SEC Finalizes Pay Versus Performance Disclosure Rules

Last Friday (August 25), the Securities and Exchange Commission (SEC) adopted final rules implementing the “pay versus performance” disclosure requirement, completing a 12-year journey to fulfill a provision of the 2010 Dodd-Frank Act.

Under the rule, U.S. public companies must provide a new table in their annual proxy filings that contains executive compensation and financial performance measures covering a period of up to five years. While this new rule does not mandate any action that will narrow the pay disparity between executives and workers or reduce wealth inequality in the U.S., the rule requires companies to provide data comparing executive pay to financial performance. This table and the new figures will provide investors some clearer information for the mandatory (advisory) “Say on Pay” votes in every company’s proxy.

As a result, I hope that this makes Rosanna Landis Weaver’s work for As You Sow a little easier as she annually prepares a report on “The 100 Most Overpaid CEOs.” Previously, she had to dig through the not-so-transparent data in the “Compensation Discussion and Analysis” (CD&A), a required part of a company’s annual proxy statement, to generate her figures. Theoretically, the new rule will allow for a more straightforward means of comparison. (Worth noting: Year after year, the report uncovers overpaid CEOs who underperform on “Total Shareholder Return.”)

As You Sow, The 100 Most Overpaid CEOs, 2022

Some will take issue with the new disclosure rule as it is all about financial performance. Rightfully, socially responsible investors may be concerned because these new required charts do not include non-financial disclosure (i.e., human rights performance or emissions reduction). However, the rule does not preclude a company from including that information.

The new rule may draw companies to better tell their story, rather than bury shareholders in legalese. At the end of the day, the rule is not just about filling out the table, but that companies devote time to develop a narrative that helps investors understand how pay and performance align.

Even after this rulemaking, the SEC has yet to finish the implementation of Dodd-Frank. Perhaps we may see the SEC finalize the long-delayed provision for a clawback rule for accounting missteps mandated by Dodd-Frank. And we may be light years from reducing pay disparity and acting on wealth inequality, but better disclosure is a small step in the right direction.

Time for a Say-on-Pay

The proxy statements for 2022 are arriving, and we debate anew: “How much is too much?”

Mandated under the Dodd-Frank Act, say-on-pay is a nonbinding, advisory shareholder vote on the compensation policies for the company’s executive officers. In their proxy statement, companies must disclose how their compensation strategy has considered the results of their most recent say-on-pay vote, but the law does not require the company to make any changes based on the vote. Nonetheless, the say-on pay vote is a barometer for shareholder perception of the company’s executive compensation practices.

For instance, Apple proposes a $99 million pay package for CEO Tim Cook this year, but shareholder advisory firm ISS has recommended a “no” vote. I understand the basis for ISS’ recommendation is because it is triple the package of peer median pay and serves no purpose for retaining Cook, as he will earn shares in retirement. On the contrary, Glass Lewis, the other large proxy advisor, recommended supporting the package.

It is almost certain that the Apple say-on-pay resolution will have a majority of support as most shareholders routinely vote in favor of these packages. This will have a cascading effect on executive compensation in 2023 as peer companies will try to keep up. Cook’s proposed salary may simply be keeping up with the Joneses as Alphabet’s CEO Sundar Pichai was awarded more than $280 million in 2019.

Last year, however, bore seeds of hopeful news. Failure rates on compensation packages in 2021 were considerably higher than 2020 and 2019 levels as numerous companies experienced a “failed” vote for the first time, including AT&T, Marathon, Starbucks, and Walgreens. A more complete list of failed say-on-pay votes can be found here.

There are, of course, better ways to ask the question than “How much is too much?” We hosted a webinar last year on Pay and Wealth Disparity. One of the participants, Rosanna Landis Weaver, will host her annual webinar on Thursday: “100 Most Overpaid CEOs: Are Fund Managers Asleep at the Wheel?” (You can register here.) As well, one can turn to the AFL-CIO’s Executive Paywatch.

SGI has a long history in this space. From our founding in 1973, Fr. Mike Crosby, O.F.M., Cap. advocated for a living wage. SGI consistently advocates for increasing the federal minimum wage.

In 2013, President Obama said, “Rising income inequality is the defining challenge of our time.” Pope Francis, in the same year, noted, “How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?” As a consequence, one of Fr. Mike’s final efforts was a campaign for pay equity in 2014, filing shareholder resolutions with 12 retailers. The SEC allowed companies to omit the resolution based on ‘micro management.’ SGI members continue to challenge retailers and restaurants to pay living wages, for their own workers and for those in their supply chain.

In hopes of building an economy that works for the many, not one that concentrates more and more wealth in the hands of a privileged few, we keep coming back to this issue to see if there are new ways that we can address income and wealth disparity. The Franciscan Sisters of Perpetual Adoration proposal in 2021 on racial equity & starting pay at the Walmart AGM obtained strong shareholder support for a first-time resolution (12.5% of total shares or 27% of independent shares voted). SGI members have joined this year’s ICCR campaign asking restaurants to raise their sub-minimum wage for tipped workers.

