Investors Deeply Dissatisfied With Executive Compensation Disclosure, Study Finds

February 20, 2015

Highlighting the need stressed by HR Policy Association's Center On Executive Compensation and others to streamline executive compensation disclosure requirements, only 38% of institutional investors believe executive pay is clearly and effectively disclosed in company proxies, according to a new survey of 64 asset managers and asset owners with a combined $17 trillion under management.  The study, conducted by the Stanford Graduate School of Business's Corporate Governance Research Initiative in collaboration with financial communications advisor RR Donnelley Financial Services and Equilar, found that investors are "deeply dissatisfied" with compensation disclosure and "lukewarm" on say on pay despite the fact that disclosures have steadily increased in the wake of mandatory say on pay.  In fact, as Rob Schneider of RR Donnelley explained and as the Center has noted to investors and SEC policy staff, it seems that "lengthy disclosure...can actually impede rather than improve shareholder understanding" of executive pay.  Professor David F. Larcker, director of the initiative, noted that "even the largest, most sophisticated investors are unhappy."  Key findings of the report include:

  • Disclosures Are Unclear.  65% of respondents believed that the disclosed relationship between compensation and risk is unclear (65%), and that it is "not at all" clear that the size of compensation is appropriate (48%) or whether incentive plan goals are rigorous.
  • Proxies Overly Long.  More than half (55%) of investors said proxies are too long, while 48% said they are difficult to read and understand.  Investors reported they only read about 32% of the average proxy and named an ideal length of 25 pages (vs. the Russell 3000's 80-page average).  Investors noted they are most likely to read the summary section, total compensation tables and long-term incentive plan disclosure, and "highly value" a table highlighting any significant changes from the previous fiscal year.
  • Say on Pay and Other Voting Decisions. Investors noted that when it comes to proxy voting, the most critical sections of the proxy are pay for performance disclosures, performance metrics and director independence. However, most investors rely on a variety of other factors in addition to proxy disclosures when making voting decisions, including internal policies or analysis (73%), proxy advisory firms (63%), and company engagement (58%).  Only slightly more than half of investors believe that say on pay is effective in influencing company pay practices (58%) or that proxies allow them to make informed say on pay votes (54%).
The study's findings reaffirm the Center's belief that executive compensation disclosures are in need of reform, especially given the SEC's renewed focus on proxy disclosure, and aligns with the Center's work on a conceptual framework for supplemental pay for performance disclosures that promotes greater consistency and comparability in disclosing the link between pay and performance.