SEC roundtable: SEC lays the groundwork for significant changes to executive pay disclosure 

The SEC held a roundtable June 26 to discuss whether executive compensation disclosures have strayed from the agency’s three-part mission ― protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation ― and, as Chairman Atkins articulated, become a “Frankenstein patchwork of rules.” Three rules in the SEC’s crosshairs implement Dodd-Frank Act mandates: CEO pay ratio disclosure, pay-versus-performance disclosure and clawback policies. A fourth target is the test for determining whether a benefit is a perquisite, with a focus on whether company-provided personal security and personal use of corporate aircraft should continue to be categorized as perks. Panelists commented on these rules and urged the agency to undertake a holistic review of all required disclosures to ensure the information is useful to investors without being overly burdensome to companies. Panelists included lawyers, consultants, and representatives from associations, companies and institutional investors. The SEC has posted a replay of the roundtable and is seeking public feedback on the rules. Interested parties can use the roundtable’s event page to submit a comment letter and review letters as they are submitted.

The three Republican commissioners criticized the current executive pay disclosure rules, particularly those mandated by Dodd-Frank. They opened the roundtable by noting that disclosures have become unwieldy and costly for companies, and that the agency should review, modernize and streamline the rules to ensure the information is clear, concise and material to investors. They also advocated a return to principles-based (vs. prescriptive) rules.

Overall, the panelists endorsed an SEC review of the rules. However, they had differing views on the best approach to ensure investors receive material information in plain English without draining company resources. They generally supported a more principles-based approach, but investor and association representatives pointed out that sometimes prescriptive rules are necessary to facilitate comparisons across companies.

Below are highlights of the observations and recommendations on specific topics:

• CEO Pay Ratio: Panelists favored a less burdensome approach to the CEO pay ratio rule, given the cost of compliance and the lack of comparability across companies due to differences in workforce and compensation structures. Company representatives noted that investors rarely ask about the ratio, but investors explained they use the ratio for year-over-year comparisons and to identify trends.
• Pay-versus-Performance (PVP): Panelists valued disclosures that compare executive pay and company performance but generally agreed the PVP rule is overly complex, costly to companies and goes beyond the Dodd-Frank mandate. One consultant suggested adhering more closely to the statute and requiring only a four-column table with Summary Compensation Table (SCT) total pay, compensation actually paid (CAP) company total shareholder return (TSR) and peer group TSR. Another suggested covering just the CEO and CFO, as the other named executive officers may change year to year. Of note, while most of the discussion was around streamlining the rule, investors wanted equity awards shown on a grant-by-grant (vs aggregate) basis to give more visibility into how target and actual pay compare to performance outcomes. And, similar to the CEO pay ratio, investors noted they use this disclosure for year-over-year comparisons and to identify trends.
• Clawbacks: Overall, panelists agreed clawing back pay that wasn’t truly earned in the event of an accounting restatement is appropriate. But several thought the clawback rule went too far by covering more types of restatements and compensation than Dodd-Frank requires and forcing companies to undertake overly complex analyses to determine whether a clawback is triggered and how much pay must be recouped. One panelist noted the rule has been in place only since October 2023 and recommended the SEC wait to see what complications arise before making changes.
• Perks: The long-standing controversy over the SEC’s categorization of home security protections and personal use of corporate aircraft as perks has heated up since the death of UnitedHealthcare’s CEO. Most panelists agreed the SEC’s two-pronged test should be revisited. However, investors noted that, although perks typically represent a small portion of executive pay, excessive perks can indicate poor governance and problematic pay practices. Investors also indicated they review company disclosures to determine whether a perk is excessive (e.g., home security is appropriate but security for multiple vacation homes might not be). 
• Compensation Discussion and Analysis and Other Narratives: Panelists agreed that pay program descriptions are long and repetitive but didn’t recommend what should be eliminated. And many thought voluntary disclosures were useful even if they increased the length of the proxy.
• Summary Compensation Table: The SCT didn’t escape criticism. Some panelists noted that too much attention is paid to the total compensation figure, which isn’t useful for several reasons. For example, the treatment of cash incentives and equity awards is inconsistent. Cash incentives are reported based on outcomes (with delayed reporting of long-term cash awards) and equity awards are reported based on their target grant date value. Also, the reporting of large grants intended to cover multiple years is frontloaded. Requiring a grant-by-grant lifecycle table as discussed below could address most of these concerns. 
• Equity Tables: As with the PVP table, investors pointed out the difficulties they encounter in tracing the lifecycle of individual equity grants ― particularly performance shares ― using the information in the Grants of Plan-based Awards, Outstanding Equity Awards and Option Exercises and Stock Vested Tables. This is the case even if they also research Form 4s because performance shares are generally only reported at settlement. Several panelists recommended replacing the current tables with tables showing the following on a grant-by-grant basis: target values representing the amount compensation committees intended to grant; in-progress values for outstanding awards (realizable pay); actual pay for completed awards (realized pay); and performance outcomes. This would more closely replicate the types of disclosures compensation committees use to make pay decisions and assess the link between pay and performance and the holding power of outstanding awards.
• Named Executive Officers: The panelists discussed whether the current definition of named executive officers should be retained. Some favored limiting disclosure to just the CEO and CFO, while others wanted to include additional executives with significant operational influence.
• Say on Pay: Panelists praised say on pay as the most effective executive pay rule because it has resulted in increased shareholder engagement and enhanced disclosures (e.g., realized and realizable pay) to garner shareholder support for the pay program.
• Proxy Advisors: Several panelists stated proxy advisor voting policies have influenced how companies design pay plans, sometimes resulting in “one-size-fits-all” three-year performance share plans that may not be appropriate for all companies. One investor advocated for restricted stock with longer vesting periods, and consultants noted programs should be tailored to a company’s development stage. Investors noted they primarily use proxy advisors to aggregate data and execute their voting intentions, rather than strictly following proxy advisors’ voting recommendations.
• XBRL Data Tagging: Panelists suggested the SEC expand the implementation of machine-readable XBRL tagging to increase the utility of many aspects of the proxy disclosure, including the SCT. Currently, it’s required only for a few sections, including PVP and clawbacks. This would allow investors to better analyze compensation data and be less reliant on proxy advisors.

The SEC will be digesting the roundtable recommendations and reviewing public comments to determine how to modernize and streamline the current disclosure regime. The agency can’t unilaterally revoke disclosures mandated by Congress, but they can amend rules that go beyond what’s statutorily required. Amending the rules will not be a quick or easy process but there was support for it ― in one manner or another ― among the stakeholders represented at the roundtable. Mercer will be monitoring developments.

^{Note: Mercer is not engaged in the practice of law or accounting, and this content is not intended as a substitute for legal and accounting advice. Accordingly, you should secure the advice of competent legal counsel and accountants with respect to any legal or accounting matters related to this document.}