Pushback against the new rule began simultaneously with its approval. Opponents raised the prospect of legal challenges for several reasons, including the use of outdated economic analysis from the 2015 proposal. Groups like the Business Roundtable want the SEC to go back to the drawing board.
Marc Hodak, a partner at executive compensation and corporate governance consultancy Farient Advisors LLC, based in Dallas, cautions that the new rule could potentially mislead investors or disguise a lack of alignment between management and shareholders.
That is because the required disclosure ignores equity gains before vesting, which represent real value to the executive, and are important to investors. If managers are granted equity each year, that vesting equity could increase "actual pay" regardless of performance, he said. "The best way to value pay is to look at the value of options over time. That 'realizable value of the equity' is difficult to measure. It's really very complicated to do it right," Mr. Hodak said.
Even if the new SEC rule gets held up, shareholders are not likely to stop pushing for companies to make it clearer how they connect pay and performance, which would also make it easier for investors to compare companies.
A 2022 proxy season preview by ISS Corporate Solutions, a division of International Shareholder Services Inc., found CEOs in the S&P 500 and Russell 3000 received record-high pay increases, but also record levels of shareholder opposition to pay proposals. Median say-on-pay vote support that started declining in 2018 hit an all-time low in 2022. The percentage of companies with failed say-on-pay votes increased to 3.2%, up from 2.6% in 2021 — the highest failure rate since say-on-pay votes became mandatory in the U.S. in 2011.
"Existing disclosures can otherwise often be unnecessarily complex and verbose, without painting the full picture of pay outcomes and how they relate to company performance," said John Hoeppner, Chicago-based head of U.S. stewardship and sustainable investments, and Alexander Burr, ESG policy lead, in LGIM America's SEC comment letter.
They cite an Economic Policy Institute study from August 2020 that found that the average compensation of CEOs of the 350 largest U.S. firms increased 35.7% from 2009 to 2019, based on numbers provided under current standards. Measuring by what is actually paid, that same cohort of CEOs experienced a pay growth of 105.1%, the study found.
"This aligns with our experience as shareholders where we have evaluated compensation plans at public companies that often have material differences between what's disclosed and what's taken home. The intricacies of pay plans, which involve vesting periods, a range of performance targets, as well as board discretion, make it difficult for investors to make cross-company comparisons and time series analysis," the LGIM America letter said. "Executive compensation practices at U.S. public companies still have much room for improvement."
As Jeffrey P. Mahoney, general counsel for the Council of Institutional Investors, an association of employee benefit funds, public investment officials, foundations and endowments with $4 trillion in combined assets, commented to the SEC, "directors' decisions about executive pay speak volumes about the board's accountability to shareowners."