Troy Paredes gave some insight into the difficulties the commission has run into while trying to come up with new compensation rules.
Executive compensation was a major topic of discussion at the Society of Corporate Secretaries and Governance Professionals’ conference in Washington, DC last week, and SEC commissioner Troy Paredes gave some insight into the difficulties the commission has run into while trying to come up with new compensation rules as he addressed the attendees in a speech on Friday morning.
In his remarks, Paredes focused strongly on ethics in business, using the responsibilities of the board of directors and the way in which compensation policies can affect behavior to make a number of major points. Acknowledging that the SEC has taken a bit longer than expected to deliver final rules on compensation disclosures, including pay for performance measures and clawback provisions, he explained some of the challenges the commission is trying to sort out.
First, he made the point that ‘regulation needs to be workable in practice for those who have to comply with it’, which at least suggests the commission is mindful of the burdens regulation can heap on businesses. He also pointed out that finding a ‘workable’ standard for calculating CEO pay ratios was presenting practical difficulties and might actually be opening the door to softening this requirement.
‘In my view, more consideration needs to be given to alternative approaches to the rule that could advance the goal of providing investors with material information about CEO pay, but in a way that does not impose excessive obligations’ on companies, Paredes said.
He further acknowledged that changes in executive pay rules may have unintended consequences down the road, as they tend to change behavior. Compensation rules with provisions to claw back incentive pay might cause companies to restructure compensation agreements ‘so that executives end up receiving less incentive pay that can be clawed back or larger discretionary bonuses that are not explicitly linked to specific financial targets.’
Paredes then asked: ‘To what extent should we expect executives to push for higher base pay to compensate up-front for the risk the incentive compensation they do receive may have to be forfeited in the future?’ The clawback provision was not intended to shift companies away from incentive-based pay, but it might do just that if the right rules are not implemented.
His last point on compensation was that ‘executive compensation does not lend itself to one-size-fits-all approaches, but instead demands a textured company-by-company analysis.’ This is a loud and clear acknowledgement that each company has unique circumstances that may call for it to treat compensation matters differently from others.
What Paredes’ observations suggest is that when the SEC finally issues compensation rules, boards will likely have fewer obligations to meet and enjoy more flexibility in making a case for the compensation plans they believe are appropriate. How the compensation disclosures are written will therefore be key in keeping executive pay at levels that won’t rattle shareholders.
