As part of a gargantuan set of new laws aimed at making the US financial system safer after the last decade’s historic recession, lawmakers mandated that listed companies disclose the relationship between how well they perform and how much they pay executives.
The idea in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was that if CEO paychecks were tied to how well their companies were performing, they would act less haphazardly with other people’s money and perhaps avoid another financial crisis. It would also help investors evaluate executive compensation.
It was only yesterday (April 29), five years later, that financial regulators (whose job it is to officially write the rules) finally got around to proposing rules for the pay versus performance requirements—but not without a bit of a tantrum from the Republican commissioner of the US Securities and Exchange Commission, who made it pretty clear in his prepared remarks he’d rather be talking about pretty much anything else.
“It will come as no surprise that I wish we were all gathered here today for some other purpose,” says SEC commissioner Daniel Gallagher, explaining that “the last thing we need is to spend precious time thrusting ourselves into corporate governance matters best left to state law.”
Gallagher went on to explain that the SEC—the overseer of the US financial markets—had much more important things to do than to meddle in how bigwigs at America’s companies are being paid:
We have other, more germane congressional mandates to complete. And, better yet, there are pressing, complex issues in the equities and fixed income markets that desperately need our attention Instead of focusing our resources on those critical areas, we are taking another trudging step on the path towards completing Dodd-Frank’s—and thus the federal government’s—intrusions into the realm of corporate governance.
If it were up to Gallagher, he says, he wouldn’t write the rules to align executive pay and performance. But since the SEC doesn’t really have a choice (unless, improbably, Dodd-Frank were overturned), he argues that maybe the SEC should let companies make their own rules:
The more appropriate path forward would be to admit that we have not solved the very difficult question of how to align executive pay with performance. Perhaps because we shouldn’t be involved in that determination in the first place. But if we are forced to take it on, then we should give issuers the flexibility to determine how best to communicate their compensation story to investors, provided they meet the general principles set out in the statute.
Despite Gallagher’s objections, the SEC voted 3-2 to approve the proposal, which means the public now has 60 days to comment before it is voted on.
If passed, about 6,000 public companies would have to tell investors if the amount they paid CEOs and other top management over the past five years actually aligned with how well their companies did.