The SEC has released a new rule proposal for executive compensation disclosures for next proxy season. In broad strokes, the proposal calls for disclosing information about “the relationship of a company’s overall compensation policies to risk, director and nominee qualifications, company leadership structure, and the potential conflicts of interests of compensation consultants.” All these items seem like things a shareholder would want to know about.
But, as the SEC lays out the arguments for the new rules in the release, it becomes clear that the Commission is concerned with more than just accurate disclosure of compensation. The SEC is also apparently interested in influencing issuer behavior and changing the way issuers compensate.
For example, on page 8 of the release, the Staff explains that there is a concern that “compensation policies have become disconnected from long-term company performance because the interests of management and some employees, in the form of incentive compensation arrangements, and the long-term well-being of the company are not sufficiently aligned.” The SEC’s solution is a requirement for new disclosures about “how a company’s overall compensation policies for employees create incentives that can affect the company’s risk and management of that risk.”
One interpretation of this requirement is the SEC just wants shareholders to know how companies think about risk when they compensate employees. A more meddlesome interpretation is that the SEC wants issuers to stop using compensation to create short-term incentives that don’t benefit the company in the long-term. But, whether an issuer’s compensation system is good or bad is theoretically the kind of thing that can be decided by shareholders, as long as they have full disclosure.
The tacit message from the SEC’s language is more than just a request for information about risk, but rather a push for new compensation schemes, which is not in the SEC’s job description.