A Fruitless Effort: Finding Significance in the SEC’s Pay Versus Performance Disclosure

A valiant effort to analyze the pay and performance relationships in the SEC’s proxy disclosure demonstrates just how difficult it is to find meaningful insights, as shown in Compensation Advisory Partners’ study of a sample of 100 companies in the S&P 500.

By the numbers:

• As expected, the data is loaded with noise, making analysis difficult and conclusions shaky. The study authors had to remove a number of outliers before the data made sense – the result was a 41% correlation between CAP and TSR – by far the highest of any other factor.
  
  
  1. When company size is added to the analysis, the CAP-TSR correlation improves even further, to 50%.
     
     
• Two-thirds of the sample had reasonably aligned CAP and TSR.

Stating the obvious: The generally high correlation that the report found between CAP and TSR is clearly due to the direct relationship of equity values and stock price.

• Industry is also relevant: Energy and Healthcare had the highest CAP-TSR correlation, while Industrials and Utilities had almost none. This makes sense – the former industries benefited from rising energy prices and Covid-related operations while the latter were negatively impacted by supply chain issues and shutdowns.
  
  
• Finally, the use of stock options introduces more leverage into the CAP figure, and the balance of equity vs. cash will impact correlation with TSR.

Bottom line: The most likely candidates for additional scrutiny will be companies where, as a June Pay Governance analysis pointed out, CAP rank significantly exceeds TSR rank. This may indicate that pay is high compared to peers, performance targets are less rigorous, or incentive plan metrics aren’t aligned with long-term shareholder value.