Based on an initial review of a first set of proxies reflecting the new SEC executive compensation disclosure requirements, DolmatConnel & Partners, a compensation consulting firm, has published an analysis (here to download the detailed study) which notes that the new disclosures are lengthier than anticipated, but missing the information critical to a clear understanding of the company's overall executive compensation program.
Findings highlighted by DolmatConnel include:
- The median length of the Compensation Discussion and Analysis (CD&A) was 4,726 words, nearly five times longer than many original estimates.
- Only approximately one-third (36%) of companies chose to include exact financial performance targets (for short-term incentives) in their CD&A. The remaining firms did not disclosure specific targets, presumably because these firms believe such disclosure would cause competitive harm.
- There was a great lack of information and detail disclosed about the method of valuing equity paid upon termination or Change-in-Control, a component of executive pay currently under significant scrutiny, making comparisons between companies impossible. Have the new disclosures met the SEC's intended goals? Are they easier to understand than the old disclosures? Have more disclosure requirements become less helpful and more confusing to investors? The answers are varied and our conclusion is that the new rules have made a very positive step forward in some areas, and a serious step backwards in others.
- The new disclosures contain a much greater degree of detail than historically seen. Information on peer group companies, performance targets, bonus targets, non-qualified deferred compensation, and "other compensation" is available for the first time, and this adds significantly to providing a complete picture of compensation and enhances the ability to analyze the link between executive pay and firm performance.
- The "last-minute" revision to equity valuation rules (disclosing the FAS123R expense in the Summary Compensation Table instead of the previously disclosed initial grant value) obscures how most professionals in the field look at compensation for a given year. It is now aligned with accounting expense, but that is not how investors, executives, Board members and compensation consultants look at executive compensation. While this change was called a "win" for business by the media, our analysis found that this change only resulted in lower reported values 50% of the time (values are actually higher the other 50% of the time).
- The fact that a bonus, as we all know it, is no longer a bonus, but was changed to a non-equity incentive award, buried amongst the long-term incentive data in the Summary Compensation Table, was ill advised. Salary and bonus are always thought of together, and this change creates serious confusion for the average investor.
Comments