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SEC Rule Helps Investors Weigh Exec Pay Packets

Pay versus performance disclosures “a step in the right direction”, says PRI’s Head of US Policy.  

Investors are much better placed to compare the governance practices of investee firms and scrutinise executives’ contribution to value creation, say experts, following the adoption of a ‘pay versus performance’ disclosure rule by the US Securities and Exchange Commission.  

Last month, the agency voted to adopt a new measure that will require US public-listed companies to disclose how they pay their top executives according to the company’s annual performance. 

“A lack of consistent, comparable information from issuers on governance practices – just one part of ESG considerations – is a primary barrier to efforts at incorporating ESG information and being more responsible investors,” Greg Hershman, Head of US Policy at the UN-convened Principles for Responsible Investment (PRI), told ESG Investor. 

“The disclosures required by the new rule will allow investors to evaluate whether proportionate pay policies are in place and how executive pay stands in relation to value created as well as requiring companies to explain their top considerations when deciding executive pay.” 

The rule requires firms to outline executive compensation in relation to financial performance measures over the five most recently completed fiscal years in proxy statements and other disclosures. Companies will also be required to report their total shareholder returns (TSR) compared to other companies in their peer group, net income, and a financial performance measure of their choice. For the latter, companies will be asked to provide a list of financial performance measures linked to its executive remuneration schemes.  

Hershman noted that the PRI was “pleased to see” the SEC’s clarification that these performance metrics could be non-financial and therefore focused on a broad range of ESG issues.  

Smaller companies – with a public float of less than US$250 million, or less than US$100 million in annual revenues and a public float of less than US$700 million – will be subject to “scaled disclosure requirements”, the SEC said.  

US SEC Chair Gary Gensler said that this rule “serves investors and our markets”, helping investors secure the “consistent, comparable and decision-useful information” they need to evaluate executive compensation policies.  

Hershman added: “The recent steps taken by the SEC on pay versus performance, along with several other disclosure requirements proposed this year, have a simple goal: generating consistent and comparable information for all investors. This is a step in the right direction, but we expect continued efforts in the coming years to better understand issuer actions and considerations that fall under the spectrum of ESG information which is important to investors for their decision-making.” 

“An interesting proxy season” 

The pay versus performance rule follows increasing scrutiny from investors on corporates’ executive pay policies.  

During the US 2022 proxy season, a majority of JP Morgan Chase shareholders voted against the bank’s executive pay plan in a Say on Pay vote, which included a US$201.8 million pay package for six executives, with CEO Jamie Dimon receiving a one-off US$50 million pay-out.  

Tech giant Amazon was also challenged on its plans to pay CEO Andy Jassy a one-off US$212 million pay packet, nonetheless managing to secure a narrow 56% majority for the proposed package. It is thought this majority was assured due to the company’s dual class share structure.  

Median investor support for Say on Pay proposals at S&P 500 firms was at 92.2% in May, according to analysis by ISS Corporate Solutions. This is a slight decrease from 92.7% the previous year.  

In 2021, 20 S&P 500 companies failed to secure majority support for the executive pay packages, the report said.  

Recent research found that 67% of directors were willing to sacrifice shareholder value to avoid controversy on CEO pay.  

“I only wish the SEC has adopted this rule sooner; there have been a number of bad actors who have continued to award hugely inflated executive pay packets,” said Rosanna Landis Weaver, Wage Justice and Executive Pay Programme Senior Manager at shareholder advocacy non-profit As You Sow.  

“I’m looking forward to the 2023 proxy season, as it will be interesting to see whether these requirements for more detail will provide investors with more clarity and better highlight the bad actors,” she added. 

However, given that Say on Pay votes are non-binding, it remains to be seen whether thenew rule will translate in tangible improvements, Landis Weaver said.

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