SEC on Pay Disclosure: Less Conversation, More Analysis

After reviewing the executive compensation disclosures of 350 companies, the commission says it still doesn't understand how businesses figure out their pay packages.

The Securities and Exchange Commission has summarized its take on the first year of its compensation disclosure rules. In essence, the SEC wants more analysis of how and why companies pay their top executives but also wants the information presented in a tighter, more concise way.

On Tuesday, the SEC released the observations in a 10-page document listing the broad faults it found in the Compensation Discussion and Analysis sections of 350 public companies’ financial statements. Providing better explanations of how companies reach decisions on how much to pay their CEOs, CFOs, and other high-earning executives “does not mean that disclosure needs to be longer or more technical,” the staff wrote. “Indeed shorter, crisper, and clearer would often be better.”

To satisfy the SEC — which acknowledges that the first year was a learning curve and a “substantial” undertaking — companies should focus less on their processes and more on what led them to their final compensation decisions, the commission suggests. The SEC’s comments to the companies it reviewed range from major changes — such as refocus the gist of the CD&A — to minor ones, such as increase the font size of a footnote for readability. “We seek … more direct, specific, clear, and understandable disclosure,” the SEC wrote. “We believe this will foster enhanced and more informative executive compensation disclosure.”

The SEC will release the comment letters it sent to the 350 companies within the next 45 days on EDGAR, its electronic filing system. Companies that have not yet been privy to the SEC’s feedback may be intrigued to learn what the SEC is requesting, particularly for critics of the CD&A rules worrying that the new disclosures could cut into competitive issues.

Indeed, the SEC commented on companies’ methods of benchmarking executive pay with those of peers. The SEC wants companies to specify which companies they are comparing themselves with and what types of compensation are considered in those comparisons. In addition, the commission frowned upon companies that benchmarked compensation based on “a vague or broad range of data” from peers; it wants companies to be more specific about where their own compensation falls in that range.

To be sure, the SEC is being careful in how it guides companies in fulfilling its CD&A requirements. In a speech on Tuesday, John White, director of the SEC’s Division of Corporation Finance, emphasized that the rules are principle-based, leaving it up to each company’s judgment to decide when a disclosure is materially necessary.

White also declined to pull real-life examples from the companies the SEC reviewed, to discourage firms from churning out “boilerplate” CD&As in next year’s disclosures. Instead, he spotlighted what the SEC wants in broad terms. “Focus on how and why you reached the compensation decisions you made in your CD&A,” he said. “Don’t provide a laundry list of facts. Discuss and analyze the elements of your decision-making.”

The SEC also made these observations and recommendations:

• The SEC staff issued more comments related to pay-for-performance targets because they didn’t understand how companies used those goals or how those targets affect their compensation decisions. If companies think including a specific target could put them at a competitive disadvantage, they should explain why.

• Companies may find it necessary to include previous years’ targets to give their current compensation plans context. In fact, the SEC has asked companies to include prior-year and current-year targets when they indicated that those targets were material to understanding a certain pay package.

• Approximately two-thirds of the reviewed companies included charts that weren’t required by the SEC rules.

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