If the SEC's own chair describes the compensation disclosure rules as “Frankenstein patchwork,” it is clear that something is cheating. In recent years, efforts to better understand compensation programs for investors through more robust disclosure requirements have created a slate of rules that expands, from wage log calculations to CEO pay ratios and clawback disclosures.
As a result, compliance has moved beyond the burden and completely confused for many companies, especially those without deep internal resources. Moreover, rather than drawing a clear picture of how pay is consistent with investor performance, the resulting disclosures often missed the mark when telling stories that are useful for consistent decision-making. Instead, new requirements, a short window of compliance, and a lack of critical guidance from the SEC allowed us to present overly complex CDs and layers of data that were repeated, confusing, or sometimes inconsistent.
Quality than quantity
This is the very fact that the SEC felt the need to host an event where its chairman, Paul Atkins, saw its Frankenstein reference (July Roundtable on Enforcement Fee) roundly as acknowledging that the current disclosure framework was cumbersome. Comments from SEC commissioners, investors, executives and advisors who participated in the discussion itself highlighted the sentiment. “My takeaway from the roundtable is that the pendulum appears to be a little bit off the very additive approach to the regulatory process in recent years,” says Jose Furman, Principal of FW Cook. “At least, this could lead to less regulation and more concise disclosures to improve investors' understanding of executive compensation.”
It appears that relief in the form of revisions to the current mission is also possible. “This was the first sneak peak that SEC commissioners were discussing potential disclosure changes,” says Michael Abromowitz, Principal of FW Cook. “You have a different agenda due to all administrations, especially parties switching. So the question is, which items do the SEC want to see change.”
One focus is that the number of CDs and A disclosures required can be enormous, resulting in a mass of mandated data that is often obscure, rather than illuminated, rather than how Executive Pay is actually tied to performance. “You're forced to calculate things differently between tables, and sometimes those numbers are at odds with each other,” explains Furman. “You're throwing away both cash that's already been acquired and stocks that are still recognized but not yet acquired, but then you're in your own complicated calculations, two perspectives are apples and oranges.”
Scrutiny security
The treatment of security arrangements offered by the company as reportable power of attorney under the Enforcement Fee Disclosure Rules was another area of scrutiny during the Roundtable discussion. The business impact of recent well-known corporate safety incidents has been of interest to implement personal security arrangements for executives. However, prospects should raise questions about whether such arrangements are considered profitable and therefore include them in summary compensation.
“Most companies don't see security benefits as a compliment to employees that is not necessarily an operational company-critical,” explains Abromowitz. “However, many have hesitated to provide or limit the size of the arrangements due to concerns that doing so would invite scrutiny from a proxy advisor. However, since the killing of the executives at UnitedHealthCare, we have seen an increase in clients to review and enhance personal security arrangements.
However, the signs suggest that the Compensation Committee may want regulatory reforms to simplify disclosure requirements and ease compliance, but the timing and scope of the changes remain uncertain. The SEC has announced plans for a public comment period, suggesting that key rulemaking updates are unlikely in the short term.
In the meantime, Furman recommends focusing on increasing the clarity and usefulness of existing disclosures. This is especially true in CD&A – that investors and proxy advisors can better understand the rationale behind wage decisions. “Investors are looking for CDs, explaining the reasons behind the decision to make a reward,” he explains. “What is the basis for the business? How is our salary tied to performance? There are ways to enhance disclosure, improve clarity, actually go home, get ahead of this, and ultimately improve readability and ease of understanding from investors.”
Theoretical and practical
Including CD&A realisable or feasible pay analyses is one way that allows businesses to increase transparency around wage and performance adjustments. Achieveable or feasible pay analysis compares the compensation that the CEO or other appointed executive officer intended to receive on what he actually received over the length of his long-term incentive plan (often 3-5 years). The actual bonus payout calculation factors, the value of the performance-based stock awards (often paid between zero and double depending on how well the target is achieved), and the value of the stock-based prizes based on our stock price.
This type of retrospective analysis provides meaningful context for investors and proxy advisors. This is especially useful when the results of compensation appear to be inconsistent when viewed through the lens of a summary compensation table that reflects accounting value rather than realized economic value. “For example, a company may have a five-year program aimed at compensating CEOs at the median market, $5 million through granting long-term incentives in base salary, target bonus opportunities, and time-based performance-based equity,” explains Furman. “However, if the inventory is declining and the analysis shows that he only recognizes 50% of that coverage, it shows that the pay aspect of the program's performance is functioning as designed by scaling backpays when results are lacking.”
By providing this type of supplementary disclosure, companies can communicate the logic behind pay decisions, emphasize the integrity of their incentive structures, and strengthen their commitment to governance arranged by shareholders. This approach is an aggressive tool that a company can take to show that it provides results that reflect the actual company's performance. Though not a standard practice yet, companies like Exxon Mobil, Medtronic, Chevron and Marriott have reported feasible salaries in their latest proxy statements.
Investors and proxy advisors are also increasingly seeking more details on setting annual and long-term performance goals. “They understand why goals are chosen, how these goals are calculated, and what adjustments are being made,” says Furman. He recommends that you consider writing CD&A in advance in a letter from the board chair or the compensation committee chair explaining the important teneri of the compensation program.
“In many cases, letters are introduced after a pass-through challenge to tell investors what the company has done, how they take it seriously, and how their programs align with the company's performance over a period of time,” he explains. “It speaks to incentive payments, operational performance, total shareholder profit (TSR), and other commitments they have made to investors through outreach. Ultimately, it aims to place all the most important points or takeouts of CD&A Upfront for readers.
By actively strengthening CD&A's clarity and narrative, businesses can bridge the current gap between regulatory compliance and meaningful investor communication through tools such as realized wage analysis and letters from board leadership. By taking these measures, businesses will not only advancing potential regulatory changes, but will also strengthen the integrity and integrity of their executive pay programs and help them prepare their businesses for future SEC rules, says Abromowitz.
“The biggest scrutiny that companies get from proxy advisors and shareholders is their lack of disclosure,” he says. “Therefore, even as the SEC begins to question the usefulness of some of these burdensome disclosures, there is a continuing demand for transparency from stakeholders (the macro trends we have seen over the past decade).
