The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Last week, SEC Commissioner Luis Aguilar gave this speech on proxy disclosure. I briefly noted that fact in a blog last week because its rare that disclosure is the topic covered in a Commissioner speech (here’s Mark Borges’ blog on the speech). But otherwise, I didn’t give it much thought as Commissioner speeches typically don’t mean a whole lot. It doesn’t change the rules nor interprets them – nor is it a harbinger of potential changes in most cases.

Anyways, some folks perhaps have read more into Aguilar’s speech than there really is on pay ratios. Or even if the speech says what they think it says, it’s just the opinion of one Commissioner. Here is the excerpt from the speech dealing with executive pay disclosure (my emphasis added to the pay ratio part so you can find it easily):

Compensation Risks

A key provision of the 2009 amendments is Item 402(s) of Regulation S-K, which requires a narrative discussion of a company’s compensation policies and practices relating to risk management. Although, by its terms, this rule requires such disclosure only “to the extent” that risks arising from the issuer’s compensation policies and practices are “reasonably likely to have a material adverse effect,” it would be prudent and appropriate for all issuers to discuss the role of compensation in risk management in their proxy statements.

By their very nature, policy decisions on compensation create incentives, and therefore have consequences that go beyond the dollar amount paid. The manner in which companies assess and respond to the risks and rewards embedded in compensation plans and other policies is inherently material to investors. Few if any issuers may disregard the effects of compensation on risk management without exposing the company and its business to potentially material adverse effects.

Moreover, risks relating to compensation go beyond the immediate incentives of a particular compensation plan or policy. The relative pay of different classes of employees, such as the ratio between CEO compensation and median pay, can also create risks to an enterprise, including the risk of employee, customer, and shareholder discontent. Decisions regarding executive compensation may also affect succession planning and related risks. Companies should consider whether additional disclosure is necessary to enable stockholders to assess such risks and the manner in which any such risks may be affected by a company’s compensation policies and practices.

Issuers should also consider including enhanced disclosure in the proxy statement regarding the relationship between executive compensation actually paid and a company’s long-term performance. Policies and practices that reward management despite poor performance, or that result in a poor correlation between pay and performance, may adversely affect risk management by sending the wrong signals to a company’s executives and by impeding the board’s ability to exercise the oversight for which it is responsible.

It is recognized that the discussion called for by Item 402(s) will vary among different companies and industries. Investors are not looking for boilerplate, and there is no one-size-fits-all solution that issuers can take off a shelf. Rather, I urge public companies and their counsel to apply thought and judgment to the principles set forth in the rules, and, most importantly, to be guided by a clear vision of the investors who are relying on the disclosure to make important voting and investment decisions.