SEC’s Pay Versus Performance – 2023 Early Impressions
As we head into March and the start of proxy season, the SEC’s newly required Pay Versus Performance disclosures are front of mind for many that deal with compensation and corporate governance. The Commission just recently released some *timely* clarifications on their rules, called Compliance & Disclosure Interpretations (SEC’s C&DI’s), which introduced clarifications (or complexities) for many public issuers just days before some proxy statements went live. Given SEC Chair Gary Gensler’s comments that the new rules “will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies,” we thought an analysis of early disclosure examples might help inform investor utility?
Early Impressions
At the time of this writing, there were 18 companies that had filed 10-Ks or proxy statements which included Pay Versus Performance disclosures. While there will be differing approaches to how companies furnish their required disclosures, there are some early trends forming that seem worth noting.
1. Compensation Actually Paid “CAP” Varies Widely
As predicted, there is a wide variance between the calculation of CAP vs. summary compensation table. The first 18 disclosures report a variance of -471% to +191%. While there is a correlation of CAP to company TSR that helps illustrate company pay and performance vs peers, the methodology for CAP calculation and resulting wide variance seems to weaken investor clarity.
| Company Name | Ticker | Filing Date | Industry | Ratio of Total CAP to Total SCT for PEO | Total PEO SCT | Total PEO CAP | TSR 2022 | TSR 2021 | TSR 2020 |
|---|---|---|---|---|---|---|---|---|---|
| Praxis Precision Medicines, Inc. | PRAX | 2/7/2023 | Biotechnology | -471% | $16,933,898.00 | ($79,796,078.00) | -96% | -64% | n/a |
| TRACON Pharmaceuticals, Inc. | TCON | 2/13/2023 | Biotechnology | 30% | $3,323,963.00 | $1,005,111.00 | -87% | -76% | n/a |
| Owens Corning | OC | 2/24/2023 | Building Products | 139% | $28,311,786.00 | $39,397,373.00 | 37% | 43% | 18% |
| MYR Group Inc. | MYRG | 2/23/2023 | Construction and Engineering | 191% | $11,668,361.00 | $22,294,377.00 | 183% | 239% | 84% |
| IQVIA Holdings Inc. | IQV | 2/27/2023 | Life Sciences Tools and Services | 165% | $84,326,866.00 | $139,013,042.00 | 33% | 83% | 16% |
| AGNC Investment Corp. | AGNC | 2/23/2023 | Mortgage REITs | 95% | $41,678,000.00 | $39,583,535.00 | -19% | 4% | -2% |
| CSI Compressco LP | CCLP | 2/7/2023 | Oil and Gas Equipment and Services | 91% | $2,974,859.00 | $2,699,329.00 | 32% | 15% | n/a |
| Schlumberger Limited | SLB | 2/23/2023 | Oil and Gas Equipment and Services | 161% | $38,159,343.00 | $61,260,541.00 | 42% | -22% | -44% |
| Equitrans Midstream Corporation | ETRN | 2/23/2023 | Oil and Gas Storage and Transportation | 50% | $23,342,207.00 | $11,674,688.00 | -36% | -8% | -33% |
| Magellan Midstream Partners, L.P. | MMP | 2/21/2023 | Oil and Gas Storage and Transportation | 103% | $30,643,493.00 | $31,506,987.00 | 4% | -11% | -26% |
| Commerce Bancshares, Inc. | CBSH | 2/21/2023 | Regional Banks | 107% | $13,821,593.00 | $14,729,699.00 | 22% | 15% | 3% |
| Farmers & Merchants Bancorp, Inc. | FMAO | 2/16/2023 | Regional Banks | 103% | $1,471,410.00 | $1,520,773.00 | 25% | 46% | n/a |
| Park National Corporation | PRK | 2/17/2023 | Regional Banks | 107% | $6,617,603.00 | $7,050,872.00 | 55% | 46% | 8% |
| ServisFirst Bancshares, Inc. | SFBS | 2/23/2023 | Regional Banks | 116% | $6,719,682.00 | $7,765,335.00 | 86% | 124% | 9% |
| Trustmark Corporation | TRMK | 2/17/2023 | Regional Banks | 88% | $8,828,047.00 | $7,794,709.00 | 11% | 0% | -18% |
| Federal Realty Investment Trust | FRT | 2/24/2023 | Retail REITs | 100% | $23,918,744.00 | $23,849,719.00 | -11% | 15% | -31% |
| Luther Burbank Corporation | LBC | 2/22/2023 | Thrifts and Mortgage Finance | 106% | $4,416,526.00 | $4,689,547.00 | 21% | 47% | n/a |
| Fastenal Company | FAST | 2/24/2023 | Trading Companies and Distributors | 137% | $10,402,374.00 | $14,202,541.00 | 38% | 83% | 37% |
