Charting performance: the SEC's new disclosure rules.

• Author: Dixon, Catherine T.
• Position: Executive Compensation in the Spotlight

As a matter of policy, the SEC disclaims responsibility for any private publications by any of its employees. The views expressed herein are those of the authors and do not necessarily represent the views of the Commission or any of its staff.

The Securities and Exchange Commission's new executive compensation disclosure rules, adopted in October, have two key purposes: to provide shareholders with highly formatted, easily understood information regarding a company's executive compensation policies and practices, and to ensure that members of boards of directors, ultimately responsible for setting such compensation, can be held fully accountable at the corporate ballot box by an informed shareholder electorate.

Under the new rules, the lengthy descriptions of compensation plans previously mandated will be replaced with a series of tables outlining each item of compensation awarded, earned, or paid in a given fiscal year to the company's chief executive officer and the four other most highly paid executive officers. Board compensation committees also must furnish, over the names of each committee member, a report of the rationale for the compensation disclosed.

Accompanying these disclosures will be a linear graph reflecting long-term trends in corporate performance as measured by total shareholder return (stock price plus dividends). Based on this graphic illustration, shareholders should be better equipped to evaluate the adequacy of the compensation committee report discussing the relationship of executive pay to the company's performance.

The performance graph compares annual changes in the company's five-year cumulative total shareholder return, calculated on a dividend-reinvested basis, with returns for the same period on both a broad equity market index and an industry or peer-group index. For purposes of the industry comparison, companies may select either a published industry or line-of-business index, or construct an index of peer entities selected in good faith. The new rules make clear that companies have broad discretion in determining a peer comparison; for example, the comparison may be made to as few as one entity and to foreign as well as domestic companies.

To chart the requisite annual changes in cumulative total return, the company should calculate the fluctuations in the dollar value of a hypothetical investment made at the beginning of the five-year period, or "measurement point," in a class of its registered common...