The SEC's PvP Rules are...almost helpful?

The SEC’s PvP rule was established in 2010 under Dodd-Frank, but the SEC didn’t finalize the details until the last few years. Companies are now required to include a new table in their def 14a statements with a calculation of “Compensation Actually Paid” to executives or “CAP.” So far, it’s created a lot of work to prepare the filings, and no one cares about it or uses it. I think that could change a little. I wrote an article with my thoughts here: PvP Disclosure Article. Sharing a few more thoughts here.

The point of the law was to make it easier to figure out what someone was actually paid ostensibly so investors could evaluate whether pay aligned with performance. The long-standing disclosure requirements to list pay in the “Summary Compensation Table” make it hard to evaluate what someone really earned. Executive pay includes stock grants (which vest over multiple years and are subject to price performance), performance awards (which can pay out within a range), and all sorts of bells and whistles that make it hard to investigate the simple question of “was your pay appropriate?”. The PvP disclosure requirement is the SEC’s response to that awkwardness.

My article includes more about the mechanics. My two cents is that the requirement actually works intellectually, and it will eventually be helpful to investors but with a very narrow use case: evaluating pay for outside CEOs over their full tenure in the role. I say actually because it’s not a common take in the compensation or governance worlds just yet. The disclosures are confusing, the prep process is really annoying for in-house compensation folks, and it’s frankly an arduous requirement. Whoever at the SEC designed the requirement was doing so in an intellectual vacuum without understanding the nuts/bolts of the data or how this might be used. They almost created a really powerful tool. We have more data now, so we should try to make sense of it.

I’ve spent more time in the SEC PvP data than most, and my thoughts:

• When you can get an apples-to-apples look at Compensation Actually Paid and Summary Compensation Table pay numbers, it’s meaningful and an intellectually pure approach for evaluating pay versus performance.
• That “apples-to-apples” means you need data for each year someone was employed to be broken out in the disclosure for their full tenure.
• That apples-to-apples data is only ever going to be available for outside CEO hires who started in 2020 or later (the first year companies were required to report on)
• Otherwise, we shouldn’t try to make sense of the data because there is no use for (i) internally promoted CEOs (who received grants from their employer that aren’t broken out in the PvP disclosure) and (ii) other NEOs (where the data is listed as a non-sensical average and you can’t track apples-to-apples).

Investors, proxy advisors, and compensation consultants should try to use the data more effectively, but everyone needs to be clear about the limitations. If proxy advisors wanted to take this up as a cause and design a new quantitative framework for CEO pay evaluations, this might be it.