Embracing transparency

Shreena Patel looks at the SEC’s new rules on executive compensation transparency and why companies should build a narrative around their disclosure.

Is it impolite to talk about how much you earn? If you’re an executive at a listed company in the US, that question is now moot. New rules from the Securities and Exchange Commission (SEC) mean that once private information will soon become public knowledge.

Starting in Spring 2023, the SEC will require almost all US public companies to list executive compensation and explain the relationship between the, sometimes astronomic payouts and a company’s financial performance. In some respects, this is just the US catching up with other markets – but it will still be a significant change nonetheless.

The new rules provide an opportunity to build a narrative explaining the decision-making process that leads to these figures, and why the remuneration is both fair and good for the company.

What are the new rules?

Under regulation S-K, the SEC is requiring reporting companies to provide a ‘pay-versus-performance’ table that specifies both executive compensation – for the principal executive officer and other named executive officers – and financial performance for the past three years. Over time, the reporting window will be increased to five years.

Not only will companies be asked to disclose compensation, but they will also have to share their total shareholder return (TSR) as well as the TSR for their company’s peer group. To make comparisons easy, all mandated disclosures will be tagged in XBRL – a tagged reporting language.

Companies will still have some leeway in how they tell their compensation stories. In addition to the mandated figures, they will be able to include additional measures to further explain how compensation is granted.

How much should you report?

Global law firm DLA Piper has highlighted some of the key data points for building a narrative around executive pay in its paper on the upcoming disclosures.

DLA Piper notes that the compensation disclosures themselves will be provided in a dense table of numbers. Companies that wish to make their disclosures clearer would do well to provide further narrative to explain why they pay their executives what they do.

Mercer is also urging companies to use narrative and graphics to elaborate on compensation considerations.

In their article from August 2022 titled ‘A Deep Dive into the Long-Awaited Pay-for-Performance Disclosures,’ they suggest that companies ‘consider what conclusions investors might draw from the disclosures, and what narrative disclosures would best demonstrate the company’s pay-for-performance link.’

By providing more than the minimum requirement companies can help shareholders to understand the numbers they are seeing. Additional narrative will help build shareholder confidence ahead of say-on-pay votes.

Listen to shifts in say-on-pay

Harvard’s corporate governance blog recommends that companies incorporate lessons from 2022 say-on-pay votes into their compensation disclosures.

In 2022, there was a minor fall (3%) in the percentage of say-on-pay votes with over 70% approval rates for companies in the Russell 3000 compared with the previous year. In the same period there was a small drop in ‘for’ recommendations (2.5%) for Russell 300 companies by proxy advisor ISS.

These small shifts in approval levels may not seem to indicate much. Then again, the say-on-pay vote is the most powerful year-on-year signal that shareholders could be beginning to balk at executive compensation excess.

The new SEC disclosure requirements may seem complex enough without adding extra work, but smart companies would be wise to provide more data rather than less. The additional information and surrounding explanation will provide far greater support in justifying compensation practices to a broad and perhaps increasingly sceptical audience of shareholders.

If you would like to hear how Bladonmore can help build a compelling narrative for your investor communications, get in touch.

 

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Shreena Patel

Associate Director

Shreena focuses on a range of strategic positioning, narrative and development projects.

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