Increasingly, economists have come to see that wealth and income disparity harm the economy. Rising concern for pay and wealth disparity in proxy voting and changes at the SEC lead us to think the tide may be shifting, and so we call upon shareholders to act.

Pay and Wealth Disparity Webinar

Good corporate governance, the “G” in ESG, allows for companies to better lean into the challenges and opportunities. Well-governed companies drive change rather than being subjected to it.

Warren Buffett, Chairman and CEO of Berkshire Hathaway, famously described executive compensation as the acid test of corporate governance. For my part, I think the Oracle of Omaha may only be half right. Yes, executive compensation is critical, but it is only half of the picture. The other half of the picture is looking at the wages of the lowest paid, most vulnerable within a company or within its supply chain. It’s a matter of looking not only from the top down, but also the bottom up.

On November 19th, we continued efforts to educate ourselves on issues related to pay and wealth disparity and about some actions we can take to address them. We are grateful that Brandon Rees of the AFL-CIO and Rosanna Landis Weaver of As You Sow joined us to enrich our conversation.

A couple of weeks ago, Tesla CEO Elon Musk made headlines as the first person in history with a net worth exceeding $300 billion. The other part of that story is that, by comparison, the median U.S. worker would need more than 4 million years to make that much.

SGI has a long history in this space. From our founding in 1973, Fr. Mike Crosby has advocated for a living wage. SGI consistently advocates for increasing the federal minimum wage.

In 2013, President Obama said, “Rising income inequality is the defining challenge of our time.” Pope Francis, in the same year, noted, “How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?” As a consequence, one of Fr. Mike’s final efforts was a campaign for pay equity in 2014 by filing shareholder resolutions with 12 retailers. SEC allowed companies to omit the resolution based on “micro management.” SGI members continues to challenge retailers and restaurants to pay living wages, for their own workers and for those in their supply chain.

In hopes of building an economy that works for the many, not one that concentrates more and more wealth in the hands of a privileged few, we keep coming back to this issue to see if there are new ways that we can address income and wealth disparity. The Franciscan Sisters of Perpetual Adoration proposal on racial equity & starting pay at the Walmart AGM obtained strong shareholder support for a first-time resolution. SGI members have joined this year’s ICCR campaign to ask restaurants to raise their sub-minimum wage for tipped workers.

Increasingly, economists have come to see that wealth and income disparity harm the economy. Rising concern for pay and wealth disparity in proxy voting and changes at the SEC lead us to think the tide may be shifting, and so we come to today’s conversation to get better informed and to renew our commitment to act.

Again, we are very grateful for the presence of Brandon and Rosanna in this webinar, for their commitment to this work, and their generosity in sharing their wisdom and experience with us. As always, we welcome your feedback via a confidential evaluation found here. Slides are available here.

Pay and Wealth Disparity Resources:

Pay and Wealth Disparity: Still our greatest social challenge

By Frank Sherman

Sister Sue Ernster’s (Franciscan Sisters of Perpetual Adoration) proposal on racial equity & starting pay at the Walmart AGM earlier this week obtained strong shareholder support for a first-time resolution (12.5% of total shares or 27% of independent shares voted). Congratulations to Sue and the many ICCR co-filers.

I’m reminded of Father Mike Crosby’s 2015 campaign on income disparity. At that time, President Obama called the growing pay & wealth gap in our country “the greatest social challenge of our time“…. and it hasn’t gotten better since then. We didn’t get very far back then after the SEC’s sided with the companies, permitting them to omit our proposal from the proxy based on the “ordinary business” exclusion.

Starting in 2011, the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 required companies to include disclosure of the total compensation of the top 5 paid executives in their annual proxy statements. Shareholders are allowed to cast a non-binding advisory vote for or against these pay packages (“say-on-pay”). Very few companies “failed” their say-on-pay vote in recent years. A failure occurs if the company does not obtain majority support from shareholders for the executive compensation proposal.

The tide may be shifting. Twice as many say-on-pay proposals failed this year as in previous years, including some companies that had never had a failure in these resolutions. As You Sow’s Rosanna Landis Weaver does great work digging through the fine print of the “Compensation Discussion and Analysis” section of each company’s proxy statement with an annual report on the 100 Most Overpaid CEOs. A recent NEI article on CEO compensation (A Promising Start To The Challenge Of Excessive CEO Pay) notes that support for pay packages among S&P 500 firms fell to an average of 87%, down 3 percentage points from 2020 and 2019, and down 4 points from 2016 to 2018. It references a report from the Institute for Policy Studies (Pandemic Pay Plunder: Low-Wage Workers Lost Hours, Jobs, and Lives. Their Employers Bent the Rules – to Pump up CEO Paychecks) which found that 51 of the S&P 500 firms with the lowest median worker wage revised their pay rules in 2020, so that median worker pay fell 2%, while CEO pay rose—by 29%.