| Average | 79% | ||||||||
| Median | 105% |
2. The Line of Business Index is the most common approach for determining peer group total shareholder return (TSR)
As companies began their PVP preparations in the fall, one of the first disclosure elements discussed was the construct of the peer group that would be used for TSR calculation purposes (for any readers involved with Smaller Reporting Companies, no need to fret as the peer group TSR disclosure is not part of your scaled down requirements). Initially, companies and advisors debated what type of peer group would satisfy the requirements – an index or issuers used for the performance graph in the 10-K? Companies identified as the compensation benchmarking peer group in the CD&A? Something else? Given these unknowns, as well as the complexity of having to calculate peer group TSR on a weighted basis based on each company’s market capitalization, many companies early on gravitated toward the idea of using a line of business index for determining peer group TSR. Despite the SEC’s C&DI’s clearing up the confusion on peer group design, it appears the majority of companies (8 of 13 with Peer Group TSR requirement) decided to stick with their initial preference and used a relevant line of business index as the peer group for the tabular disclosure.
| Company Name | Ticker | Filing Date | Industry | Peer group used |
|---|---|---|---|---|
| Praxis Precision Medicines, Inc. | PRAX | 2/7/2023 | Biotechnology | N/A – SRC |
| TRACON Pharmaceuticals, Inc. | TCON | 2/13/2023 | Biotechnology | N/A – SRC |
| Owens Corning | OC | 2/24/2023 | Building Products | Not clear |
| MYR Group Inc. | MYRG | 2/23/2023 | Construction and Engineering | 10-K Performance Graph Peers |
| IQVIA Holdings Inc. | IQV | 2/27/2023 | Life Sciences Tools and Services | Compensation Peer Group |
| AGNC Investment Corp. | AGNC | 2/23/2023 | Mortgage REITs | Line of Business Index |
| CSI Compressco LP | CCLP | 2/7/2023 | Oil and Gas Equipment and Services | N/A – SRC |
| Schlumberger Limited | SLB | 2/23/2023 | Oil and Gas Equipment and Services | Line of Business Index |
| Equitrans Midstream Corporation | ETRN | 2/23/2023 | Oil and Gas Storage and Transportation | Line of Business Index |
| Magellan Midstream Partners, L.P. | MMP | 2/21/2023 | Oil and Gas Storage and Transportation | Line of Business Index |
| Commerce Bancshares, Inc. | CBSH | 2/21/2023 | Regional Banks | Line of Business Index |
| Farmers & Merchants Bancorp, Inc. | FMAO | 2/16/2023 | Regional Banks | N/A – SRC |
| Park National Corporation | PRK | 2/17/2023 | Regional Banks | Compensation Peer Group |
| ServisFirst Bancshares, Inc. | SFBS | 2/23/2023 | Regional Banks | Line of Business Index |
| Trustmark Corporation | TRMK | 2/17/2023 | Regional Banks | Line of Business Index |
| Federal Realty Investment Trust | FRT | 2/24/2023 | Retail REITs | Line of Business Index |
| Luther Burbank Corporation | LBC | 2/22/2023 | Thrifts and Mortgage Finance | N/A – SRC |
| Fastenal Company | FAST | 2/24/2023 | Trading Companies and Distributors | General Index |
3. Companies are identifying STI metrics to use as the Company-Selected Measure (CSM)
Companies have to identify the CSM and include its performance in the table. The SEC defined the CSM as a measure that represents the “most important” performance measure not already included in the table that is used by the board to link Compensation Actually Paid during the fiscal year to company performance. According to the SEC, staff included the CSM requirement to lessen the likelihood that the required figures in the tables would “misrepresent or provide an incomplete picture of how pay relates to performance.” Many industry participants suggested early on that companies’ CSMs would likely be tied to profitability, as those metrics were often heavily-weighted short-term incentive plan measures. Those projections appear to be accurate, as our early review of disclosures found that most companies (10 out of 13 with CSM) opted for an STI metric as their CSM.
