The Advisors' Blog

During our recent webcast “The Top Compensation Consultants Speak,” Ira Kay described a Pay Governance study that used pay versus performance data of 50 S&P 500 companies that filed their proxies on or before March 10, 2023 to calculate the level of alignment of “compensation actually paid” with TSR, relative TSR, GAAP net income, and the company selected measure, which we subsequently blogged about. Now that more time has passed, Pay Governance has reviewed PVP disclosures of 160 S&P 500 companies that filed their annual proxies as of March 31, 2023 and has released a viewpoint with more takeaways for us.  Here are the key findings from that data, the first of which confirms the conclusion in their prior study with this larger sample size:

– The new PVP disclosure is supportive of the current executive compensation framework used by most companies, as compensation outcomes are directionally aligned with shareholders’ interests. It also justifies their significant support for Say on Pay during the Say on Pay era these past 12 (going on 13) years.
– The fair value of the current year’s equity award has the greatest impact on the CAP absolute dollar amount.
– Higher performing companies (as measured by TSR) reported significantly higher CAP values than lower performing companies for each of the last three years (2020-2022).
– As explicitly expected by the SEC, CAP can be very volatile between years due to stock price changes and adjustments to expected performance outcomes.
– Changes in SCT total compensation, on the other hand, tend to move within a narrow range because the biggest drivers of the change relate to the current year’s annual incentive, a relatively small portion of total compensation, and changes in the grant date value of the current year’s equity awards, which are generally conservative.

Given these findings, the study concludes with thoughts for management and compensation committees:

In general, we do not believe companies should or will make program design changes to try to improve their PVP disclosure. However, we do recommend management and Compensation Committees consider the questions investors and other stakeholders might ask at the next shareholders’ meeting based on the new disclosure. These might include:

– Is the relationship of CAP and TSR sufficiently aligned?
– Are the relationships of CAP to the other financial performance measures included in the PVP table (GAAP net income and the company selected measure) sufficiently aligned, and if not, are the reasons explainable?
– Is the company’s TSR in line with its peers?
– Is the absolute quantum of CAP reasonable?
– Are the year-over-year changes in CAP driven by the company’s performance?
– Is the use of grant date fair values — as presented in the SCT and used as the primary pay-for-performance test by the proxy advisors, or the equity values as presented in the PVP disclosure — the best way to evaluate pay-for-performance? Or is some type of realizable/realized pay, that considers expected (realizable pay, similar to PVP disclosures) or actually realized pay outcomes, a better approach?

– Meredith Ervine