The stepped-up executive pay disclosure required by the Securities and Exchange Commission (SEC) in a rule it released last week won’t be new to companies that already provide data on pay-to-performance to proxy advisory firms, but it could give them a chance to better control the narrative about how they’re doing, a corporate strategy advisor says.
The SEC rule requires companies to include a table within their filings covering executive compensation and financial performance indicators for a five-year period. The rule stems from a 2010 Dodd-Frank provision that seeks to make it easier for shareholders to evaluate how well companies are performing relative to the amount they pay the CEO and other top executives.
“This rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies,” SEC Chair Gary Gensler said when the rule was released August 25.
The requirement will mainly be new for companies that are relatively small or new or for some other reason are not on the radar screen of the big proxy advisory firms like International Shareholder Services (ISS) and Glass Lewis, said Brennan Rittenhouse, managing director at Alvarez & Marsal Taxand Group.
The rule instructs companies to compare the pay of their CEO and the other highest paid executives, including the CFO, to total shareholder return (TSR) and the TSR for a peer group. It also wants a comparison between pay and net income.
The methodology sought by the SEC doesn’t necessarily align with how the proxy advisory firms want to make the comparisons, but for many companies some kind of process is already in place, so the requirement by itself doesn’t mean too much of added an burden, although the way the SEC wants equity pay calculated might be novel to many companies.
“Large companies probably already have the guts that are going to go into this new disclosure,” he said. “This is just going to be in a new format.”
Even for companies that haven’t had to gather the data for these types of calculations before, the requirement shouldn’t be that difficult to meet, Rittenhouse believes.
Even so, it places an added administrative duty on companies even though the impact it’s going to have on executive compensation isn’t clear.
In a statement released about the rule, SEC Commissioner Hester Peirce said the disclosure is of “questionable utility” despite the “costly, complicated” burden it imposes.
“It’s curious the commission came right out and said it didn’t see any major benefits to this on the day they released the rule,” said Rittenhouse.
Regardless, the stepped-up disclosure can be useful to a company by giving executives a chance to use the comparisons to shape how the company is meeting its challenges.
Among other things, the rule lets companies pick some measures, like revenue, to compare pay against. Having that kind of choice can enable executives to include narrative-shaping commentary in their filings.
“Maybe you built and launched a factory,” Rittenhouse said. “You probably killed net income because of the cost to build it. But from an overall company performance perspective,” the story is different. “Maybe there are operational changes. Maybe there are changes to your executive suite that caused some anomalies. Just putting out the table and saying ‘There you go’ is probably not the smartest move. But describing all the details of how you got to where you are, why you believe your pay is reasonable based on performance, tells a story to shareholders.”