SEC's New Rules Will Change The Game On Calculating True Value Of CEO Pay: What You Need To Know

The U.S. Securities and Exchange Commission (SEC) announced that public companies will soon be required to reveal crucial metrics linking financial performance and CEO pay.

What Happened: The move is a result of a provision in the Dodd-Frank Act in 2010, according to the Wall Street Journal, that was finally approved by the SEC. The rule will require companies to provide a table listing executive compensation and financial performance measures for their five most recently completed fiscal years.

While the regulations aim to provide greater transparency, companies may face challenges in calculating the value of stock awards as they will have to reassess the value of these awards annually when they prepare their proxy statements.

Called "compensation actually paid," it will list the resulting values for the most recent three years, along with other performance measures such as total shareholder return and net income.

The Journal gave an example: Using the new disclosure, the value of Schlumberger NV SLB CEO Olivier Le Peuch’s compensation jumped roughly $24 million during 2022, owing to the gains in the company’s share price.

Read Also: Why Apple CEO Tim Cook Is Staring At A Big Pay Cut In 2023

The goal of the rule is to enable investors to better understand how executive pay tracks company performance.

Although some have criticized the new regulations as being unnecessarily complicated and costly, they could have a significant impact on how investors view executive pay.

While proxy advisory firm Institutional Shareholder Services stated it won't use the new numbers when scoring pay-for-performance practices at public companies this year, analysts may take the new disclosures into account when assessing individual pay packages.

Corporate governance analysts agree that poor pay practices will stand out, and the new disclosure will provide insight into how boards are thinking about pay and performance.

Why It Matters: The SEC's new rule requiring companies to disclose metrics that link their financial performance and CEO pay, as well as demonstrate how a company's official net income relates to top pay, could have far-reaching effects on how investors view executive pay.

Although the new disclosures are expected to be complex, they will provide investors with greater transparency and ensure that everyone's calculations are on an “apples-to-apples” basis, according to the Journal.

Read Next: What You Could Buy With These CEOs' Yearly Compensation: From Elon Musk To Eric Wu

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