On June 26, the Securities and Exchange Commission hosted a roundtable discussion about potential changes to existing executive compensation disclosure requirements. In the lively discussion, panelists representing issuers, advisors, and investors scrutinized many of the SEC’s disclosure rules, contemplated the utility of the disclosures provided, and discussed potential rule changes. Based on the SEC’s request for public comments, this roundtable appears to be the first step towards rulemaking.
In his opening remarks, SEC Chairman Paul Atkins described the current disclosure requirements “as a Frankenstein patchwork of rules.” The last significant overhaul of the executive compensation disclosure rules was in 2006. Since then, the SEC has adopted numerous other disclosure requirements as mandated by the Dodd-Frank Act of 2010. Panelists were particularly critical of these congressionally mandated rules, which tended to be more prescriptive than the SEC’s prior rules governing executive compensation disclosure.
One panelist analogized executive pay disclosure to rum raisin ice cream, meaning something that is valued highly by only a select few. Since materiality under the federal securities laws is based on a “reasonable investor” standard, the analogy begs the question: is the reasonable investor among the select few who do enjoy rum raisin? Or does the reasonable investor prefer a more mainstream flavor such as vanilla? Should issuers continue to provide information that is only useful to a small subset of investors? In this regard, the panelists barely touched on the question of whether investors make investment or voting decisions based on the SEC’s mandated executive compensation disclosure.
Rules Discussed at the Roundtable
Below are some roundtable highlights based on the discrete disclosure requirements that were discussed. In general, panelists noted that compensation disclosure has become unwieldy, less useful, and increasingly repetitive.
- Compensation Discussion & Analysis. Panelists were unanimous in remarking how CD&A disclosure has swelled over the years. Participants noted that in its nearly 20-year history, CD&A has morphed from principles-based disclosure in plain English to unwieldy, lengthy, and complicated disclosure of diminished utility.
- Say-on-Pay. This rule was the least criticized of the Dodd-Frank rules during the event. Panelists noted that the rule has led to more engagement between issuers and investors. However, one investor representative inquired about the continuing effectiveness of say-on-pay votes considering the increasing complexity of executive compensation disclosures.
- Pay Ratio. The requirement to disclose the ratio of a CEO’s total compensation to the median total compensation of all other company employees drew significant criticism. Issuer representatives emphasized that they have never received questions about their companies’ pay ratio disclosure since the rule went into effect. One panelist commented that such disclosure was less about assisting investors than it was to “name and shame” to achieve a political agenda, instead of serving the SEC’s primary mission of providing material information to investors from which to base their investment decisions.
- Pay-versus-Performance. Panelists also criticized this rule, which was adopted in 2022. One participant remarked that the rule resulted in disclosure written by economists, for economists. Focusing on the rule’s highly prescriptive nature, panelists discussed whether Congress’s goal could have been achieved with a more principles-based disclosure requirement affording companies flexibility to tailor disclosure based on their specific compensation processes and procedures.
- Clawbacks. As with pay-versus-performance, panelists criticized this rule’s one-size-fits-all approach. Specifically, participants commented on how clawbacks were an important issue in the wake of the financial crisis when Dodd-Frank was enacted. But by the time the SEC finalized its rules, companies had already adopted their policies and were now forced to adjust to the new rule years later. However, one panelist iterated that it could be premature to amend the rule at this point since it is so new.
- Executive security expenses. Aside from the discrete rules noted above, the issue of whether executive security expenses should be disclosed as a perquisite was a hot topic. The summary compensation table must include perquisites—or “perks”—as part of an executive’s total compensation. Issuer representatives and their advisors concurred that security expenses are not perks and thus should not be characterized as compensation, urging the SEC to update its guidance on the subject. Since the SEC’s rules do not define perquisites, this could be an area where the SEC staff issues updated guidance outside of the rulemaking process.
Panelists also expressed areas for additional or improved disclosure. One suggestion was to provide disclosure tracking equity grants from date of grant through payout. The proponent explained that tracking this information across different filings is burdensome and new disclosure could simplify it. Another proponent questioned the need for scaled disclosure for smaller reporting companies, which are required to disclose compensation information for only three executive officers instead of five.
Next Steps
Changes to the executive compensation disclosure rules are all but expected based on the takeaways from the roundtable and the commissioners’ remarks. Indeed, Chairman Atkins stressed that the SEC’s disclosure rules must be cost-effective for companies to follow, provide material information to investors, and be presented in plain English.
Based on the roundtable’s discussions, the debate over changes is sure to be lively and highly consequential. The SEC continues to actively seek further comment from the public. Therefore, issuers, market participants, and other stakeholders can make their voices heard by submitting comment letters to the SEC.
