Why CEOs Make 351 Times the Typical Worker
Have you ever wondered what a CEO does to merit an annual salary upwards of $500K? Well the SEC has, and they want to make that information easily accessible to you.
Today, we’re here to talk about the topic of pay-versus-performance, a ruling proposed by the SEC that would require companies to disclose information defining the relationship between a company’s executive pay and the company’s performance.
An original ruling requiring pay-versus-performance disclosures was actually passed in 2015, and focused primarily on a company’s “financial performance” as the sole metric to determining CEO compensation. But as CEO-to-worker compensation has skyrocketed from 21–1 in 1965 to a staggering 351–1, and averaged $24.2M for the top 350 firms in 2020, there’s no question that it’s essential for the SEC to revisit the pay-versus-performance ruling.
What’s all this about comment periods, then?
On January, 27, 2022, the SEC opened a comment period on proposed amendments to pay-versus-performance, exploring whether “additional performance metrics would better… provide shareholders with information they need to evaluate a company’s executive compensation policies.”
Specifically, the comment period this time around invites interested parties (literally anyone) to submit comments and data on topics including, but not limited to, whether registrants should be required to disclose:
- Additional performance measures beyond total shareholder return
- The performance measure that represents the most important link to executive pay, called a “company-selected measure”
- A tabular list detailing the five most important measures determining executive pay
By law, the SEC is required to read and take into account every comment letter. You can think of submitting a comment letter to the SEC as akin to calling your local representative to share your thoughts on new policies — there’s no guarantee of change, but enough flooded inboxes and certain themes of the constituents’ demands will become clear.
Where does Troop stand on pay-versus-performance?
Troop stands strongly in support of expanding pay-versus-performance requirements that would increase transparency to consumers, shareholders, and investors when evaluating executive compensation policies.
Ultimately, how a company decides to compensate, and more importantly incentivize, it’s top executives, is essential to understanding how a company is run from the top down, what types of policies are being enacted, and whether or not executive compensation is being distributed in a sensible way.
While we believe that the proposed rule has already created a solid groundwork for change, we believe it can go further. In our letter, we submitted a series of suggestions which fall under three main principles:
1. Standardizing Required Reporting Across Corporate Structures
As it stands, not only does reporting vary across companies, creating discrepancies when assessing executive compensation, but only certain companies are required to submit specific metrics. The effect this has is that certain SRC’s (Smaller Reporting Companies) are able to exempt themselves from the pay-versus-performance rule. There is already a “corporate governance gap”, owed in large part to the fact that these SRC’s are far less scrutinized than their larger counterparts, and the lack of standardized reporting will only serve to exacerbate this issue.
2. Establishing Consistent and Longitudinal Proof of Measures
Currently, companies are able to use shortened windows of data to make it appear as if they are meeting certain goals. What is often happening is that companies are enacting short-sighted policies in order to fulfill specific metrics required for executive compensation packages, often at the expense of overall company health and growth. We recommend that the rule institute a requirement for much more detailed metrics displayed over longer periods of time and for the explicit detailing and expounding of any shifts in company policy that directly rate to the pay-versus-performance metrics provided by the company.
3. Integrating Standard DEI and Sustainability Benchmarks
Finally, there are currently no stipulations in place which mandate DEI or sustainability metrics as part of the pay-versus-performance rule. It is necessary that these metrics be included amongst those required by the rule. Not only has it has been shown that more sustainable, more diverse companies perform better, grow more rapidly, and increase shareholder value at a higher rate, but it also forces companies to put their money where their mouth is instead of being allowed to continually pay lip service to ethical issues. Currently, only one-third of companies in the S&P 500 include a diversity metric, while the majority still do not.
A More Transparent Future for All
While the pay-versus-performance rule is only one step towards making corporate governance and accountability to shareholders a reality, we are hopeful that it is a step that can springboard real change.
We hope that you take the time to read our letter to the SEC in full.
Until next time, fellow Troopers,
🦍 The Troop Team 🦍
