Thank you. Well, it's my distinct pleasure to welcome you all here. It is so nice to see so many people here in person. I was wondering what the audience would look like. And then we started getting RSVPs and we had to go and find some additional chairs in the building to be able to fit everyone. So I appreciate you all coming. We are also webcasting this on the web. My name is Sebastian Gomez. I'm the Acting Deputy Director over legal and regulatory policy in the Division of Corporation Finance. And I'm so excited about today's roundtable. A few logistics: I'm going to welcome the Chairman to provide some remarks followed by Commissioner Peirce and Commissioner Uyeda. Commissioner Crenshaw, unfortunately, was not able to join us today. She would like to be here and instead she will be providing remarks that will be published on the SEC website. Since we have a lot to cover, I am not going to spend more time here and I'm going to just turn the podium over to Chairman Atkins. Chairman, make it official.
Super. Well, thank you, Sebastian. And it's great to see everybody here and hopefully you made it through the line OK upstairs in the lobby. But you know, it's a pleasure to see, you know, so many familiar faces as well who are here. So I welcome all of you who are attending here in person, obviously, and or and then watching and listening to today's roundtable on Executive compensation. I thank the very distinguished group of panelists who are assembled here today for volunteering their time to contribute your thoughts on this important topic. So, as one of the enumerated disclosure items in Schedule A to the Securities Act of 1933, the requirement to provide executive compensation information is as old as the federal securities laws themselves. Over the past 90 years, the Commission has adopted numerous rules requiring more and more information about executive compensation. Some of these rules have come about from congressional mandates, while others have not. So actually I've been at the SEC in one rule or another for a couple of these changes, including the 1992 rulemaking initiated by Chairman Richard Breeden that created the summary compensation table. And then after that, the when I came back as a commissioner of the 2006 rulemaking that introduced compensation discussion and analysis and added other compensation tables. So today one might describe the Commission's current disclosure requirements as a Frankenstein patchwork of rules. The volume and complexity of these rules may be just as scary to a lost firm associate. I was one of those Once Upon a time, performing a form check of a proxy statement as the Monster was to Doctor Frankenstein himself when the Monster opened his eyes. So the Commission amended item 402 of Regulation S-K in 1992 to state specifically that, and I quote, this item 402 requires clear, concise and understandable disclosure of compensation. Unquote. So one could say that this well-intentioned 3 decade old statement has perhaps become a little bit facetious with a passage of time in light of the lengthy narrative disclosure and the numerous tables and charts that appear in today's proxy statements. A rules must be grounded in achieving the Commission's three-part mission and that is investor protection, fair, orderly and efficient markets, and capital formation. These rules should be cost effective for companies to comply with and provide material information to investors in plain English. Most importantly, the information required to be disclosed should be material to the company and understandable to the Supreme Court's objective reasonable investor. The outcome of our rules is not effective when companies require a highly specialized lawyers and compensation consultants to prepare disclosure that the reasonable investor struggles to understand. Today's round table is one of the first steps in considering what are the current executive compensation disclosure requirements achieve these objectives, and if not, how the rules should be amended in connection with this process. I previously asked the Commission staff to consider several questions in this area for the public to provide their views on those questions. So thank you to those who have already submitted comment letters. For others who intend to submit a letter, please do so as soon as possible over the next several weeks to provide the staff time to consider and incorporate your views into any potential rulemaking proposal that will come along. Thank you to the staff of the Division of Corporation Finance, the Office of Support Operations, the Office of Information Technology, and the Office of Public Affairs for organizing this round table. I very much look forward to your discussion this afternoon. Unfortunately, I won't be able to stay here the full time, but I'm sure I will listen to it here over the next few days. So thank you very much and good luck and look forward to the outcome. Thank you.
