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CEO Pay: SEC© Rules Would Require Companies To Compare Executive Pay With Performance

Publisher: International Business Times
Author: Owen Davis

The mood was downbeat during the 2015 annual shareholder meeting at Barrick Gold, the world’s largest gold mining company.

Barrick’s share price had tumbled 33 percent in the past year, and doubts swirled around upper management’s ability to weather a tough gold market.

But there was a glimmer of good news at the Toronto mining company, at least for one person: Chairman John Thornton saw his compensation rise 35 percent, to nearly $13 million.

The contradiction between the Barrick’s performance and its leader’s pay rankled shareholders, who voted overwhelmingly against the pay deal. This week, Thornton told investors, “We have heard you loud and clear,” and announced plans to overhaul his company’s executive compensation system.

Those kinds of battles could soon become more common. On Wednesday, the Securities and Exchange Commission proposed new rules that would require publicly traded companies to make public the relationship between executive compensation and corporate financial performance.

The 2010 Dodd-Frank Act empowered the SEC© to enact a number of measures around executive pay, including an as yet unwritten requirement that companies compute the ratio of CEO pay to earnings of average workers. Pay for CEOs grew 12 percent in 2014, compared with about 2 percent for private, non-supervisory workers.

The new disclosures promise to give shareholders concerned with executive pay new ammunition for proxy battles. Under the proposed rules, companies would be required to publish tables showing their executives’ actual compensation alongside the company’s financial performance over the previous five years, as measured by stock performance and dividends, as well as the returns of similar companies.

Though simple on its face, calculating these measures invites debate. Dodd-Frank required the comparison to include executives’ “actual pay,” a phrase the bill didn’t define. Should stock options, for instance, be counted as compensation in the year they are granted, the year they vest or the year the executive exercises the options?

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