Today As You Sow submitted the letter below to the SEC regarding its reopening of a long-delayed rule on what sort of disclosure companies should make on the link between performance and pay. For more information on the rule-making here is the SEC’s fact sheet.: https://www.sec.gov/files/34-94074-fact-sheet.pdf

March 4, 2022

File Number S7–07–15

RIN 3235–AL00

Dear Ms. Countryman:

I am writing to provide comments to the U.S. Securities and Exchange Commission in response to the reopening of the comment period for pay versus performance [Release No. 34-94074; File No. S7-07-15]. As always, we appreciate the opportunity to share our views. This letter supplements our letter of July 7, 2015.

Founded in 1992, As You Sow promotes environmental and social corporate responsibility through shareholder advocacy, coalition building, and innovative legal strategies. Our efforts create large-scale systemic change by establishing sustainable and equitable corporate practices. As You Sow was founded on the belief that many environmental and human rights issues can be resolved by increased corporate responsibility. As investor representatives, we communicate directly with corporate executives to collaboratively develop and implement business models that reduce risk, benefit brand reputation, and protect long term shareholder value while simultaneously bringing about positive change for the environment and human rights.

We are grateful for the Commission for moving forward with this rulemaking and others. Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required companies to allow shareholders to vote on the company’s executive compensation practices, including compensation of its senior officers. This vote and how it is exercised has become the basis of our annual report,  “The 100 Most Overpaid CEOs: Are shareholders asleep at Wheel”.  The report calculates the S&P 500 executives we consider to be most overpaid and identifies the voting practices of funds.

Section 953 (a) requires rules for public company issuers to disclose information that shows the relationship between executive compensation actually paid and the financial performance of the company (or the lack thereof). It will give shareholders casting such votes important new information.

Background:  Poorly designed incentive programs are dangerous for long-term investors. Severe limitations with current disclosure make evaluation of pay for performance challenging.

It is well documented that incentive compensation contributed to the economic crisis that originally spawned the Dodd-Frank reforms. We believe that it also contributes to climate change denialism or reluctance to take the actions necessary at the speed necessary.

The de facto universal comparison for performance has too often been Total Shareholder Return (TSR). We have always had concerns with the over-reliance of TSR: we believe it can and often does promote poor incentives that drive short-term behavior and undermine long-term changes to performance. TSR is vulnerable to financial engineering and can be gamed. Yet if TSR is used, the maximum amount of disclosure should accompany it. The proposed changes help address our concerns.

As You Sow supports the inclusion of the proposed measures of pre-tax net income and net income as well as company self-selected measures.

We believe the inclusion of pre-tax net income and net income will be an important addition. As noted in the release: “Because these measures [pre-tax net income and net income] reflect a registrant’s overall profits and are net of costs and expenses, we believe they are additional important measures of company financial performance that may be relevant to investors in evaluating executive compensation.”

Over the past number of years we’ve too often seen pay based on non-GAAP (Generally Accepted Accounting Practices) figures. The inclusion of more GAAP figures will allow for a stronger evaluation.

The inclusion of self-selected measure strikes us as another piece of potentially complementary data, to what is elsewhere being required. It can provide additional insight into the company’s perspective. If it were not accompanied by other measures, including those listed below, it would allow for potential gamesmanship. However, it will not be a stand-alone measure and can provide context for industry specific measures.

Requiring the inclusion of tabular disclosure of a list of the five most important performance measures driving paid compensation would be useful for investors.

The proposed disclosure of a tabular ranking of the five measures that directly influence compensation paid will be very useful to investors. It will provide important data that will stand out in the dense language of company CD&As (proxy statement Compensation Discussion and Analysis), which often seemed designed to obfuscate rather than clarify.

The growing complexity of plans provides another important reason for this inclusion. At many companies that now boast of environmental links, we have found it represents too small a part of a given executive’s pay to truly motivate performance.

As You Sow supports the company selected measure. Disclosure of non-financial measures including ESG-related measures should be permitted.

Shareholders have shown increased interest in compensation linked to ESG measures for obvious reasons. The necessity of moving with the greatest possible speed and using every possible lever to address climate is well documented and I will not reiterate it here.

However, it is critical that the disclosure be quantitative when possible. As You Sow believes to avoid green-washing, executive compensation figures tied to environmental measures should disclose the  specific goals to which incentive pay is being tied (such as explicit targets on GHG reduction) and the extent to which pay was awarded based on attainment of those goals.. In general, we believe these are best-connected to long-term rather than annual pay.

Conclusion

While we are pleased to support the considered amendments to the Commission’s originally proposed rule on pay verses performance. Individually many of these items of disclosure and those already adopted – including the ratio of CEO pay to that of a median worker

We also urge the Commission to continue to explore ways of meaningfully including disclosure related to climate in future rule-makings.