December 9, 2022

Pay Versus Performance Disclosure: What Will Investors Do?

I have been discussing the new pay versus performance disclosure requirement with management teams and boards of directors over the past few months, and the most frequently asked question is: “What will investors do with this new information?” It is a logical question to ask, because whenever one is drafting new disclosure, it is always important to think about how investors will use that information and what consequences the disclosure might ultimately have for the company.

Unfortunately, when I am asked this question, there is really no good answer at this point. During our 3-part “Special Session: Tackling Your Pay Vs. Performance Disclosures” last month, I was joined by Jun Frank, Executive Director, ISS Corporate Solutions and Rob Main, Managing Partner and COO, Sustainable Governance Partners to talk about how the new pay versus performance disclosure will be perceived by investors and the proxy advisory firms and how they might ultimately use it in their analysis. On this point, Jun Frank noted:

In terms of what is most important, probably many investors will take a “wait and see” approach to see how this disclosure will play out and what companies say about this disclosure, and then start formulating opinions about how to utilize this information. I believe data is important, but in the first year, I expect there’s going to be more focus on the narrative portion of it — how does this tie into your pay versus performance, say-on-pay, CD&A? Does it tell a coherent story and narrative? That qualitative, storytelling aspect of it is going to get no more attention than the data aspect, at least at the outset.

From Rob Main’s perspective, given the uncertainty about how the disclosure will be utilized by investors, it is advisable to engage with investors now on the topic:

From what I’ve understood, very few investors, if any, and proxy advisers, not at all, are going to be incorporating this information into their 2023 analysis. That’s for a variety of reasons. Timing is a big piece of it. Yet, there is still an opportunity in fall engagements for companies to inquire with investors specifically on how they are thinking about this new disclosure.

As far as my views, I noted that consistency of your message is the key when approaching pay versus performance disclosure in the upcoming proxy season:

I’m not in a position to influence what investors or proxy advisers do by any means, but my initial guess is that, at least for the first year or first couple of years, it’s not something that’s going to supplant what people already are doing in the Compensation Discussion & Analysis and in their proxy statement for the benefit of the investors and proxy advisers. It’s something where you can just hurt yourself with this disclosure if it is inconsistent with that broader message and not aligned with the story you’re trying to tell in the other context, and then it just goes to your integrity and whether what you’ve been saying all along is true.

Be sure to check out the rest of the transcript for this session. If you registered for this Special Session, follow the “Access the Session Archives” link to find the videos and transcripts for each of the three panels.

– Dave Lynn