The Advisors' Blog

Last Friday, the SEC announced that it will host a roundtable discussion on executive compensation disclosure requirements on June 26. It will be held at the SEC’s headquarters and open to the public (plus streamed live on SEC.gov). More Information on the agenda & speakers will be posted before the event.

In the meantime, Chairman Atkins issued a statement saying, “While it is undisputed that [the executive compensation] requirements, and the resulting disclosure, have become increasingly complex and lengthy, it is less clear if the increased complexity and length have provided investors with additional information that is material to their investment and voting decisions. It is important for the Commission to engage in retrospective reviews of its rules to ensure that they continue to be cost-effective and result in disclosure of material information without an overload of immaterial information.” He then includes the following questions for the staff to consider — and for members of the public to provide views on (before or after the event). Comments can be provided by mail or electronically — see the announcement for details.

Executive compensation decisions: setting compensation and making investment and voting decisions

– What is the process by which companies develop their executive compensation packages? What drives the development and decisions of compensation packages? What roles do the company’s management, the company’s compensation committee (or board of directors), and external advisors play in this development?

– Current disclosure requirements seek to unpack these processes for investors. How can our rules be revised to better inform investors about the material aspects of how executive compensation decisions are made?

– What level of detail regarding executive compensation information is material to investors in making their investment and voting decisions? Is there any information currently required to be disclosed in response to Item 402 of Regulation S-K that is not material to investors or that could be streamlined to improve the disclosure for investors? How do companies’ engagement with investors drive compensation decisions and compensation disclosure?

Executive compensation disclosure: past, present, and future

– The Commission substantially revised its executive compensation disclosure requirements in 2006 with requirements to provide, among other things, enhanced tabular disclosure of compensation amounts and a compensation discussion and analysis of the company’s compensation practices. The rules were intended to provide investors with a clearer and more complete picture of the compensation earned by a company’s executive officers. Have these disclosure requirements met these objectives? Do the required disclosures help investors to make informed investment and voting decisions? Given the complexity and length of these disclosures, are investors able to easily parse through the disclosure to identify the material information they need?  In what ways could disclosure rules be revised to return to a simpler presentation and focus?

– The Dodd-Frank Act added several executive compensation related requirements to the securities laws, including shareholder advisory voting on various aspects of executive compensation. What types of disclosure do investors find material in making these voting decisions? Are companies able to provide such disclosure in a cost-effective manner? Do the current rules strike the right balance between eliciting material information and the costs to provide such information?

– With the experience of almost 20 years of implementing the 2006 rule amendments, how can the Commission address challenges that either companies or investors have encountered with executive compensation rules and the resulting disclosures in a cost-effective and efficient manner while continuing to provide material compensation information for investors? For example, are there requirements that are difficult or costly to comply with and that do not elicit material information for investors? Are there ways that we can reduce the cost or otherwise streamline the compensation information required by the rules

Executive compensation hot topics: exploring the challenging issues

– The Commission recently adopted rules implementing the requirements of Dodd Frank related to pay-versus-performance and clawbacks. Now that companies have implemented the new rules, are there any lessons we can learn from their implementation? Can these rules be improved? If so, how? For example, which requirements of these rules are the most difficult to comply with and how could we reduce those burdens while continuing to provide investors with material information and satisfy these statutory mandates?

– Since adoption of the pay-versus performance rules, I have continued to hear concerns regarding the rule’s definition of “compensation actually paid” (CAP). What has been companies’ experience in calculating CAP and what has been investors’ experience in using the information to make investment and voting decisions?

– What has been companies’ experience in applying the two-part analysis articulated by the Commission in 2006 with respect to evaluating whether perquisites for executive officers must be disclosed? How do disclosure requirements resulting from the test, and whether a cost constitutes a perquisite, affect companies’ decisions on whether or not to provide a perquisite? For example, how has the application of the analysis affected evaluations relating to the costs of security for executive officers? Are there types of perquisites that have been particularly difficult to analyze? How do investors use information regarding perquisites in making investment and voting decisions?

It certainly seems that the SEC’s retrospective review of executive compensation disclosures will be very broad! I immediately noted that clawbacks, PvP (in particular, the CAP calculation) and perks (in particular, executive security) were all specifically noted — while CEO pay ratio was not. But Mark Borges said he suspects pay ratio is probably in the spotlight as well. He also noted that each of the cited rules is statutorily mandated — so the Commission is probably most interested in how it can streamline the compliance burden associated with these disclosures.

– Meredith Ervine