The SEC held an afternoon of panel discussions with attorneys, executives and pension fund managers last week. Up for discussion were the current rules on executive compensation disclosure, and a possibly more streamlined version of future rules requiring publicly traded companies to reveal the pay of their top executives.

The Executive Compensation Disclosure event kicked off with commissioners Paul Atkins, Hester Peirce and Mark Uyeda stating their support for paring back disclosures requiring publicly traded companies to compare CEO pay to that of the median worker, as well as reporting requirements that detail how executive pay is tied to a business’s financial performance.

The objective of the discussions was to figure out how to supply material information to prospective investors to give them a rational basis to evaluate a company and its securities with while avoiding unwieldy, expensive, and not particularly useful details.

Panelists included senior executives from PNC, Mastercard, United Airlines, ExxonMobil, and BlackRock, and from executive compensation advisers the Council of Institutional Investors, Compensia and the Center on Executive Compensation, law firms Sullivan & Cromwell, Gibson Dunn and Goodwin Proctor, and pension fund managers from California and Florida.

Commissioners’ thoughts

Commissioner Peirce referenced the Dodd-Frank Act’s pay-versus-performance rule in her prepared remarks. “The overarching feedback I hear on the rule is that it is a regulatory ‘tax’ on public companies without a corresponding benefit for investors. Management, and the high-priced consultants and lawyers they hire, spend hours preparing the various narratives, tables, and graphs that produce nothing but yawns of disinterest from investors,” she said.

And Chairman Paul Atkins bluntly stated: “Today, one might describe the Commission’s current disclosure requirements as a Frankenstein patchwork of rules. The volume and complexity of these rules may be just as scary to a law firm associate performing a ‘form check’ of a proxy statement, as the monster was to Dr. Frankenstein himself when the monster opened its eyes.”

And Commissioner Uyeda said that aspects of the CEO pay ratio rule (the one requiring publicly traded companies to disclose the ratio of their CEO’s compensation to the median compensation of their employees) seems to have a “name-and-shame” motivation. “The Commission’s rulebook should not serve to further political agendas,” he said.

“The volume and complexity of these rules may be just as scary to a law firm associate performing a ‘form check’ of a proxy statement, as the monster was to Dr Frankenstein himself when the monster opened its eyes.”

Paul Atkins, Chairman, SEC

Democratic party commissioner Caroline Crenshaw explained the rationale behind these rules, carefully crafted in the Dodd-Frank Act of 2010: “Congress observed that executive compensation practices encouraged risk taking in a manner that exacerbated many of the problems underlying the 2008 financial crisis, and called for comprehensive reform,” she reminded everyone.

“The ratio of CEO to median employee pay at S&P 500 companies rose to approximately 192:1, and at the companies of the 100 highest paid CEOs, that ratio is 348:1. Do larger data sets reveal compensation trends or practices that may foretell problems down the road?” Crenshaw wondered. Her unstated question: Shouldn’t we know about those growing, mammoth pay discrepancies, especially when also compared to company performance?

Panelists’ thoughts

Panelists noted how proxy advisory firms like ISS and Glass Lewis identify a range of pay practices they deem problematic, influencing how institutional investors vote on executive compensation at shareholder meetings. 

These concerns often center on pay-versus-performance misalignment and excessive perks, and panelists were concerned that their priorities have made companies too eager to adjust their playbooks to accommodate them. “This has led to companies becoming a bit too homogenous in the area of executive compensation, even when the firms themselves vary so much,” said one.

And it’s happening because the regulations compel the proxy advisory firms to emphasize these areas, some panelists added.

Their main concerns centered on whether SEC rules encourage certain compensation committee decisions, are more burdensome than useful to investors, and more specifically on the compensation given to executives that is considered “perquisites.”

A few panelists worried that annual pay is emphasized unduly when more frequent changes to pay rates could be warranted, especially for a new top executive finding his or her footing in that role.

And summary compensation tables in proxy statements provide a clear overview of executive compensation (salary, bonuses, stock awards) for named executive officers (NEOs). Some of the panelists were concerned that the table is burdensome to create, offers little value in understanding the rationale behind compensation decisions, and use grant date fair value for stock and option awards that might not reflect the actual realizable value for the executive. And who is considered an NEO is unclear.

When it comes to awards of free cars and country club memberships, the panelists were in agreement about those legitimately falling into the “perk” categories and needing transparency.

But when on the issue of providing certain executives with personal security details at work, at home (maybe even extending it to family members) and when traveling, most panelists felt that in today’s society, this award has become less of a perk and (sadly) a warranted investment, given the growing threat of violence directed at corporate figureheads.

This fact needs to be addressed through changes in regulatory reporting, they added.

Final comments

Generally, speaking, most of the panel participants felt that materiality should guide regulators in streamlining these disclosure mandates – preserving only those that are material to investment or voting decisions.

Data backs up much of what the panelists said at the event: complexity has increased substantially over time as more compensation consultants, institutional investors, proxy advisors, and a need to benchmark to peers (some of these things directly tied to meeting disclosure requirements) greatly affect the process of creating executive compensation programs.

Does the complexity help investors?

Although he did not answer that question, one panelist, speaking on behalf of the investing public, commented that thanks to the outsized awards for some executives and ever-growing pay gap between CEOs and their “median” worker, “it can feel like a CEO needs a crazy amount of pay to even show up to do his or her job.” It would likely be a lie if most of us had thought the same at some point.