Remarks by Commissioner Uyeda at the Executive Compensation Roundtable

Thank you, Chairman Atkins, for convening today’s roundtable. I look forward to engaging in a dialogue with panelists and commenters on whether the executive compensation disclosure framework can be improved. Already, the Commission has received a number of public comment letters on executive compensation, which I found helpful in preparation for today’s roundtable. [1]

At the outset, the Commission has no authority to set or limit compensation paid at public companies, whether with respect to executives, workers, or contractors. SEC disclosures should not drive executive compensation decisions or seek to influence compensation practices. Moreover, it is inappropriate to use SEC regulations with the intent of addressing desired political or social outcomes with respect to income and wealth inequality in the United States. To the contrary, executive compensation disclosures should provide information material to an informed investment or voting decision.

Attempts to control executive pay through indirect means have proven clumsy and often resulted in the exact opposite result. In the 1990s, Congress passed tax legislation to make it less favorable to provide chief executive officer (CEO) salaries in excess of $1 million. Rather than limit CEO pay, the legislation significantly accelerated equity-based forms of executive compensation. In 2006, then-Chairman Christopher Cox described this effort, which backfired: “[w]ith complete hindsight, we can now all agree that this purpose was not achieved. Indeed, this tax law change deserves pride of place in the Museum of Unintended Consequences.” [2]

Other executive compensation disclosures appear to have dubious purposes. The CEO pay ratio disclosure is one such example. [3] There appears to be little nexus to investor protection concerns. Instead, aspects of the CEO pay ratio rule, and the underlying Dodd-Frank statutory provision, seem to have a “name and shame” motivation. [4] The Commission’s rulebook should not serve to further political agendas. In addition to distracting from the Commission’s primary mission of providing material information with respect to executive compensation, this rule also increases regulatory compliance costs without providing any corresponding investor benefits.

We have received many recent comment letters on executive compensation that are critical of the CEO pay ratio disclosure. One letter noted that the “CEO Pay Ratio does not provide an accurate comparison of pay equity within organizations” as “various industries have different workforce and compensation structures, which prohibit meaningful evaluation.” [5] Another comment letter stated that the CEO pay ratio “does not appear to have played a material role in compensation committee discussions, investor decision-making, or the rapid rate of increase in executive pay relative to that of the wider workforce.” [6] Disclosures that are both costly and complex to produce, while not material to investment or voting decisions, are at odds with good disclosure regulations.

Regarding the adoption of clawback rules, [7] the scope and impacts of the rule may have increased uncertainty. Specifically, market participants indicated that there is a lack of clarity as to what type of accounting errors “need to be analyzed and when boxes need to be checked …” [8] Further, third-party analysis indicated that few companies have analyzed the underlying accounting errors potentially requiring a clawback. [9] As such, the benefit of this framework appears minimal. Perhaps these issues could have been avoided if the Commission, in its haste, had not rushed in 2022 to adopt an unadopted 2015 proposal from the Obama Administration without first updating the economic analysis and engaging with the stakeholders as how to best implement this rule.

Similarly, the recent pay versus performance rule adoption relied on stale economic information—dating as far back as twenty-five years prior to the date of the reopening of the comment period. [10] The Commission relied on Paperwork Reduction Act estimates that were sixteen years old, including the assumption that legal fees are only $400 per hour. [11]

Since 2006, the Commission has added numerous requirements to the executive compensation disclosure on a piecemeal basis without undertaking a review of the overall reporting environment. The Commission is long overdue for a review of the executive compensation disclosure rules, both from the perspective of what information gets reported as well as from the lens of whether scaled disclosure is appropriate depending on the size of the reporting company.

Any rules should promote transparency into compensation frameworks and structure rather than function as a tool to dictate compensation decisions. In 1992, then-Commissioner Richard Roberts addressed these concerns, when he stated:

The Commission is not interested in dictating the level of pay for corporate executive officers. That is the job of the board of directors, as elected by shareholders. The Commission’s interest and jurisdiction in this area is limited to full and fair disclosure. [12]

These words still ring true today. The Commission should refrain from expanding its rulebook simply because some may think that executive compensation is too high.

Thank you to everyone who organized today’s roundtable.

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