Among the biggest compensation-related risk factors facing corporate boards in 2016 will be establishing short- and long-term incentive goals that are selected and calibrated to motivate behavior while driving corporate results and company total shareholder return (TSR). This issue will be more transparent in 2016 due to the SEC’s proposed pay for performance (P4P) disclosure rules.

 

At a high level, the proposed P4P disclosure rules require that registrants include:

A standardized table in proxy statements that includes a new calculation of compensation actually paid (CAP), compensation from the current summary compensation table, and TSR for the company and a peer group.

A narrative description and/or graph to describe relationship between CAP and company TSR, and also between company and peer TSR.

Unfortunately, as proposed, the P4P disclosure rules measure executive equity awards at vesting, where any alignment or misalignment with end-of-year TSR is inherently coincidental, or even false. This mismatch may provide a hazy or even coincidental understanding of pay for performance linkage at best. We expect that many companies will not show alignment of pay and performance in the P4P disclosure table.

Since executive compensation disclosure is subject to close scrutiny by media, proxy advisory firms, investors and regulators, it will be critical that the narrative and/or graphic explanation clarify pay for performance alignment.