PvP Tracker™ Joins Farient Data Suite

Mandated Pay vs. Performance (PvP) disclosures are finally here. Stemming from the 2010 Dodd-Frank Act, the new SEC rule forced public companies to scramble to comply in the months and weeks leading up to their 2023 proxy filings.

The rule also introduced a complex new pay definition, Compensation Actually Paid (CAP), and raised a host of questions, including:

• How should companies structure this new disclosure, and where should the disclosure be in the proxy?
• Would companies select an index or peer group for relative comparisons of total shareholder return (TSR)?
• What types of measures would be used for the company-selected measure (CSM)?
• Would companies select non-financial or ESG-based measures as “most important?”
• Would the PvP disclosures show an alignment between executive pay and performance?

Given that this is the first year of implementation, companies were blind to how competitors and peers were reporting. To assess the emerging trends revealed in this year’s first-time PvP disclosures, Farient Advisors’ PvP Tracker™ collects their details as they are filed by S&P 500 companies.

Included in our newly launched PvP Tracker™ is coverage of both qualitative and quantitative elements. On the qualitative side, the PvP Tracker™ summarizes trends in peer group selection, the “most important” performance measures, and the formats employed when describing the relationships between CAP and measures of financial performance, among other elements.

For instance, early findings for the S&P 500 indicate that 88% of companies do not include an introduction to their PvP disclosures. Only 12% of companies provide some sort of introduction detailing their pay-for-performance philosophy or their compensation structure or approach, which helps explain the link or lack thereof between pay and performance.

 

Percentage of Companies Including a PvP Disclosure Introduction

Source: Farient PvP Tracker™ data as of March 30, 2023

 

Additionally, when companies reference the relationship between CAP and performance measures, they most commonly (55% of S&P 500 companies) disclose those relationships in a graphic format only. Another 34% of companies use a combination of graphs and narrative. A slim minority (11%) of S&P 500 companies disclose these relationships in a strictly narrative format. Thus, a visual representation is the preferred approach either because it helps to better show the connection between pay and performance, or because no additional narrative is needed to satisfy SEC reporting requirements.

 

Format of PvP Relationship Disclosures

(Percentage of Companies)

Source: Farient PvP Tracker™ data as of March 30, 2023

 

In terms of the “most important” company-selected metric (CSM), Farient’s PvP Tracker™ finds that a majority (54%) of companies are choosing an earnings metric, such as operating profit or EPS, followed by returns (15%) and cash flow (13%). Of course, CSM trends vary by industry—for instance, 37% of companies in the financial sector select a returns measure as their CSM.

 

Prevalence of Company-Selected Measures by Type

(Percentage of Companies)

Source: Farient PvP Tracker™ data as of March 30, 2023

 

The PvP Tracker™ also calculates CAP for CEOs over the past three years at the 25th, median, and 75th percentile, and compares CAP to grant-date summary compensation table (SCT) values of total pay. The PvP Tracker™ then compares the ratios between CAP and SCT values versus one-year TSR to understand the alignment between compensation outcomes (i.e., CAP) versus SCT values and performance. In years where TSR is down, such as in 2022, CAP is lower than SCT values, as expected. However, differences exist by industry due to variances in performance and trends in compensation design (i.e., certain industries with more leveraged pay plans may exhibit larger swings in CAP).

The PvP Tracker™ captures the highest and lowest paid CEOs under the CAP pay definition, which can be positive or negative. The CAP pay definition adjusts for year-over-year changes in the value of vested and unvested equity, as well as the value of any forfeited awards that fail to meet vesting conditions.

Of the proxies filed through March 30, 2023, ConocoPhillips CEO Ryan Lance was the highest paid CEO in fiscal year 2022 with CAP of $74.7 million (compared to SCT of $19.97 million and one-year TSR of 70.6%). At the other end of the pay spectrum, Paycom Software CEO Chad Richison was the lowest paid CEO with CAP of negative $149.5 million in 2022, paired with negative one-year TSR of -25.3%; the huge negative number reflects the severe drop in the value of unvested awards that were granted in prior years.

 

Highest and Lowest Paid CEOs in 2022

(Using CAP Definition)

Source: Farient PvP Tracker™ data as of March 30, 2023

 

Discover Emerging PvP Trends

Various questions remain around these PvP disclosures, including how investors and proxy advisors may use them to inform their Say-on-Pay vote decisions, and whether they see PvP as a reliable indicator of pay and performance alignment. Both proxy advisors—ISS and Glass Lewis—have indicated they might use the new PvP disclosure as a qualitative input to their Say-on-Pay evaluations, especially for companies already showing misalignment under legacy pay for performance tests.

Whether your company has already disclosed its PvP or is preparing to, it is instructive to see how other companies are complying with the requirements. Visit the Farient PvP Tracker™ each week to discover the latest trends and analysis on these new disclosures.

 

By Brian Bueno

Brian Bueno is Farient’s ESG Leader.

 

About Farient Advisors 

Farient Advisors LLC is an independent premier executive compensation, performance, and corporate governance consultancy. Farient provides a full array of services, linking business strategy to compensation through a tailored, analytically rigorous, and collaborative approach. Farient has locations in Los Angeles, New York, Louisville, and Dallas and works with clients globally through its partnership in the Global Governance and Executive Compensation Group (GECN). Farient is a certified diverse company and is recognized by the Women’s Business Enterprise National Council.