Yesterday, the SEC held its roundtable on executive compensation disclosure requirements. The event was well-attended and featured wide-ranging discussions on the state of executive compensation disclosure today and potential changes that could be made to the SEC’s requirements. Chairman Atkins, Commissioner Peirce and Commissioner Uyeda each delivered opening remarks and Commissioner Crenshaw posted a statement because she was unable to attend in person. These statements touch on many of the issues that were discussed at the roundtable. The statement of Chairman Atkins notes:

The Commission amended Item 402 of Regulation S-K in 1992 to state specifically that “This Item [402] requires clear, concise and understandable disclosure of…compensation…” However, one could say that this well-intentioned, three-decade-old statement has become facetious with the passage of time in light of the lengthy narrative disclosure and numerous tables and charts that appear in today’s proxy statements.

Our rules must be grounded in achieving the Commission’s three-part mission: investor protection, fair, orderly and efficient markets, and capital formation. These rules should be cost-effective for companies to comply with and provide material information to investors in plain English. Most importantly, the information required to be disclosed should be material to the company and understandable to the Supreme Court’s objective reasonable investor. The outcome of our rules is not effective when companies require highly specialized lawyers and compensation consultants to prepare disclosure that the reasonable investor struggles to understand.

Today’s roundtable is one of the first steps in considering whether the current executive compensation disclosure requirements achieve these objectives, and if not, how the rules should be amended. In connection with this process, I previously asked the Commission staff to consider several questions in this area and for the public to provide their views on those questions. Thank you to those who have already submitted comment letters. For others who intend to submit a letter, please do so as soon as possible over the next several weeks, to provide the staff time to consider and incorporate your views into any potential rulemaking proposal.

Commissioner Peirce focused her remarks around the theme of missing the forest for the trees, noting:

Some executive compensation rules seem more responsive to the general public’s curiosity than a genuine investor need for material information. Painstakingly calculated tallies of perks, like rides on the corporate jet, housing allowances for overseas assignments, or car services give us a tiny window into executives’ lives, but do little to fill out an investor’s picture of the company. Lately, our rulemakings have taken a “more is better” approach to executive compensation disclosure. These tack-on rules to the growing alphabet of Item 402 of Reg S-K—we are almost all the way through the alphabet—do not provide new information. Instead, these rules re-package and re-present data that investors mostly already have. Or they add details that are immaterial. Do investors even look at this “new” information? And if they do, are we confident it gives them a rational basis to evaluate a security’s price?

Consider, for example, pay ratio disclosure and pay-versus-performance disclosure. In his statement of dissent on the pay ratio rule, then Commissioner Dan Gallagher noted that it could have been “marginally less useless” if it were limited to U.S. full-time employees. While not a ringing endorsement of the rule or any of its possible permutations, his comment highlights that even with respect to a rule mandated by Congress as this rule was, the Commission retains some latitude to implement it in the best way possible. More recently, pursuant to another Dodd-Frank mandate, the Commission adopted the pay-versus-performance rule. 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.

More concerning than the direct costs of producing executive compensation disclosures are the costs that arise from the distortion of corporate behavior in response to executive compensation disclosure mandates. Perhaps a company opts for a compensation scheme that is less effective at aligning incentives because of the way such a scheme will be reflected under SEC disclosure rules that do not necessarily represent economic reality. Or perhaps a company opts not to provide security for its executives because it appears in a laundry list of examples of perks in a 2006 Commission release that incidentally declines to define what a perk is. Now may be time for the Commission to return to a more nuanced approach to personal security disclosure that considers the context in which those measures are provided. Some companies have even gone so far as to eliminate perks altogether while offsetting such “cost-saving” measures with increases to base salaries. Executive compensation disclosure, along with other disclosures, should reflect rather than direct corporate actions.

Commissioner Uyeda focused on a number of SEC rules that have been identified as problematic, as well as concerns with the process in adopting those rules, noting:

Other executive compensation disclosures appear to have dubious purposes. The CEO pay ratio disclosure is one such example. There appears to be little nexus to investor protection concerns. Instead, aspects of the CEO pay ratio rule, and the underlying Dodd-Frank statutory provision, seem to have a “name and shame” motivation. The Commission’s rulebook should not serve to further political agendas. In addition to distracting from the Commission’s primary mission of providing material information with respect to executive compensation, this rule also increases regulatory compliance costs without providing any corresponding investor benefits.

We have received many recent comment letters on executive compensation that are critical of the CEO pay ratio disclosure. One letter noted that the “CEO Pay Ratio does not provide an accurate comparison of pay equity within organizations” as “various industries have different workforce and compensation structures, which prohibit meaningful evaluation.” Another comment letter stated that the CEO pay ratio “does not appear to have played a material role in compensation committee discussions, investor decision-making, or the rapid rate of increase in executive pay relative to that of the wider workforce.” Disclosures that are both costly and complex to produce, while not material to investment or voting decisions, are at odds with good disclosure regulations.

Regarding the adoption of clawback rules, the scope and impacts of the rule may have increased uncertainty. Specifically, market participants indicated that there is a lack of clarity as to what type of accounting errors “need to be analyzed and when boxes need to be checked …” Further, third-party analysis indicated that few companies have analyzed the underlying accounting errors potentially requiring a clawback. As such, the benefit of this framework appears minimal. Perhaps these issues could have been avoided if the Commission, in its haste, had not rushed in 2022 to adopt an unadopted 2015 proposal from the Obama Administration without first updating the economic analysis and engaging with the stakeholders as how to best implement this rule.

Commissioner Crenshaw offered a different perspective, raising some questions for discussion:

Compensation Trends. The Chairman has posed a number of questions in advance of these roundtables. Many focus on how compensation is set today. I’m also interested in hearing about compensation trends. Long-term data on executive compensation can be both decision-useful for shareholders writ large and can help us evaluate potential weaknesses in the market. For example, we’re just starting to realize the data from our pay versus performance rulemaking in 2022. And, the figures on “compensation actually paid” metrics are potentially revealing. The data show that the highest paid CEO in 2024, using compensation actually paid metrics, made over $6.9 billion. 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?

Material Information. Looking further into the roundtables, the Chair has posed a number of questions on what information is material to shareholders. Feedback from investors on the materiality of executive compensation disclosures has been consistently strong, from comment files in our rulemakings, to everyday conversations, to testimony in the leadup to the seminal Dodd-Frank legislation.

I nonetheless encourage all shareholders to continue to comment on what is the most decision-useful information in response to the questions posed in connection with this forum. In addition, I hope commenters will discuss how data quality can be improved and made more comparable, for example, potentially by reconciliation of non-GAAP financial measures to comparable GAAP measures. I hope we see shareholder and issuer input alike, which goes not only for the preeminent panelists on the dais today, but also market participants of all stripes. Please use the opportunity to make your voices heard in the comment file.

Additionally, staff (at the behest the Commission) has recently taken steps to limit shareholder engagement with management, in the executive compensation and other contexts, by amending staff guidance on 13D and 13G filings. This may put more pressure on the proxy process. How can we strengthen transparency and the quality of disclosures, both in general and specifically in light of these regulatory changes that tend to discourage shareholder communications?

Cost. The Chairman has also posed questions relating to cost. I would encourage panelists to consider all costs in their comments, and not just those incurred by issuers (which, of course, are ultimately borne by the shareholders). Oftentimes, shareholders expend substantial sums analyzing compensation data disclosed in filings. Are there ways to use technology to lower the costs of the entire ecosystem, without sacrificing the quality of data provided to shareholders – and perhaps even improving data quality?

– Dave Lynn