Beware: The Cleansing Sunlight of Disclosure Has Actually Mushroomed CEO Pay
CEO pay has always been contentious. Shareholders and the Media regularly question why executives at the top of large companies receive such exorbitant salaries. Over the past few decades, CEO pay has increased almost geometrically while the wages of regular employees have remained essentially stagnant. So, what is driving this increase in CEO pay, and how can it be addressed?
A largely overlooked factor driving the increase in CEO pay is the SEC's move to require increasing granularity of CEO rewards within annual proxy statement disclosures. Proxy statements are documents that publicly traded companies are required to file with the Securities and Exchange Commission (SEC) each year. The Compensation Disclosure and Analysis (CD&A) sections of these filings provide a detailed breakdown of executive compensation, including salaries, bonuses, stock options, parachute packages, and other perks.
While proxy statements have been around for decades, it wasn't until the late 1990s, with changes to Regulation S-K, that they began to include detailed information about executive pay in a standardized format. This change was driven by a combination of factors, including increased public scrutiny of CEO pay (Disney and Michael Eisner) and pressure from activist investors and shareholder groups. Prior to detailed and uniform proxy statement disclosures, CEO pay was largely determined by a company's board of directors, with little input from shareholders or the public. Board members often had close, undisclosed personal relationships with the CEO, potentially leading to conflicts of interest and inflated pay packages.
Shareholders and the public can now access uniform and detailed information about executive compensation. This has led to increased scrutiny of CEO pay and a greater focus on tying executive compensation to performance. Detailed proxy statement disclosures combined with 162m (the Million Dollar Cap on CEO pay) performance pay exclusions have influenced CEO pay through the greater use and prevalence of performance-based pay. Prior to the late 1990s, many CEO pay packages were heavily weighted towards base salary and bonuses, with limited to little consideration given to performance. However, with the increased focus on performance-based pay, many companies now tie a significant portion of executive compensation to the Company's financial and stock price performance.
Add to this the reality that Boards are generally reluctant to disclose pay or performance targets at anything below average or median levels. Over time this reluctance has ratcheted up rewards and executive pay expectations. Increased transparency has led to a "race to the top" in CEO pay, as companies compete year after year to offer ever-larger pay packages in order to attract top talent. Over time, we find ourselves in a situation where CEO pay has become disconnected from the Company's performance, and based Board and CEO vanity rather than merit.
Are you worried about how executive pay is determined and disclosed at your Company? FutureSense can help.
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