Early Insights from the First Year PVP Disclosures: Resource Roundup

Early proxy filers seem to be following “the letter of the law” in how they comply with the SEC’s new PVP rules.  Two summary pieces by Compensation Advisory Partners (CAP) and FW Cook are worth a look as they review the early proxy filers of the S&P 500 to analyze the decision points companies made as they incorporated the new information into the already hefty proxy reporting.  Equity Methods also is tracking 2023 proxies to identify trends and warned against some potential pitfalls in their recent blog.

Some key findings of these initial disclosures:

Comparator Groups. Not surprisingly, industry/sector indices depicted in the 10-K graph were the predominant choice for comparing TSR calculations. Both FW Cook and CAP found about three-fourths of companies used this as their benchmark over a custom peer group to avoid the requirement to explain year-over-year changes within the peer group and include additional calculations comparing TSR to both the old and new groups. A little over 20% chose to use the custom peer group with one outlier using the S&P 500 index (which may not be fully compliant with the rule) and another who used industry indices for previous years and changed to a custom peer group for the current year.

Company-Selected Measures. Financial performance measures were overwhelmingly selected as the most important, with the majority using an adjusted/non-GAAP metric as cited in their incentive plans. FW Cook indicated 68% using a non-GAAP measure.

The company-selected measure was split at 46% being in the annual plan, 34% in the long-term plan and 19% in both. As we previously reported, the SEC’s recently released C&DIs seem to specifically prohibit the use of long-term metrics, but this was not contained in the original rule, so companies may be choosing to interpret it differently. Three of the 75 companies reviewed by FW Cook also included a supplemental measure because it had the same weighting as the company-selected measure in one of the plans.

Tabular List of Most Important Measures. Almost all companies selected one list for all NEOs and disclosed between 4 and 5 measures. CAP indicated 64% used only financial measures in their list and 36% included both financial and non-financial. A combination of ESG and operational goals was the most cited non-financial measure.

Explanation of Relationships. The most common practice was to illustrate the relationship between “compensation actually paid” and the PVP table using graphs, with approximately 85% electing this method.  While some combined graphs with narratives, the descriptions did not add much color. Equity Methods dug into this a bit by examining the depth of the narratives categorizing most (62%) as “shallow analysis” rehashing information already present versus “deep analysis” which offers new insights to understand the “why” behind the numbers. About 8% of Equity Method’s sample demonstrated a percent change across the PVP variables which provided some additional insights without a detailed explanation. Some chose to include a narrative emphasizing alignment, point out stock price implications or reference additional metrics outside the PVP table. Overall footnotes seem brief, with 69% of companies using 5-8 footnotes in the table itself and the median word count for the entire PVP section is 1400 words.

Another interesting callout by Equity Methods is around unclear guidance from the SEC about valuation assumption disclosure. Despite a rule indicating that a footnote should be added for “any assumption made in the valuation that differs materially from those disclosed as of the grant date of such equity awards,” 94% of companies did not disclose any assumptions. Companies should internally document the thought process in support of their approach and model assumptions to determine the actual impact on final values.