In November 2020, amendments to Reg S-K to modernize the required business narrative became effective. The amendments including changes related to disclosure about a company’s human capital resources, replacing a requirement to disclose only the number of employees with a new requirement to disclose, to the extent material, information about human capital resources. In particular, the amendments identified as non-exclusive examples of measures or objectives that the company may focus on in managing the business “measures and objectives that address the attraction, development, and retention of personnel.” Even these measures, the SEC emphasized, were not a mandate. However, then-SEC Chair Jay Clayton said at the time of adoption that he expected “to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.” The principles-based rules did not articulate specific metrics for human capital resources disclosure, allowing companies wide latitude in crafting their disclosure to focus on information that is material to each company. At the same time, however, the rules did not provide much direction, leaving many companies at something of a loss for how to proceed. In this paper, Compensation Advisory Partners provides an “early read on developing best practices” regarding human capital disclosure, analyzing the earliest disclosures to provide some guidance on topics, trends and level of detail provided. The CAP paper also includes a number of useful samples. Similarly, Willis Towers Watson reviewed the first three dozen human capital disclosures by companies in the S&P 500 published in 10-Ks filed since the effective date of the new requirement and, in this report, provides some data on the prevalence of topics and metrics.
Length. CAP found that “more robust disclosure” was about 1,000 to 1,500 words in length, while shorter, less detailed disclosure was about 300 to 500 words in length. The shortest they found was 63 words and the longest 6,800 words. Most companies included their disclosure in the description of business in their Forms 10-K, while some included only a brief couple of paragraphs in their 10-Ks and instead referred readers to the lengthier descriptions in their proxies.
Topics. CAP identified the following as popular topics, noting that companies typically selected three to six of these topics as most relevant to address:
- “Facts about the make-up of the work force, including total number of employees, number or percentage in each major geography, breakdowns by type of employee, including full-time, part-time and seasonal, as well as management, administrative, engineering, skilled trades and hourly workers whether union or non-union;
- A statement of company culture and identification of core values;
- Description of governance and oversight of human capital initiatives by the board of directors, senior management and, in some cases, various councils or advisory groups composed of employees;
- Initiatives and statistics relating to diversity and inclusion;
- An overview of total rewards, with greater emphasis on all-employee programs, such as retirement and welfare benefits or a commitment to living wages;
- Discussion of talent development and training;
- Recruiting and retention practices;
- Use of employee engagement surveys;
- Pay equity; and
- Health and safety initiatives and metrics.”
WTW identified the following as common topics and provided the prevalence:
- “Health and safety 18%
- Compensation and/or benefits 38%
- Employee engagement 44%
- Diversity initiatives and strategies 62%
- Employee development and training 68%”
WTW also found that most companies included some COVID-19-specific disclosures.
Metrics and goals. Based on its assessment of examples, CAP concluded that “most disclosures to date depend heavily on a qualitative description of core values, programs and practices. Very few companies are disclosing actual objectives and/or metrics used to manage the business.” According to CAP, some companies did disclose various objectives, such as goals to increase by specific percentages its officers and other employees from underrepresented communities, achieving a 10% annual reduction in recordable safety incidents and reducing the rate of voluntary employee attrition. Among the specific metrics, companies disclosed the breakdown of employee demographics by gender and race/ethnicity, gender and racial/ethnic pay gaps, the number of self-identified nationalities, gender demographics by profession or position at the company, the number of employees subject to collective bargaining agreements with various labor unions, the number of recordable safety incidents relative to OSHA standards and voluntary attrition rates relative to industry standards.
However, CAP did not observe disclosure of productivity metrics, such as “revenue per employee, growth in sales relative to growth in compensation costs, or compensation costs as a percentage of revenue.” CAP concluded that the absence of these types of metrics “indicates that human capital management will change over time. Consulting firms, data analytics shops and government will publish more information on benchmarks. Human capital metrics will become more standardized.”
WTW found that almost all companies (94%) surveyed included the metric of the number of employees. After that, the prevalence of the use of metrics declined substantially:
- gender representation 44%,
- race/ethnicity representation 38%,
- collective bargaining/union representation 18%
- training participation 18%
- voluntary attrition rate 15%,
- employee engagement results 12%
- recordable incidents 12%
Like CAP, WTW also found that few companies provided concrete goals. For example, of the companies that provided disclosure regarding diversity, two-thirds provided representation metrics, but only 19% provided concrete gender diversity goals. WTW expects “an uptick in their prevalence” in future filings.