Investors pushed corporations to tie their pay packages to stock performance (…to better align management pay with investor returns) in the early ’90s. Little did they know that this would be used by companies to successively ratchet up CEO, and as a result, the rest of management’s, comp packages every year to a level that makes U.S. CEOs stand out on the global stage.

The Dodd–Frank Act also required companies to disclose the ratio of CEO compensation to the median compensation of their employees. The rule has only been in effect since 2017, but the SEC allows companies “substantial flexibility” in the calculation of the ratio, making it difficult for investors and society to make meaningful comparisons.

Of course, CEO’s know that their pay relative to the median pay of their workers is out of control. But even if they wanted to change this (and I’m not sure many “want” to do so), they are reluctant to be a first mover on restructuring pay because it would “negatively impact retention and make them less competitive”.

As we complete the next draft of SGI’s strategic plan and think about our engagement focus for the 2022 season (which starts this summer), I believe pay disparity has to be high on our list. I hope you concur.

An eyebrow raising statistic

 

Annually, Oxfam, in conjunction with Forbes magazine and its global rich list, publishes a report on how many of the world’s wealthiest are needed to match the wealth of the bottom half of the planet. In recent years, as market values have soared and wealth has concentrated evermore increasingly, the number has shrunk from 80 wealthiest in 2015 to just eight men holding the same wealth as the bottom 3.6 billion people in 2017.

Recently, researchers from the Institute for Policy Studies refined the statistics to reflect the U.S. alone. Their conclusions were eyebrow raising:

It can be hard to grasp just how much money is concentrated in just a few hands in our lopsided economy today. But here’s a start: The richest three people in the United States — Jeff Bezos, Bill Gates and Warren Buffett — together have more wealth than the entire bottom half of the country combined.

To put an even finer point on it: That’s three people versus about 160 million people.

To really comprehend just how insane the wealth concentration has become, consider Bezos, the head of Amazon. Worth about $90 billion, he recently was declared the richest man in the world. In October alone, his wealth jumped by $10 billion — or about $4 million per second.

The authors made a particular point that the wealthiest of the group, Jeff Bezos, pays some of his warehouse workers as little as $12.84 an hour.

The report initially appeared in the Los Angeles Times, and more information can be found on the IPS website.

Priests of the Sacred Heart continue to challenge TJX’s executive pay policies

The TJX Companies, which includes well-known discount chains of TJ Maxx, Marshalls and Home Goods, is the leading off-price apparel and home fashions retailer in the U.S. …and worldwide. They claim 40 years of sales and earnings growth to the satisfaction of their shareholders. But not all shareholders are happy. “TJX maintains one of the largest pay gaps in America,” said Mark Peters, Director of Justice, Peace and Reconciliation for the Priests of the Sacred Heart. “As public scrutiny of the gap between CEO and worker pay increases, TJX may be risking the health of its labor force and the reputation of its brand.”

Mark filed a shareholder resolution with TJX concerning their executive pay policies and the widening pay gap with their workers for the third year in a row (see proxy memo). “The company’s proxy states that developing and retaining talent is a key component of their continued success. But this attention should not be limited to their executives. Their Associates’ pay has stagnated while executive compensation packages continue to escalate. Long term, this hurts the company and society.”

CEO pay has grew by almost 1000% over the past 40 years, greatly outpacing the growth in the cost of living, the productivity of the economy, and the stock market. This disproves the claim that the growth in CEO pay reflects the performance of the company, the value of its stock, or the ability of the CEO to do anything but disproportionately raise the amount of his pay (Economic Policy Institute).

Beginning in 2018, a Dodd-Frank Act provision requires companies to report the ratio of the CEO’s total compensation and that of their median employee. While the Trump administration is reviewing this requirement as too burdensome, Mark believes that it is not enough. “Shareholders need a historic view of this ratio and board’s informed view on whether the CEO-to-worker pay gap comes at the expense of the health of the Company’s human capital and long term shareholder value.”

See also: Priests of the Sacred Heart_TJX Proposal 8- 2017_Memo

Investors with $3 Trillion in Assets Call for CEO-to-Worker Pay Ratio Disclosure

Seventh Generation Interfaith members Congregation of St. Agnes, Franciscan Sisters of Perpetual Adoration, Dana Investment Advisers,  Province of St. Joseph of the Capuchin Order, Racine Dominican Sisters, Priests of the Sacred Heart (U.S. Province), School Sisters of St. Francis,  and Sisters of the Presentation of the Blessed Virgin Mary, joined over 100 institutional investors in a letter to the SEC in support of maintaining existing CEO-to-worker pay ratio disclosure requirements.