SEC’s Pay Versus Performance: Even the WSJ Is Confused

A recent Wall Street Journal article attempted to describe new SEC pay versus performance disclosures with a catchy headline, proclaiming that “Companies for first time must tell how much stock awards soar or shrink; for one CEO, a $24 million difference.”

The problem is, the article doesn’t make the obvious conclusion that should be drawn about the differences in pay. The confusion between Summary Compensation Table pay, the SEC’s new Compensation Actually Paid (which is nothing of the sort) and the realized or realizable definitions of pay that many companies already use is so great that it perplexes even experienced subject-matter expert journalists like Theo Francis – to say nothing of investors.

The headline is referring to oil company Schlumberger, who reported a 2022 CEO CAP of $39.5 million compared to Summary Compensation Table compensation of $15.7 million, “driven by a sharp rise in the company’s share price.” 

• This may lead readers to believe that CEO Le Peuch is, in the WSJ’s terms, “poised to get” $24 million in stock when in fact, the number boils down to the accounting difference between the January grant date and the year-end SEC-required revaluation. In an extreme example like Schlumberger where stock price increased more than 70%, this translates to an award valued at $12 million in January and over $35 million in December.  Neither the $12 or $35 million is compensation actually paid, but in the new method, the $35 million replaces the $12 million which leads to the big headline.
  
  
• Meanwhile, Le Peuch’s 2020 CAP was negative ($10.6 million) primarily due to unearned equity awards decreasing in value by ($14 million) in 2020 as oil stocks tanked, but this is not noted in the article.

Numerous large companies have filed their proxies over the past couple weeks reporting large CAP swings year-over-year. 

• The CEO of a ventilation equipment manufacturing firm disclosed CAP of $61 million for 2021 and negative ($20 million) in 2022 while Summary Compensation Table indicated $13.2 million. The company included a section headed Analysis of the Information Presented in the Pay Versus Performance Disclosure explaining why not all performance measures are in the table and why CAP may not align with long-term performance.
  
  
• The CEO of a large paint manufacturer reported CAP of $48 million in 2021 and negative ($19 million) in 2022 while SCT pay was $12.7 million. That company took a minimalist approach, without any additional commentary or narrative beyond requirements. This seems to be the trend with many of the early disclosures. Some organizations are emphasizing strong correlation with TSR but many are keeping the description of the relationships brief, if at all. It remains to be seen how investors will react to this approach.

An alarming aspect of the WSJ piece was the number of early proxy filers that were asked to comment on their own disclosures. One company went to considerable lengths to explain the significance of stock price fluctuations and estimated values of unearned awards, but one wonders how much of these explanations the general public is going to understand.