SEC Adopts Final Executive Compensation Rule 12 Years Later

The U.S. Securities and Exchange Commission (SEC) has finalized the executive compensation or “pay-versus-performance” rule that Congress first directed it to create in 2010 when it passed the Dodd-Frank Act. The rule, designed to provide more information to investors about how companies calculate pay for CEOs and other top executives, requires companies to justify executive pay to shareholders by comparing it to the company’s financial performance. The SEC passed the final rule by a vote of 3-2. The rule will become final 30 days after its publication in the Federal Register.

The SEC first proposed the executive compensation rule in 2015 but never finalized it. In January 2022, the SEC reopened the comment period to ask whether it should amend the rule to include more information on the companies’ financial performance. Based on the comments received, the final rule requires many publicly traded companies to compare executive pay to various financial performance measures, including cumulative total shareholder return, net income, and a measure the company chooses. Smaller reporting companies must follow a scaled-down version of the rule.

SEC Commissioners who voted in favor of the rule pointed to it as a valuable tool that investors need to make informed decisions about their investments and their votes on executive pay. They also expressed that the rule, when combined with other provisions of the Dodd-Frank Act, would increase companies’ financial stability and minimize the likelihood of future taxpayer bailouts.

Those Commissioners who voted against the rule complained that the SEC should not have waited to finalize the rule after 12 years without first updating the economic analysis, benefits and costs discussion, and related analyses.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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