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SEC Proposes New Rules For Linking Executive Pay With Firm Performance


Enormous pay packages for corporate chief executives whose companies are struggling have long been a source of outrage. Well, today, the Securities and Exchange Commission introduced a rule designed to help shareholders understand just how deserving a CEO really is. It was approved by a vote of 3 to 2. NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: The rule grew out of the 2010 Dodd-Frank financial overhaul bill. And it simply says that companies have to disclose whether executive pay tracks the firm's financial performance. This information is already available for people who want to pour through financial reports. The new law would simply require companies to put it in a form that's easier for shareholders to digest. Lynn Stout is a professor of corporate and business law at Cornell.

LYNN STOUT: Anything that allows people to understand better exactly how much executives are being paid is a good thing, because it introduces oversight. It brings in sunlight on the dark issue of executive compensation.

ZARROLI: The new rule, which still needs to be given final approval, is the latest attempt by regulators to address soaring corporate pay. Compensation consultant Alan Johnson believes too many CEOs are earning way more than they should. But he's also skeptical about the rule approved today. For one thing, he says, executive pay packages can be pretty complicated. And in any given year, it's not always clear just how much a CEO is really earning.

ALAN JOHNSON: Now, the problem is much of the pay may have been actually granted years before. So for example, the exercise of stock options may be realized this year, but it may have been granted seven years ago.

ZARROLI: Johnson says the rule will accomplish little besides embarrassing publicly-traded companies. Lynn Stout says there's another problem with the proposal. The rule would require corporations to contrast executive pay with total shareholder return. That's a measure of how the company stock has performed. But Stout says U.S. companies already place far too much emphasis on short-term fluctuations in their stock price.

STOUT: At the end of the day, this rule may simply encourage more corporate short-termism and more unethical executive behavior by increasing the relentless focus on short-term financial metrics.

ZARROLI: It's also not clear what impact the new rule can have on corporate pay. Another rule approved by the SEC in 2011 allows shareholders to call for a vote when they don't like a company's compensation practices. But the vote is nonbinding. In the end, the only way shareholders can really affect pay may be to sell their shares and walk away altogether. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.

Jim Zarroli is an NPR correspondent based in New York. He covers economics and business news.