New CEO Pay Disclosures, Same Old Confusion
Pay at the top of the fashion hierarchy is something like a corporate Rorschach test — everybody looks at the eight- or nine-digit payouts and sees some kind of reflection.
For workers and social activists, it’s the yawning divide between chief executive officers and the people who power the companies they run.
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For boards, it’s a necessary bet on the right leader and a small fraction of their multimillion or -billion dollar operating budgets.
Investors see a down payment on their own returns.
And for the CEOs themselves, the reports of big paydays are guesses at just how much money they will eventually take home — guesses that however inaccurate will serve to benchmark them against their peers and leave them open to criticism from many people.
There’s some truth in all of those perspectives.
One of the problems is that there is no easy answer as to what CEOs actually make given that compensation packages include salary, incentive pay, perks and, overwhelmingly, stock awards and options.
Last year Wall Street’s watchdog and rulemaker, the Securities and Exchange Commission, stepped in to try to clarify things — but only partially succeeded.
“The commission has long recognized the value to investors of information on executive compensation,” said SEC chair Gary Gensler at the time. “Today’s rule makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies.”
Specifically, the SEC started requiring that companies tally not just the value of the stock awarded to CEOs as of the date it was granted, but as of the end of the financial year as well. And companies also have to clearly benchmark their stock performance against their own chosen peer group.
“I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies,” Gensler said.
While CEO pay often makes for outsized reactions among some constituencies — especially workers’ rights groups — investors get a chance to participate in advisory votes on compensation packages. The vast majority of the so-called “say on pay” votes have investors signing off on compensation packages, however.
And while the new disclosures do help to give some more visibility into the inner workings of how corporate titans are compensated, they don’t lay everything bare.
For instance, that multimillion-dollar payday cited in the proxy is not the money that the CEO will take home this year. The CEO might never exercise their stock options and stock awards might not vest until years in the future.
That’s one of the benefits of stock-based compensation — it gives the CEO an economic incentive to drive the company’s stock price higher so investors benefit as well.
According to compensation experts, the new rules provide a way to understand the effectiveness of a board’s CEO pay practices.
Companies now have to compare “summary compensation,” which is sometimes referred to as target pay, with a new measure — “compensation actually paid.”
Except that “compensation actually paid” is not, well, compensation actually paid, but represents the changing value of stock and options awards that were given, but haven’t actually vested yet.
By this measure, a WWD study of 13 prominent companies that have had the same CEO over the past three years showed that Brian Cornell, chief at Target Corp., comes out on top with “actual” pay of more than $126 million, followed closely by Nike Inc. CEO John Donahoe.
But the new stat only tells part of the picture as it shows the changing value of equity grants that are going to continue to change.
“Incremental growth in unvested equity is definitely not compensation actually paid,” said Terry Adamson, a partner at Infinite Equity, which helps companies create stock-based compensation programs.
“Even though I hate the name, I do theoretically like the math,” Adamson said. “CEO pay is really complicated and this attempt by the SEC to add these disclosures is an attempt at transparency. But they have created a disclosure that is too long and complex and there’s a lot of noise in it.”
Still, the transparency does shine more light on company practices.
“By forcing some of these disclosures, bad pay practices will stand out,” Adamson said.
The new disclosures also make clearer just how skewed “target” pay can be given that it offers only a static view of the value of unvested stock options, marking only what they were potentially worth the day they were granted.
One stark example comes from Warby Parker Inc., which went public in a direct offering in 2021.
Co-CEOs Neil Blumenthal and Dave Gilboa each received stock and option awards totaling more than $102 million in 2021 as their hot company made its Wall Street debut.
But as the stock reset — it’s lost about 75 percent of its value since the offering — so has the value of the co-CEOs unvested equity, leading to “compensation actually paid” of a negative $98 million last year. Over the past two years the co-CEOs “actual” pay tallied $38.8 million each, well short of the the nearly $137 million target pay envisioned for each of them.
While a negative amount of compensation paid doesn’t actually make sense, the difference between target pay and “compensation actually paid” does offer a new view on a company’s pay practices. If the actual pay is higher than the target, the CEO is making more than was initially envisioned by the board.
And there might be good reason for that — the company’s stock might have risen strongly, benefiting all shareholders.
To get a sense of that and compare pay with performance, the SEC is also having companies single out how their stock rose or fell against the stocks in their peer group.
It’s the comparison that — potentially — speaks to the effectiveness of a company’s compensation practices.
For instance, Macy’s Inc.’s CEO Jeff Gennette’s pay plan had him targeted for pay of $34.4 million for the combined 2020-2022 period. But his actual pay came in at $59.4 million given the change in the company’s stock and how that influenced his equity grants. Gennette’s actual pay came in 42 percent over target.
Over that same time period, Macy’s stock underperformed its peer group by 9.4 percent.
That’s a 51-point spread between pay and performance — the largest disconnect on the upside in a WWD study of 13 fashion CEOs who have been in the job for at least three years and have reported pay under the new rule.
But as with nearly everything in the world of CEO pay, there are layers of often dense analysis and explanations that offer a range of interpretations.
A Macy’s spokeswoman pointed to another figure in the company’s proxy statement — total compensation realized — which showed Gennette’s realized pay was $36.1 million over the past three years, just 7 percent above his $33.7 million target pay.
Further, the company pointed out that Gennette’s realized pay over the past five years has only been about 79 percent of his target pay. He also hasn’t exercised any stock options over the past five years, except to cover the taxes on those shares, making the actual take-home value wrapped up in a lot of his pay still very theoretical.
And Macy’s stressed comparisons from company to company are not on an apples-to-apples basis as each chooses their own peer group to measure themselves against — so Macy’s stock changes are being compared with a different group of companies than, say, Walmart Inc. “This does not provide for an equitable comparison between companies as it may skew the results of the analysis,” the spokeswoman said.
Indeed, standardizing the timing and comparing all of the 13 companies in WWD’s study with the S&P 500 puts Gennette in the the middle of the pack — seventh — with a roughly 7 point spread as Macy’s stock rose 34.8 percent more than the S&P 500 and the CEO’s actual pay came in 42 percent above target.
Michael Jenkins, who is a partner at Kearney and leads the consultancy’s CEO Advisory practice, said using a single point of comparison helps draw conclusions on pay practices between companies.
But he also noted that investors are not using pay figures to decide on selling one retail stock and buying another, but making different kinds of financial decisions in their portfolios.
“We sell Ford and we buy gold,” he said. “We get out of a diversified fund and put it in a vacation home.”
CEO pay speaks not so much to investor expectations, but the desire to fill out the corner office.
“The market for CEOs is an intense labor market and it is a competition to get the right CEO,” Jenkins said. “It’s truly make or break so companies are being as creative as they can in order to get the best person — for the right cost, no one wants to overpay.
“There no correlation between CEO pay, CEO overpay and performance,” Jenkins said. “It actually doesn’t matter. You can’t prove to me that if I overpay my CEO I’m going to underperform or overperform.”
He suggested that every CEO get paid $10 million and then get some kind of performance-based pay like stock options that were tied to the company’s returns, above the market, or alpha.
“That would solve everything,” he said.
As CEO pay stands now, Jenkins said: “It’s not as clear as I’d like. That’s called a market and this is a talent market.”
But if CEO pay is an important metric for investors, requiring mandatory disclosure in multiple formats, why is it so hard to understand?
It’s complicated — and that seems to suit the status quo of big business just fine.
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