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SEC Executive Pay Plan Stokes Fear of Misguided Investor Votes

Jan. 31, 2022, 11:00 AM

The SEC’s long-delayed proposal requiring companies to report ties between their financial showing and executive compensation is bringing back corporate jitters that misleading information would cloud shareholder voting.

The Securities and Exchange Commission on Jan. 27 moved to get more public feedback on the “pay-versus-performance” disclosure plan it released in 2015 under the Dodd-Frank Act and shelved in 2017 during the Trump administration.

The proposed rules would make companies use uniform standards, including total shareholder return, in proxy statements that shareholders use to evaluate and vote on executive pay and board directors. The SEC also is considering letting companies showcase an additional metric of their choosing.

The plan would force companies to retool their proxy statements and would lead to even more disclosures if a company feels it needs to put unflattering statistics in context.

Companies fear the SEC plan would cast their pay practices as out of step with true corporate performance, causing unwarranted attacks from shareholders during proxy voting. The proposal’s proponents see it as an opportunity to modernize a crucial component of shareholder voting to better suit environmental, social, and governance (ESG) obligations.

“A lot of folks, us included, felt like, boy, this needs some work,” said Ani Huang, president and CEO of the Center on Executive Compensation, which advocates for companies. “In its current form, it’s going to be quite confusing.”

Choosing Metrics

Companies currently can deploy any metrics they want, or none at all, raising concern among investors seeking comparable statistics. Few, if any, of those disclosures comply with the proposed rules from 2015.

The SEC plan follows complaints by investors, labor advocates, and others pressing for greater detail about how companies reward their top executives and common metrics that can be compared among industry peers.

“Evaluating compensation is one of the clearest ways to look at whether the directors are doing their jobs,” said Rosanna Weaver, executive pay program senior manager at As You Sow, an investor advocacy group.

Exxon Mobil Corp., FedEx Corp., and other companies told the SEC in comment letters that mandatory and uniform metrics would give investors information that doesn’t provide an accurate picture of a company’s circumstances. Representatives of both companies declined to comment for this story.

Exxon, for example, uses a metric known as return on average capital employed to help measure its performance when deciding executive pay. The statistic gives Exxon insight into how well its management has invested shareholder money, according to the company.

FedEx evaluates its earnings per share and the ability of its executives to meet business plan goals to help the company determine their pay.

Total shareholder return, as the SEC proposed, focuses on short-term performance at the expense of long-term value for shareholders, the companies told the agency. Companies would have to report what their investors and competitors’ shareholders made off their stock over the past five years to satisfy the total shareholder return requirement .

The 2015 plan also would require companies to disclose their CEOs’ actual pay and other executive compensation information. Exxon, FedEx, and other companies currently report executive pay, but have various ways of calculating it.

Now, the SEC is asking for input on whether it should require companies to report income metrics in conjunction with other pay-versus-performance data. The agency also is mulling whether to let companies disclose an additional metric that they believe is their most important performance measure.

Adding more disclosure requirements wouldn’t fix the problems companies see with the proposal, Huang said.

“No one performance metric is appropriate for all companies,” she said. “Requiring every company to use the same metric in this required disclosure, whether financial or market-based, is not useful to investors.”

Investor Desires

Investors have their doubts about corporate concerns.

The California Public Employees’ Retirement System and other investors have urged the SEC to adopt its 2015 proposal, saying it adds value to information shareholders use to analyze executive compensation.

The proposal initially came after concerns that multi-million-dollar compensation packages for JPMorgan Chase & Co. CEO Jamie Dimon and other executives didn’t correlate with the performance of their firms during the 2008 financial crisis.

Shareholders need more pay-versus-performance data that’s consistently disclosed among companies, Weaver said.

“Shareholders want as much data as possible,” she said. “Smart companies go above and beyond with disclosure.”

But the SEC is thinking about giving investors more information than just a company’s financial performance to evaluate executive pay.

ESG Link?

The SEC also said it’s considering letting companies include ESG statistics, as they’re tied to executive compensation.

Chevron Corp., Marathon Petroleum Corp., and other oil and gas companies in recent years have tied executive compensation to reductions in their greenhouse gas emissions.

“Companies will have a very interesting task in determining that company-selected metric best for them and their industry,” said Steve Seelig, senior director of executive compensation at consultancy Willis Towers Watson.

Increasing companies’ ESG disclosures is a priority for Democratic SEC Chair Gary Gensler. After calls from investors, the agency is working on a range of ESG plans, including proposals that would require companies to disclose their risks from climate change and the diversity of their boards.

A lot has changed since the rules were proposed in 2015, and they should reflect what investors want, said Jill Fisch, a University of Pennsylvania Law School professor who studies corporate governance.

“It would be ill-advised to pass a rule that got in the way of modern thinking about ESG,” Fisch said.

To contact the reporter on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com