  However, some have suggested that company policies that permit hedging of the company’s equity securities could have the opposite effect.[3]  By allowing corporate insiders to protect themselves from stock declines while retaining the opportunity to benefit from stock price appreciation, hedging transactions could permit individuals to receive incentive compensation, even where the company fails to perform and the stock value drops.[4]

The purpose of this rule change is not to prohibit stock-based compensation, but to provide greater transparency for investors.

Keep in mind that this is only the first in a series of Congressionally-mandated rules intended to improve transparency in executive compensation. The other disclosures are dealing with "pay for performance" contracts and the ratio between the CEO and the average worker's pay.

This proposing release is a positive step in the direction of providing more information to shareholders as to whether the interests of corporate insiders are truly aligned with their own. 
If you have any concerns, public comments are being accepted.

To read Aguilar's full statement click here.