Pay-for-Performance Rules Roil Republicans
At the end of April, the Securities and Exchange Commission (SEC) has proposed rules that would require most public companies to disclose the relationship between executive pay and their financial performance in an open data format.
The proposed rules fulfill a requirement in the Dodd-Frank financial reform law. Dodd-Frank section 953(a) directs the SEC to require public companies to disclose materials that show the relationship between executive compensation paid by the company and the company’s financial performance.
Still, the proposal is controversial. The agency’s three Democratic commissioners voted in favor of issuing the proposal; but its two Republican commissioners voted against, criticizing the new rules’ reliance on a single performance metric, Total Shareholder Return (TSR), that they say is simplistic.
But apart from whether the SEC is getting the substance right or not, the format of the new disclosure is a win for open-data advocates.
This proposal marks the first time the agency has proposed to incorporate searchable data as part of public companies’ annual proxy statement.
Searchable Data in the Proxy Statement – Why Does That Matter?
Most of the information public companies file with the SEC is expressed in non-searchable formats. In 2009, the annual and quarterly financial statements became the first big exception; the agency requires companies to file data versions of each financial statement. (Implementation and data quality have been poor, but are improving.)
But the annual proxy statement has always been a plain-text document – difficult to electronically search or analyze.
The SEC’s new pay-for-performance proposal would make data part of the proxy statement for the first time – data that SEC chair Mary Jo White said can be easily “compared across companies.”
The tabular format disclosing pay-for-performance data will allow investors an electronic view of how their investment dollars are being rewarded in line with how the company executive’s compensation has fared during the same period.
By proposing to use the XBRL open data format for this table, the SEC is ensuring that the information will be vastly more valuable than if it were expressed as regular text – the way the rest of the proxy statement is formatted. Investors’ software will be able to understand the relationship between their executives’ performance and return on their investments, with no need to manually re-enter any figures.
The next question is when other content in the proxy statement will be transformed into searchable data.
More Modernization to Come?
The decision by the SEC to use XBRL for this new sliver of reporting reflects the agency’s new openness to modernizing its disclosure system. XBRL-formatted pay-for-performance data is just the latest in the SEC’s recent headway toward an open data transformation.
In mid-September 2014 the agency quietly released the final version of its Draft Strategic Plan for fiscal years 2014 to 2018 which commits the SEC to major efforts in data standardization and publication—and illustrates the impact of the Coalition’s advocacy. In July 2014, the SEC took its first steps toward XBRL quality enforcement. This past fall, its brand-new chief economist, Mark Flannery announced at our policy conference that the agency is poised to stop collecting separate document-based and data-based versions of company financial statements and collect a single version that is both human-readable and machine-readable.
We hope that this progress and leadership will continue at the SEC—and we will continue to urge Congress not to cut it off through short-sighted legislation.
A proposal currently being considered before Congress, the Financial Transparency Act, will ensure the SEC and the 7 other major U.S. financial regulatory agencies make the information they already collect from industry available online as open data — electronically searchable, downloadable in bulk, and without license restrictions.
Modernization might occur incrementally through proposals like pay-for-performance, or all at once through a mandate like the Financial Transparency Act. Either way, it is coming.