The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

March 14, 2023

Pay Versus Performance: Early Disclosure Trends

Meredith blogged last week that we are starting to see more large-cap pay versus performance disclosures “in the wild” – in response to the SEC rules adopted last August. This memo from Compensation Advisory Partners summarizes early trends for S&P 500 disclosures. Here are some highlights:

Comparator Group for TSR: Most companies are using an industry index rather than a custom benchmarking peer group.

Company-Selected Measure: So far, 96% of companies selected a financial measure while one company selected relative TSR. Of the companies that selected a financial measure, the vast majority defined this measure as adjusted or non-GAAP.

Tabular List of Most Important Measures: The number of measures in the tabular list was 4 at median and 4.6 on average. Disclosure of only financial measures was far more prevalent than disclosure of financial and non-financial measures. Among the companies that disclosed non-financial measures, the measures were typically operational and ESG measures or a combination of operational and ESG objectives.

Explanation of Relationships Between Compensation & Performance: Some companies just displayed the graphs and did not make any statements to comment on or to explain the relationships. In instances where companies added narrative to the graphs, comments related to items such as the pay and performance alignment, an explanation based on stock price or other performance, and an explanation of the metrics used in incentive plans (versus the requirement to disclose Net Income).

Summary Compensation Table Vs. Compensation Actually Paid: The relationship between SCT reported numbers and Compensation Actually Paid varied significantly by year…When PEO Compensation Actually Paid and SCT values for all three years are summed, the ratio tends to align to company 3-year TSR performance. While relationships by company vary, on balance there is alignment, likely because the majority of PEO compensation is delivered in stock-based compensation.

Location of Pay Vs. Performance Disclosure: None of the companies in our sample included their PvP disclosure in the CD&A. The vast majority included the disclosure following the already required tables and often near the CEO Pay Ratio disclosure, another Dodd-Frank disclosure requirement. The placement of the new PvP disclosure reinforces the view that the required analysis of the new rules were not part of the compensation decision-making process of the compensation committee. We do not expect the PvP outcomes to become a primary factor in analyzing future compensation decisions but it will likely be part of the discussion going forward.

Length of Disclosure: Disclosures among early filers spanned 3 to 7 pages, with a median of 4 pages and average of 4.3 pages. Since this is the first year of required disclosure, most companies focused on complying with the requirements and minimizing additional voluntary disclosure. The longer disclosures were often the disclosures with the most detailed footnotes and charts reconciling the Compensation Actually Paid calculations.

Thanks again to the CAP team for these early takeaways – see the full memo for more detail, as well as our “Pay-for-Performance” Practice Area. We’ll be sharing more analysis and guidance on newly required pay vs. performance disclosures at our “Top Compensation Consultants Speak” webcast this afternoon – join us at 2pm Eastern!

Liz Dunshee