| Company Name | Ticker | Filing Date | Industry | Company-Selected Measure | Notes |
|---|---|---|---|---|---|
| Praxis Precision Medicines, Inc. | PRAX | 2/7/2023 | Biotechnology | N/A – SRC | |
| TRACON Pharmaceuticals, Inc. | TCON | 2/13/2023 | Biotechnology | N/A – SRC | |
| Owens Corning | OC | 2/24/2023 | Building Products | Adjusted EBIT | STI metric |
| MYR Group Inc. | MYRG | 2/23/2023 | Construction and Engineering | Pretax Income | STI metric |
| IQVIA Holdings Inc. | IQV | 2/27/2023 | Life Sciences Tools and Services | Adjusted Diluted EPS Growth | STI metric |
| AGNC Investment Corp. | AGNC | 2/23/2023 | Mortgage REITs | Relative Annual Economic Return | STI metric |
| CSI Compressco LP | CCLP | 2/7/2023 | Oil and Gas Equipment and Services | N/A – SRC | |
| Schlumberger Limited | SLB | 2/23/2023 | Oil and Gas Equipment and Services | Adjusted EBITDA | STI metric |
| Equitrans Midstream Corporation | ETRN | 2/23/2023 | Oil and Gas Storage and Transportation | Economic Adjusted EBITDA | STI metric |
| Magellan Midstream Partners, L.P. | MMP | 2/21/2023 | Oil and Gas Storage and Transportation | DCF per Unit | LTI metric |
| Commerce Bancshares, Inc. | CBSH | 2/21/2023 | Regional Banks | Revenue | STI metric |
| Farmers & Merchants Bancorp, Inc. | FMAO | 2/16/2023 | Regional Banks | N/A – SRC | |
| Park National Corporation | PRK | 2/17/2023 | Regional Banks | ROAA | LTI metric, STI modifier metric |
| ServisFirst Bancshares, Inc. | SFBS | 2/23/2023 | Regional Banks | EPS | STI metric |
| Trustmark Corporation | TRMK | 2/17/2023 | Regional Banks | ROATE | LTI metric |
| Federal Realty Investment Trust | FRT | 2/24/2023 | Retail REITs | FFO per Diluted Share | STI metric |
| Luther Burbank Corporation | LBC | 2/22/2023 | Thrifts and Mortgage Finance | N/A – SRC | |
| Fastenal Company | FAST | 2/24/2023 | Trading Companies and Distributors | EBIT | STI metric |
4. The “tabular list” of other measures are predominantly financial, specific to the business
The rules also require registrants, other than SRCs, to disclose a tabular list of at least three, and up to seven, financial performance measures that they determine are the most important measures for the last fiscal year. Since registrants are permitted, but not required, to include non-financial measures in the tabular list (once they have identified at least three financial performance measures), many companies would include some nonfinancial measures in this list – especially given the growing prominence of ESG within discussions surrounding executive pay. As illustrated in the graphic below, most companies in our early review universe only identified additional financial measures as other important metrics to include in their disclosures. Other notable observations: two companies – MYR Group and Equitrans Midstream – included ESG metrics (see shading in the table), and one – Fastenal Company – provided separate lists of metrics for its CEO, CFO and non-CEO/CFO NEOs.
Are the new PVP disclosures useful?
Sometimes more is not always better, it’s just more. While there are more news headlines that may emerge from the new PVP disclosures, true investor clarity does not appear to be one of them.
