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Article | Executive Pay Memo North America

Early trends in pay versus performance disclosures

By Heather Marshall , Max Fogle and Jessica Yu | March 15, 2023

Now that more than 100 companies have filed pay versus performance disclosures, what early trends are emerging?

Last August, the Securities and Exchange Commission (SEC) adopted final rules implementing the pay versus performance (PVP) requirement in the Dodd-Frank Act. The rules applied to fiscal years ending on or after December 16, 2022, meaning the first filings started to appear in February. While the Compliance & Disclosure Interpretations (CD&Is) released in February clarified some aspects of the rule, a number of questions remain open, which has led to some differences in how companies are approaching disclosure in this first year. Last week, we hit the milestone of having 100 companies file documents with the SEC that include a PVP section. Below we provide some observations on early trends. Given the CD&Is might have been filed too late for these early filers, new trends could continue to emerge throughout March and April.

Peer group for total shareholder return comparisons

Most companies are using the industry index that’s also used in the 10-K total return chart. For full filers, the PVP table must include a column that presents cumulative TSR comparisons for a company-selected peer group. This peer group must either be that used for the 10-K performance graph (other than broad market indices) or one disclosed in the Compensation Discussion and Analysis (CD&A) that is used to help determine executive pay. Initial interpretations had widely understood the rule to limit the CD&A peer group options to those used for “benchmarking” pay levels, but the CD&Is clarified that a broader interpretation was possible. Given a footnote must be included with additional cumulative TSR calculations for peer group changes, many companies were inclined to select an index that would remain stable over time, because it is not uncommon for compensation peer groups to change subtly from one year to the next. This appears to be playing out, with over 75% of early filers selecting an industry or line-of-business index for peer comparisons.

We could see the prevalence of companies selecting a peer group for PVP TSR purposes that aligns with that used for incentive measurement purposes increase, now that the recently issued CD&Is have clarified that this is an acceptable choice.

Company-selected measure

Some form of profit or income is the most common company-selected measure. Full filers are required to include a column in the PVP table for a company-selected measure, which is defined as the most important financial measure in linking compensation actually paid (CAP) to company performance in the most recently completed fiscal year. It can’t be a measure that already appears on the table (TSR and net income, calculated on a generally accepted accounting principles [GAAP] basis), and a company is permitted to omit this column if no such measure exists.

Almost all of the companies we have analyzed include a company-selected measure, with just two of the full filers analyzed indicating that they were unable to identify a company-selected measure; one does not currently use any financial performance measures, and the other did not use any financial measures assessed over a single year.

A wide range of financial measures have been selected, with profit- and income-based measures representing almost 60%. Among those, earnings per share-based measures are most common, followed by other earnings measures such as earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings before interest and taxes (EBIT). A handful of companies have included growth measures (which inherently compare current year to prior year performance) with rare examples of three-year measures (which were probably prepared prior to the CD&Is being issued). Most companies are reporting absolute numbers or ratios (where relevant), likely informed by the CD&Is confirming that company-selected measures cannot be multiyear in nature.

Very few companies are including supplemental measures, with only six evident in the disclosures we have reviewed to date. Two of those are three-year measures with the intent that they better align with performance-based equity award time horizons.

Compensation actually paid

CAP values are widely varied, trending below summary compensation table (SCT) pay in 2020 and 2022, and materially higher than SCT in 2021. Unsurprisingly, we have seen a wide range of CAP figures reported, with values ranging from negative $644 million to over $1 billion for reported principal executive officers (PEOs) so far. Almost 20% of companies report at least one negative CAP figure in their PVP table. The table below summarizes variance between CAP and SCT figures seen for PEOs along with the average for other NEOs. For the purposes of this table, PEO data are aggregated by year in instances when multiple PEOs are reported, and two outlier companies are excluded from the PEO statistics (one accounting for the minimum and maximum values noted above and another showing a SCT total in one year of $1).

25th percentile 50th percentile 75th percentile
2022 PEO -51% -9% 21%
Non-PEO average -37% -3% 16%
2021 PEO 5% 39% 91%
Non-PEO average 4% 24% 69%
2020 PEO -33% -4% 48%
Non-PEO average -28% -6% 26%
Table: Variance of CAP to SCT total pay (%)

CAP values are heavily influenced by stock price movements and, in the case of performance-based awards, the assumed or actual level of performance achievement. Accordingly, in years where stock prices and/or performance expectations fall relative to the prior year, it can result in some of these large negative figures being reported. While negative values might not require much explanation for this first year of filing, companies might wish to explain exceptionally high figures as representing compensation that has not yet been “earned” or “realized” by an executive where that is in fact the case. Numbers might simply reflect that an outstanding and unvested value has increased during the year, and for awards that continue to remain unvested and outstanding, those values will change again.

Tabular lists of most important measures

Most companies disclosed a single tabular list featuring two or three additional measures; the inclusion of non-financial measures is uncommon. In addition to the company-selected measure, full filers are required to include a tabular list of the three to seven most important measures in linking CAP to company performance during the year. The first three such measures must be financial in nature, and if a company has fewer than three, then it must list all such measures. Companies are permitted to include multiple lists (i.e., separate lists for PEOs and non-PEO named executive officers [NEOs], or separate lists for each NEO) if deemed appropriate.

