Executive Compensation

Dodd-Frank Section 953(a) adds a new 14(i) to the Exchange Act, "Disclosure of Pay Versus Performance." The new section requires each public company to disclose in its annual proxy statement "information that shows the relationship between executive compensation actually paid and the financial performance of the issuer." The company's "financial performance" must take into account any change in the value of the company's stock and dividends or other distributions. Presumably, this is to be calculated in the same manner as the Performance Graph required in the proxy statement, based on cumulative total shareholder return.

Section 953 is one of the least clear provisions of Dodd-Frank. Open questions that the SEC will need to answer in its rulemaking include:

• The definition of the new term "compensation actually paid." Does this include gains actually recognized in the year on equity awards from prior years? Does it include a bonus actually paid in the year but attributable to a prior year?
• Whether this disclosure applies to the compensation of the named executive officers only, all of those in the Section 16 group, or some other group.  
• Whether this new disclosure requirement applies to the same five-year period as the existing Performance Graph.

The Act allows, but does not require, this disclosure to include a graphic representation of the information required to be disclosed. Presumably, this would be an enhancement to the Performance Graph.

Section 953 directs the SEC to adopt rules implementing this disclosure requirement, but does not give it a deadline for doing so. However, as with the other new disclosure rules, we expect that the SEC will try to get these rules in place for the 2011 proxy season. We have been advising clients to start working on compliance with the new Dodd-Frank rules immediately, but for this one it may be best to wait.