Investors and stakeholders alike have sought to gain greater transparency into executive pay structures in recent years, launching Say on Pay shareholder proposals, a mandate for public companies to allow investors to reject excessive C-suite pay, and demanding data around pay scales.
Looking ahead to the 2023 proxy season, executive pay will yet again be in the spotlight as Pay Versus Performance, a rule that requires companies to disclose executive compensation in relation to firm performance, takes effect for the first time. Unless various activist investors get their way, companies face relatively low risk from investor backlash on executive pay; so-called say-on-pay votes in the Russell 3000 received 96.5% in 2022 and and 97.2% in 2021 of majority support, according to Semler Brossy, an executive compensation consulting firm.
In the months since, many board compensation committees have hired a consultant to do a deep dive into its executive data, Joan Conley, senior advisor on corporate governance and ESG programs at Nasdaq, told CFO Brew. Since finance chiefs are responsible for overseeing SEC filings and often have investor relations under their wing, the change in pay disclosure rule will fall into their organizational purview.
The proposal has led boards and their hired consultants are working to answer the questions of “Is this [data] comprehensive enough? Are we giving the shareholders enough?” said Conley. “So that’s one regulatory initiative that really everyone is heads down, pencils are moving, computers are turning data, to create that.”
Pay ratio. In recent years, executive pay metrics have caught the attention of wider audiences, especially the CEO-to-typical-worker pay ratio. The ratio was 399-to-1 in 2021, a figure that showed executive compensation rose 1,460% from 1978 and typical-worker compensation by 18.1%, the Economic Policy Institute (EPI) found. The discrepancy is a “contributor to rising inequality,” which, if left unattended, can cause wider economic damage, according to the EPI report.
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Compensation committees carefully consider (say that five times fast) CFO salaries because of the potential implications for succession planning, according to proxy firm Institutional Shareholder Services. The firm noted that finance chiefs are often “first in line for internal promotions to the CEO position,” so compensation committees want to ensure that large salary differentials do not exist between CEO and CFO pay.
Mind the gap. The ISS found that the gap between CEO and CFO pay “widened substantially” between 2021 and 2022 as CFOs began to earn more. That uptick could have been a reward from compensation committees for finance chiefs’ efforts to preserve liquidity and cash flow positions over the past few pandemic years. And despite executives forfeiting their salaries in the early days of the pandemic, such moves barely affected the CEO-to-worker ratio, ESG focused nonprofit JUST Capital found.
In October 2022, the SEC issued its long-awaited clawback rule, which would require executives to return performance-based compensation and incentives if fraud or errors required a financial restatement. SEC chairman Gary Gensler said that the rule would “strengthen the transparency and quality of corporate financial statements”; however, it does tie executive pay to yet one more responsibility.
If initial 2023 data is any signal, many employees are still hoping for salary increases. But proxy season might include some investor questions on performance and say-on-pay proposals as the market begins to dip again.—KT