Statement Summary
The press release addresses the topic of executive compensation, emphasizing its importance in corporate governance and shareholder rights. A historical overview highlights key legislative and regulatory developments, including requirements for compensation disclosures dating back to the 1933 Securities Act, and reforms such as the Dodd-Frank Act, which aimed to improve transparency and accountability in executive pay. Recent regulatory updates include ‘pay versus performance’ rules requiring clearer disclosures about compensation metrics.
The release stresses the need for granular, comparable information to facilitate informed shareholder decision-making and engagement, while also encouraging feedback on material information and data quality. Additionally, it raises concerns about potential regulatory changes that could limit shareholder engagement and the associated costs of analyzing compensation data.
Original Statement
Good afternoon. I’m sorry that I can’t be with you for today’s roundtables, which I’m certain will generate some thought-provoking ideas and conversations. Executive compensation never fails to be a hot topic. It is an issue consistently and prominently invoked in discussions of corporate responsibility and governance. And, it stands out among those topics that marry capital formation to shareholder rights and engagement.
The legal history on executive compensation runs deep. Indeed, disclosure of director and officer compensation was first required of issuers in the Securities Act of 1933. Fast forward to more modern times, as Chairman Atkins highlighted in his public statement calling for today’s roundtable, in 1992, the Commission issued a new compensation disclosure rule, which sought to institute digestible and tabular formats. The Commission made further amendments to refine those tables in 2006. Recognizing the “widespread support for enhanced disclosures,” then-Commissioner Atkins noted that “stockholders as the owners of the corporation ought to have a window into the compensation decisions made by the boards of directors that represent their interests.”
Congress has also, in more recent times, weighed in on the discourse relating to executive compensation. In the Emergency Economic Stabilization Act of 2008, and again in the Dodd-Frank Wall Street Report and Consumer Protection Act, Congress observed that executive compensation practices encouraged risk taking in a manner that exacerbated many of the problems underlying the 2008 financial crisis, and called for comprehensive reform. In particular, legislation required (among other things):
Since that time, the Commission has promulgated rules aimed at effectively implementing these provisions. For example, in 2022 the Commission implemented “pay versus performance” rules, and rules controlling listing standards for clawback policies.
The disclosure regime set up by both rule and statute is multi-faceted. It is each principles-based and prescriptive. For example, the CD&A discussion encourages companies to provide meaningful narrative to shareholders about the objectives and philosophy driving their compensation decisions as to all named executive officers. Issuers also have the ability to include non-financial metrics that the company has deemed important in setting incentive-based pay in its pay-versus-performance tables. On the other hand, more prescriptively, issuers must disclose specific quantitative data in the Summary Compensation and other tables about both base and incentive compensation, calculated in a manner consistent with our rules.
Key Principles and Trends
Throughout this long history, again and again, certain deeply rooted principles reveal themselves. It is a fundamental shareholder right – as the owner of a company’s equity – to obtain full and fair disclosure around the compensation of corporate executives. That disclosure should be easy to understand and analyze; and it should be granular and consistent to allow for comparability across peer companies and filings. It should provide critical information to shareholders, not only for proxy say-on-pay and director votes, but also in capital allocation decisions. Good disclosures will drive capital formation.
Shareholders are further entitled to a fulsome, detailed and fair picture of the process of how executive compensation is set. Disclosures should further allow investors to understand and evaluate the corporate incentives at play. These are lofty principles to keep in mind during today’s session.
Compensation Trends and Material Information
The Chairman has posed a number of questions in advance of these roundtables. Many focus on how compensation is set today. I’m also interested in hearing about compensation trends. Long-term data on executive compensation can be both decision-useful for shareholders writ large and can help us evaluate potential weaknesses in the market. For example, we’re just starting to realize the data from our pay versus performance rulemaking in 2022. And, the figures on “compensation actually paid” metrics are potentially revealing. The data show that the highest paid CEO in 2024, using compensation actually paid metrics, made over $6.9 billion. The ratio of CEO to median employee pay at S&P 500 companies rose to approximately 192:1, and at the companies of the 100 highest paid CEOs, that ratio is 348:1.
Looking further into the roundtables, the Chair has posed a number of questions on what information is material to shareholders. Feedback from investors on the materiality of executive compensation disclosures has been consistently strong, from comment files in our rulemakings, to everyday conversations, to testimony in the leadup to the seminal Dodd-Frank legislation. I nonetheless encourage all shareholders to continue to comment on what is the most decision-useful information in response to the questions posed in connection with this forum.
Additionally, staff (at the behest of the Commission) has recently taken steps to limit shareholder engagement with management, in the executive compensation and other contexts, by amending staff guidance on 13D and 13G filings. This may put more pressure on the proxy process. How can we strengthen transparency and the quality of disclosures, both in general and specifically in light of these regulatory changes that tend to discourage shareholder communications?
Cost Considerations
The Chairman has also posed questions relating to cost. I would encourage panelists to consider all costs in their comments, and not just those incurred by issuers (which, of course, are ultimately borne by the shareholders). Oftentimes, shareholders expend substantial sums analyzing compensation data disclosed in filings. Are there ways to use technology to lower the costs of the entire ecosystem, without sacrificing the quality of data provided to shareholders – and perhaps even improving data quality?
Thank you to all of the participants involved in today’s roundtables, and to the SEC staff who undoubtedly put many hours into the preparation and operations behind today’s event.
