Category: Executive Compensation
Fallout from pay-ratio reporting
As a general matter, SEC rules do not mandate companies to disclose details about the composition or location of their workforces; Reg S-K requires disclosure of only the number of employees, but no information about them. And the vast majority of companies provide little detail voluntarily. But now, as this article in the WSJ reports, companies are beginning to disclose more information about their workforces overseas, and the impetus for that disclosure is the new pay-ratio rule—all at a time when issues of overseas versus domestic employment are especially fraught.
Are pay-ratio disclosures misleading?
As I noted in this recent blogpost, a survey conducted by Compensation Advisory Partners LLC of pay-ratio disclosures from 150 companies with a median revenue of $2.1 billion showed that, as of March 9, 2018, the lowest ratio was 1:1 and the highest was 1465:1. What? 1:1? How did that happen? For one explanation, I refer you to this column from Bloomberg’s hilarious Matt Levine, part of which I quote below:
Early pay-ratio trends from compensation consultants
What are the early trends in pay-ratio disclosure? Surveys conducted by compensation consultants provide some insights.
EY Center for Board Matters identifies investors’ top priorities for companies for 2018
The EY Center for Board Matters has identified investors’ top priorities for companies in 2018, based on its annual investor outreach involving interviews with over 60 institutional investors with an aggregate of $32 trillion under management.
Want a preview of pay-ratio disclosure? Equilar releases pay-ratio survey data
Equilar has just released the results of an anonymous survey of public companies, with 356 respondents, which asked these companies to indicate the CEO-employee pay ratios they anticipated reporting in their 2018 proxy statements. As you would expect, there was a lot of variation among companies based on industry, market cap, revenue, workforce size and geography. In addition, because the rule provided significant flexibility in how companies could identify the median employee and in how they calculate his or her total annual compensation, variations in company methodology likely had a significant impact on the results. These variations in the data underscore the soundness of the SEC’s view, expressed at the time it adopted the pay-ratio rule, that the rule was “designed to allow shareholders to better understand and assess a particular [company’s] compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one [company] to another”; “the primary benefit” of the pay-ratio disclosure, according to the SEC, was to provide shareholders with a “company-specific metric” that can be used to evaluate CEO compensation within the context of that company.
First pay-ratio disclosure sighted
Thanks to my colleagues Amy Wood, Dani Nazemian and the intrepid Mariane Konstantaras, all three of our Comp & Ben Group, we now have a sighting of pay-ratio disclosure under the new pay-ratio rules, Reg S-K Item 402(u). Apparently, the first example was not in a proxy statement but in a Form S-1 registration statement filed with the SEC yesterday.
Shareholder proposal to exclude impact of share buybacks on executive compensation
In 2016, the AFL-CIO submitted several shareholder proposals designed to curb the impact of stock buybacks on executive compensation. (See this PubCo post.) The question at the time was whether we would see many more of these proposals. However, amid significant media and academic criticism, as well as relatively high stock valuations, the levels of stock buybacks declined, and the anticipated wave of proposals on buybacks did not materialize. However, the new tax act is expected to trigger a new spike in the levels of stock buybacks. (See this MarketWatch article.) Perhaps with that in mind, one of the most prolific proponents of shareholder proposals has submitted a proposal to eliminate the impact of stock buybacks in determining executive compensation. Will these proposals now become a thing?
SEC Chair discusses completion of Dodd-Frank rulemaking mandate
In a speech delivered by video to the Securities Regulation Institute in San Diego, SEC Chair Jay Clayton shed some light (but just a little) on the anticipated completion of the rulemaking mandates under Dodd-Frank.
Does inclusion of executive compensation metrics related to corporate social responsibility lead to long-term value creation?
In this recent academic study, Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes, the authors examined the impact of the integration of elements of corporate social responsibility, such as environmental and social performance, into executive compensation performance criteria. In the decision-making process, executives tend to gravitate toward the achievement of short-term goals and to respond more readily to more prominent direct stakeholders, such as customers and shareholders. But CSR metrics typically have a long-term pay-off and involve less direct stakeholders, such as the environment and the local community. The question is: is the inclusion of CSR performance metrics in executive comp programs effective to motivate executives to achieve those longer-term CSR goals, engage with CSR stakeholders and enhance long-term value creation?
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