Executive Compensation: Pay Ratio Disclosures Take Center Stage as Full Complement of SEC Commissioners Breaks Logjam

January 05, 2018

As companies prepare for the first year of pay ratio proxy disclosures, the SEC will be at a full complement of five Commissioners for the first time in two years.  Meanwhile, investors are expected to zero in on pay, performance, and environmental, social and governance issues in the 2018 proxy season.

Pay Ratio Disclosures   The first pay ratio disclosures will be published in proxies by early February, and companies are hard at work completing their calculations and developing their disclosures as well as internal communications.  The Association’s Center On Executive Compensation has updated its Quick Reference Guide: Developing a Pay Ratio Communications Strategy, for Subscribers, and will be providing disclosure examples for Subscribers as proxies are released. To receive a copy of the Guide and learn more about subscribing to the Center On Executive Compensation, please click here.
SEC's Agenda  Just before it recessed for the holidays, the Senate confirmed the two pending SEC Commissioner nominees, Republican Hester Peirce and Democrat Robert Jackson.  The confirmations will put the Securities and Exchange Commission at a full complement of five commissioners for the first time since December 31, 2015.  Having three Republican Commissioners will allow the SEC to fully engage in rulemakings, given the three-Commissioner quorum requirement for rulemakings, and allow Chair Jay Clayton to focus on his agenda of fostering capital formation and other regulatory initiatives.  Chair Clayton has indicated that he may re-open the “proxy plumbing” concept release, which covers the role of certain proxy disclosures, as well as the costs and burdens of disclosures, which also includes the role and oversight of proxy advisory firms.  Mr. Clayton may also pursue changes to the shareholder proposal process.  Changes to the ownership requirements and resubmission thresholds have been key changes supported by our Center On Executive Compensation and sought by Republicans on Capitol Hill.  

Proxy Advisory Firm Reform  On December 21, the House of Representatives passed, by a bipartisan vote of 238-182, HR Policy-supported legislation that would create new SEC-led registration and monitoring of proxy advisory firms.  Twelve Democrats voted in favor of the bill, and five Republicans opposed it.  The Association’s Center On Executive Compensation sent a letter to all House members supporting the passage of the bill, which now moves to the Senate.  Companion legislation has not yet been introduced in the Senate, and given Republicans' one-vote margin there, it is not clear whether the bill will see additional legislative action.  However, the bill’s bipartisan passage in the House is an important indication of support for the concepts behind proxy advisory firm reform and reinforces the importance of having the SEC take another look at regulatory reform of the proxy advisory firm oversight process.

Governance, Pay, Performance and ESG Issues  Large investors are expected to press for diverse, effective and experienced Boards as they pursue a broad array of governance and pay issues in 2018.  For example, in a letter to clients this fall, Vanguard indicated that it will seek to ensure that companies have optimal governance structures and pay that incentivizes relative out-performance over the long-term relative to peers and competitors.  Meanwhile, BlackRock is focused on board diversity and environmental and social issues where the issues are relevant to a company’s industry and strategy.  State Street Global Advisors has long been concerned about ESG issues, while Fidelity has signed on to the U.S. Principles for Responsible Investment, which is likely to ramp up engagement and reporting on ESG issues.