Center Survey: Companies Coalesce Around “Line of Business or Industry Index” for Peer Group

The Center recently reran its November survey on Pay Versus Performance disclosures to gain better insights into how employers intend to comply with the SEC rules. The survey update was conducted from January 3–12, 2023. In total, 62 members provided responses. 

A summary is outlined below along with key changes from the original survey results. Comprehensive results are available here.

Peer Group Selection

• 71% of respondents intend to select a “line of business or industry index” as required by item 201e of Regulation SK in the 10-K report. More companies are confident in this approach as this is an increase from 54% in November.
  
  
• 15% reported they intend to use the peer group disclosed in the CD&A for compensation benchmarking purposes (down from 22%).

Company-Selected Metric

• In addition to TSR, peer TSR, and Net Income, companies are required to select the single “most important” financial metric for linking pay and performance. There continue to be multiple approaches among employers on the selected metrics.
  
  
  1. 33% of respondents are leaning toward a metric from the long-term incentive plan.
     
     
  2. 26% are leaning toward a metric from the annual plan.
     
     
  3. 20% expect to use a metric from both the annual and long-term incentive plan.

Tabular List of Metrics

• The new rule requires a list of the 3-7 most important financial metrics used to link pay and performance. Previously, most respondents indicated they expect to use the minimum of three metrics (57%) with 18% saying they would use more than three. Now, almost 40% of companies reported they are considering more than three metrics with 49% maintaining they will select the minimum three.

Description of Relationships

• The performance relationship can be shown using graphs, narrative or a combination of the two. Companies are considering various approaches and are still uncertain on the most effective option.
  
  
  1. 62% companies plan to use both graphs and narrative; approximately 16% plan to use narrative only (down from 28%) and 21% graphs only (up from 10%).         

Disclosure Location

The rule stipulates that the disclosure must go in the proxy, but not necessarily in the CD&A. It further stipulates that additional voluntary disclosure within the table is allowable but cannot overshadow the mandated disclosure.

• 78% of respondents expect disclosures to be located at the end of the proxy (near Pay Ratio). This is up from 67%.
  
  
• 65% of respondents do not intend to provide additional voluntary alternative disclosures within the Dodd-Frank table; 25% are undetermined.

Equity Valuations

• The new table will require multiple equity valuations per vesting date and type of equity. Respondents reported varying estimates for the number of required valuations, likely based on their use of stock options.
  
  
• Of those that use stock options, 62% anticipate using the Black-Scholes valuation method to calculate year-end values; 12% plan to use the lattice model.

Preparing The Committee

• Companies will need to provide Compensation Committees with a mock-up of the disclosure very soon to leave enough time for a 2023 disclosure. 32% will present this in January, half intend to present in February (or later).

Thanks again to all members who took the time to respond to this survey. We will continue to keep you informed of the various practices and trends that transpire throughout this initial proxy season. 

If you have any questions or would like to request a survey, please contact Megan Wolf at [email protected].