The Advisors' Blog

SEC Commissioner Mark Uyeda isn’t a fan of the pay-versus-performance rule — or the process by which the SEC adopted it. He gave his thoughts on the PvP disclosure requirements in a recent speech.

The speech has gotten a fair amount of attention — mostly for suggesting that the SEC re-propose climate disclosure requirements before the Commission adopts a final rule that significantly deviates from the proposed. But his PvP comments are also noteworthy — as he cites some of the eccentricities of PvP disclosures as his “case study” on why re-proposing rules is often appropriate. Here’s an excerpt from his remarks:

Approximately 34% of companies subject to the new rule reported a negative amount for the principal executive officer’s “compensation actually paid” in one of the three years included in the new pay versus performance table. Although the statute’s focus is on the relationship between an executive’s “compensation actually paid” and the company’s financial performance, it is hard to believe that Congress would have expected the Commission to adopt a rule where more than one-third of companies explain this relationship by reporting a negative number.

[…] In reporting on pay versus performance disclosure, one publication questioned whether shareholders might interpret negative “compensation actually paid” as if the CEOs theoretically owed their companies money and another observed that “the new ‘compensation actually paid’ in not compensation actually paid.”

It is bad enough that the disclosure may not be understandable or material, but even worse, preparing the disclosure may impose significant costs on companies. Much of these costs arise from hiring consultants to make the equity award fair value calculations not otherwise required by the Commission’s prior executive compensation rules. According to one trade association survey, over 50% of companies expect to spend at least $40,000 on consultants to make these calculations.

Since the treatment of equity awards was changed from the proposed to final rule, he then speculates that the calculation of CAP — and ultimately the utility of the PvP disclosure — could have been improved through the comment process:

In the 2015 proposing release, the Commission discussed the approach of including equity awards based on changes in fair value and noted that such changes could result in a negative number. Of the more than 150 comments received on the rulemaking, only two commenters supported this approach. The only mention of this approach in the 2015 proposing release was as an “implementation alternative” in the economic analysis section.

If the Commission had re-proposed the rule in 2022 with the modified calculation of “compensation actually paid” based on changes in fair value, would things have come out differently? While we may never know, doing so would have at least offered market participants an opportunity to focus on the issue. The Commission would then have had a broader set of views on the approach’s advantages and disadvantages. Some commenters might have discussed whether the potential for disclosure of negative “compensation actually paid” is useful to investors.

As for the title of this blog, according to Cydney Posner’s Cooley PubCo post, one panelist at the Annual Institute on Securities Regulation remarked that no proxy advisor or institutional investor has incorporated PvP disclosure into their decision-making. Another speaker referred to it as a “nothingburger.” While I’ll be adding that term to my lexicon — especially since it was used multiple times at the Institute — I’m not sure we can conclude that just yet with only one year of disclosure behind us. Only time will tell!

– Meredith Ervine