NCPA - National Center for Policy Analysis

Dodd-Frank Proposal Takes Aim at CEOs

April 30, 2015

The Securities and Exchange Commission (SEC) recently released a proposal that outlines new regulations on the disclosure of executive pay. The SEC hopes that these new rules — required by Dodd-Frank — will bring a new level of accountability among top managers, as well as a new metric for investors to evaluate a company's performance.

Not everything about the planned proposals is certain, but what is known is that the passage will require "actual pay," to the top five highest-paid managers to be recorded as if it were a metric on a financial statement. Notably, not all measures of compensation would be recorded, namely, compensation which is too immaterial at that point in time to be considered financially relevant.

Passing the regulation could have a major effect on private industry, as only 27 percent of companies currently have performance-based disclosures, and only 10 percent of that subset use actual pay to gauge success.

Proponents of the pay-for-performance method agree these regulations would pressure companies and CEOs who are performing poorly, while giving investors "much more opportunity to be critical of the disconnect between pay and performance." Many companies may suffer from the proposal's effects, but policy-makers believe the repercussions to be rightfully awarded.

In addition to these ideas, the SEC is moving forward with projects that target Wall Street firms that engage in high-risk activities. Forcing employees who have engaged in financial malpractice and negligent business dealings to return bonuses is just one of the most notable changes that remains in the works.

Source: Andrew Ackerman and Joann S. Lublin, "SEC Is Set to Propose New Rules on Executive Compensation," Wall Street Journal Business, April 28, 2015. 

 

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