The U.S. Securities and Exchange Commission (SEC) has set rules for how public companies must disclose information (as well as the type of information) regarding executive compensation. This includes CEO compensation, but also applies to other “named executive officers” (NEOs) holding high-level positions. In most cases, the information surrounding executive pay is included in the annual proxy statement that organizations are required to issue to their shareholders.
So, what are the mandatory disclosures that organizations are expected to make in regards to executive compensation?
Key Compensation Disclosures in the Proxy Statement
The proxy statement is where shareholders will find a comprehensive collection of data that pertains to executive compensation, via the Executive Compensation Tables and Pay Ratio, along with the Compensation Discussion & Analysis (CD&A), which provides a narrative overview. While the specific requirements will vary based on the size of the company, where provided these sections cover the information described below.
The type and amount paid to the CEO, CFO, and next three highest-paid officers
The Summary Compensation Table provides both a grand total and a category-by-category breakdown of pay over the past three years for each NEO. This means outlining all base salary amounts, incentives, benefits, perquisites, and stock options, and explaining how award values are calculated. There are additional tables for equity plan awards granted, outstanding, and exercised or vested in the year under review.
How compensation is determined and aligned with performance
The CD&A outlines the methods and practices used to set appropriate pay for CEOs, CFOs, and other high-level executive positions. This means discussing how processes like salary benchmarking are conducted, and how the incentive structures used to determine bonus awards are aligned with corporate strategy and shareholder returns, along with any specific factors that were considered in determining pay opportunities or outcomes. Additionally, the CD&A will include descriptions of compensation policies, a company’s philosophy regarding executive pay, and any executive termination benefits and entitlements.
CEO compensation in comparison to average employee pay (ratio)
Under Item 402 of Regulation S-K, the majority of publicly-traded companies must provide the ratio comparing CEO compensation to that of the average employee. Smaller reporting companies, foreign private issuers, emerging growth companies, and multi-jurisdictional companies aren’t required to disclose this ratio.