Farient Urges SEC to Keep, But Simplify, PvP Disclosure

Farient Advisors has asked the Securities and Exchange Commission to retain the agency’s Pay vs. Performance disclosure rule. But it wants the requirement trimmed back to its analytical core.

In an April 13 comment letter to the SEC on File No. 4-855, the firm said the rule’s most valuable output is a performance-sensitive pay figure known as “Compensation Actually Paid,” or CAP. It argued that CAP is expensive to calculate the first time. It is cheaper to maintain once systems are in place.

The SEC’s Pay vs. Performance table has drawn criticism since it took effect in 2022. Investors often call it hard to read. Companies often call it costly. Those complaints have fueled calls to repeal the disclosure outright.

Farient’s message: Don’t throw out the one number that can show whether executives and shareholders are in the same boat.

Why CAP Matters

Farient said the usual pay figure that investors see — total compensation in the Summary Compensation Table — is not sensitive to performance. It is built largely on grant-date values for long-term incentives. Those values do not move much year to year, even when the stock does.

CAP is different, the firm wrote. It revalues equity awards based on what has vested and what remains outstanding. That makes the figure rise and fall with share price. Farient described CAP as a measure of realized and realizable pay.

Still, CAP has not been widely used. Farient said many readers see the Pay vs. Performance table as a “bird’s nest” of numbers. It can produce odd results, including negative pay. Proxy advisors have not provided consistent guidance on how to interpret it.

Pay Level is Not Pay Alignment

The firm urged the SEC to draw a clear line between two questions. First: Is pay reasonable for the job and the company’s size? Second: Does pay move with shareholder outcomes over time?

Farient said Summary Compensation Table pay is still useful for judging cost and “pay quantum.” But it said CAP is the better tool for alignment. CAP can show when an executive’s company-linked wealth changes alongside total shareholder return.

What CAP Can Reveal

Farient pointed to patterns that can look fine at grant date but turn into misalignment later. Its top example was the “round-trip effect.” It happens when companies use fixed-value equity grants during volatile periods. If shares fall and later rebound, executives can end up with more shares and more realizable pay than they would have earned in a steadier market.

The firm also flagged “large trough grants.” Those are big awards issued after steep stock price declines and ahead of a recovery. Farient said the practice was common during the early COVID-era downturn, when boards sought to “restore” lost equity value. CAP can help investors spot when such grants look like retention tools — and when they look like opportunism.

Farient said fixing these problems can be a challenge. Efforts to reduce volatility-driven windfalls can collide with boards’ desire to keep target pay “competitive” each year. But it argued that investors cannot evaluate those trade-offs without a performance-sensitive pay metric.

What Farient Wants Changed

The firm proposed a Pay vs. Performance disclosure focused on the CEO only, not all named executive officers. It said the CEO’s alignment is the most relevant signal of board oversight and strategy stewardship.

Under Farient’s proposal, the table would keep three items:

• SCT total compensation, as the cost-based pay measure
• CAP, as the performance-sensitive measure of realized and realizable pay
• Total shareholder return, as the return context investors care about

Farient also recommended a technical swap in how pensions are treated. It wants the SCT to use the pension cost figure used in the CAP calculation. It wants CAP to include year-over-year changes in pension value. The firm said that it makes the SCT more purely a cost measure and CAP a more purely wealth-change measure.

It also urged the SEC to drop other parts of the current disclosure. That includes the tabular list of company-selected financial performance measures. It also includes the narrative “relationship” discussion. Farient said cutting those items would reduce the reporting burden without sacrificing the core comparison.

Finally, the firm asked the SEC to rename CAP. It suggested “Realized and Realizable Pay.” Farient said the current label implies cash in hand. In practice, the number includes unrealized and unvested gains that can still be forfeited.

What Happens Next

The SEC has been reviewing feedback on whether the Pay vs. Performance rule is delivering value. Farient said the answer is yes — if the Commission keeps CAP and strips out the rest. The firm urged regulators to preserve CAP, calling it the only consistently reported, performance-sensitive pay metric for public companies.