Most early filers have included a single list. This is perhaps not surprising given for most companies the “most important” measures, per the definition, will be those used in equity-based incentive plans, which are generally consistent across all NEOs. Even in annual incentive plans where more differentiation is observed, you often find that measures that vary by NEO will roll up into consistent measures across the NEO population (e.g., segment NEOs being measured against segment revenue, corporate NEOs being measured against corporate revenue, and so the tabular list simply includes “revenue” as the listed measure that applies to all).

While the SEC had hoped the tabular list might prompt greater disclosure of non-financial measures — in particular environmental, social and governance (ESG) measures — we find that this is limited, both in terms of the number of companies disclosing any non-financial measures and those going beyond one. Almost 80% of companies are only including financial measures. Those non-financial measures do often relate to ESG measures — most typically safety as well as diversity, equity and inclusion measures — perhaps acknowledging the SEC’s sentiment. Many companies are directing the reader to the CD&A for additional details on the measures included in their tabular lists rather than including any supplementary disclosure in the PVP section of the proxy statement.

Disclosure style and placement

Most companies are including the PVP section alongside CEO pay ratio following the compensation tables and are using graphs to describe relationships. The rules permit companies to determine where in the proxy statement to include the disclosure and provide flexibility in how companies explain the relationship between the CAP and performance columns of the PVP table. Most early filers have included the PVP section as a stand-alone part of the proxy statement, most typically located alongside the CEO pay ratio. There is very limited evidence of companies including any disclosure in their CD&As, beyond pointing to the PVP section elsewhere in the proxy statement.

There is slightly more variance in how companies are explaining the pay and performance relationships. A fundamental aspect of the rule is that companies must clearly describe the relationship between CAP actually paid and the performance columns in the PVP table (TSR, GAAP net income and the company-selected measure), along with company and peer TSR. The rules provide guidance, suggesting that companies may approach this graphically or narratively.

As the graphs above show, over 80% of companies have elected to use graphs as part of their description of the relationship between CAP and company performance. A small minority (less than 5%) have chosen also to include SCT total pay on the charts, to demonstrate how CAP differs. The movement between these two columns is often correlated with the performance measure trajectory, as that can affect how fair values change during the PVP measurement period versus those computed on a grant date basis. Very few companies are relying solely on narrative, and there is evidence of companies including varying degrees of narrative explanation alongside graphs where used.

The prevalence of GAAP net income graphs is very marginally lower than the other two measures, with three companies shifting to a narrative explanation citing the fact that GAAP net income is not used in compensation determinations, and so there is no meaningful relationship with CAP.

Other approaches have also been observed, with some companies choosing to include tables comparing multiyear movement in the various elements, although this too is a minority practice. Most companies are meeting the two requirements in respect of TSR (to compare company TSR to peer TSR, and company TSR to CAP) on a single chart.

Footnotes on CAP and equity valuations

Most companies are providing a detailed reconciliation from SCT to CAP, but detailed equity valuation assumptions are notably absent. Perhaps the area of most variance has been the supporting footnotes. While several footnote requirements are featured in the rule, the most burdensome relate to discussing adjustments from SCT to CAP, including the various component equity adjustments, and equity valuation assumptions that differ materially from those at the date of grant.

Since the SEC issued its CD&Is, we have seen an increase in companies providing a full breakdown of the SCT to CAP adjustments, inclusive of the component equity adjustments. Over 90% of the filings analyzed included these reconciliations, either in tabular or narrative footnotes. For clarity, this means providing details on each of the required equity calculations as set out in paragraph (v)(2)(iii)(C)(1)(i)-(iv). We expect this will continue and become the norm given the CD&Is plainly clarified what is expected.

In contrast, very few companies have provided any details on the equity valuation assumptions, an area that the CD&Is were notably silent on. The rule states that “for the value of equity awards added pursuant to paragraph (v)(2)(iii)(C) of this section, disclose in a footnote to the table required by paragraph (v)(1) of this section any assumption made in the valuation that differs materially from those disclosed as of the grant date of such equity awards.”

Most companies are simply stating that measurement date fair values required for PVP purposes have been calculated in a manner consistent with those for grant date purposes — a requirement under paragraph (v)(C)(3) — with some cross-referencing to the form 10-K grant date valuation assumptions. Only around 10% of companies are including details on specific fair values, assumed payout factors and/or underlying assumptions specific to their CAP calculations. In the absence of any further CD&Is from the SEC, it is likely this early precedent will sustain, provided companies are comfortable they are complying with the requirements of the rule.

Looking ahead

It remains to be seen how these early trends will change as hundreds more companies file their proxy statements in the coming weeks. If history teaches us anything, it is that companies rarely wish to be outliers, particularly as it relates to new SEC disclosure requirements.


Senior Director, Executive Compensation and Board Advisory
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Director, Executive Compensation & Board Advisory (New York)
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Associate Director, Global Executive Compensation Analysis Team (GECAT), Arlington
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