Good afternoon and thank you all for being here. Thank you Chairman Atkins for convening today's round table and I appreciate those of you who are moderating and and serving as panelists today to discuss this important topic. On a recent trip to Alaska, one of the most striking sights for me was the beautiful mountainsides of trees that were lining the lining the the water. I quickly stowed my binoculars in favor of looking at that whole scene, which was really quite magnificent. Absent a distinguishing feature, maybe a a special kind of tree or an intriguing root system, a bald eagle perched in the branches or a bear lurking in the shadows of a tree. The grandeur of the forest is really lost when you look at individual trees. Trying not to lose sight of the forest for the trees in beautiful Alaska brings me back, of course, to executive compensation disclosure and the ugly reality of what it is. Over the years, executive compensation disclosure has become increasingly unwieldy and expensive and decreasingly useful. The SEC rules focus excessively on random trees rather than giving a realistic view of the forest. They direct readers attention to a set of executive compensation items that largely entertain the onlooker rather than educate the investor. Preparing lengthy and complex disclosures eats up lots of resources, management time and attention, attorneys and accountants, billable hours, and even trees as the pages of disclosure pile up. And they distort corporate decision making. Done right, disclosure rules are one form of investor protection. Material information provided to prospective investors arms them with a rational basis to evaluate a company and its resources and the and its securities. In the words of Alan Levinson, my primary question for today's panels is whether our current disclosure rules on executive compensation accomplish that goal. Some executive compensation rules seem more responsive to the general public's curiosity than a genuine investor need for material information. Painstakingly calculated tallies of perks like rides on corporate on the corporate jet, housing allowances for overseas assignments or car services give us a little window into executives lives, but do little to fill out an investor's picture of what the company actually is. Lately, our rulemakings have taken a more is better approach to executive compensation disclosure. These tack on rules to the growing alphabet of item 402 of Reg SK. We're almost all the way through the alphabet do not provide new information. Instead, these rules repackage and represent data that investors mostly already have, or they add details that are immaterial. Do investors even look at this new information? And if they do, are we confident that it gives them a rational basis to evaluate a securities price? Consider, for example, pay ratio disclosure and pay versus performance disclosure. In a statement of dissent on the pay ratio rule, then, Commissioner Dan Gallagher noted that it could have been, quote, marginally less useless if it were limited to US full time employees. Well, not quite a ringing endorsement of the rule or any of its possible permutations. His comment highlights that even with respect to a rule that's mandated by Congress, as this rule was, the Commission retains some latitude implemented in the best way possible. More recently, pursuant to another Dodd Frank mandate, the Commission adopted the pay versus performance rule. The overarching feedback I hear on that rule is that it's a regulatory tax on public companies without a corresponding benefit for investors, management, and the high-priced consultants and lawyers they hire. Spend hours preparing the various narratives, and this is no offense to anyone in the room. Prepare. Spend a lot of time preparing those various narratives, tables, and crafts that produce nothing but yawns of disinterest for investors. More concerning than the direct cost of producing executive compensation disclosures, however, are the costs that arise from the distortion of corporate behavior in response to disclosure mandates. Perhaps a company opts for a compensation scheme that is less effective at aligning incentives because of the way such a scheme will be reflected under SEC disclosure rules and and that that may not exactly actually represent economic reality. Or perhaps a company opts not to provide security for its executives because it appears in a laundry list of examples of perks in a 2006 Commission release that declines to even define what a perk is. Now may be time for the Commission to return to a more nuanced approach to personal security disclosure that considers the context in which those measures are provided. Some companies even have gone so far as to eliminate perks altogether while offsetting such cost saving measures with increases to base salaries. Executive compensation disclosure, along with other disclosures, should reflect rather than direct corporate actions. The age-old philosophical question is whether a falling tree makes a sound in the forest when there's nobody around to hear it. The more relevant and less philosophical question for today's discussion is if the disclosures were mandating do not provide investors a rational basis to assess a company, why mandate them at all? I look forward to hearing from today's panelists and moderators about how we can improve our executive compensation disclosure mandates. Thank you.
Well, good afternoon, everyone. Great to see everyone here in person at the Commission. So I also want to give my thanks to Chairman Atkins for convening today's Round Table. And 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 comment letters on an executive compensation, which is posted to our website and which I found helpful in preparing for today's roundtable. Now, at the outset, the Commission has no statutory authority to set or limit compensation paid at public companies, whether with respect to executives, workers or contractors. SEC executive compensation disclosures should not drive 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 disclosure should provide information material to an informed investment or voting decision. Attempts to control executive pay through indirect means have often proven clumsy and result in the exact opposite effect. In the 1990s, Congress passed tax legislation to make it less favorable to provide chief executive officer salaries in excess of $1 million rather than limit CEO pay. The legislation significantly accelerated equity based forms of executive compensation. In 2006, our then chairman Chris Cox described this effort which backfired as with complete hindsight quote, 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, unquote. Other executive compensation disclosures appear to have dubious purposes. The CEO pay ratio is one such example. 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 sharing motivation. The Commission's rule book 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've received many recent comment letters on executive compensation that are critical of the CEO pay ratio disclosure. One letter noted that quote, 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 unquote. Another recent letter stated that the CEO pay ratio quote 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 rather relative to that of the wider workforce, unquote. Disclosures that are both costly and complex to produce, while not material to investment or voting decisions, are at odds with any form of good regulatory disclosure. Regarding the adoption of clawback rules, the scope and impacts of the role may have increased uncertainty. Specifically, market participants indicated that there is a lack of clarity as to what types of accounting errors need to be analyzed and when boxes need to be checked. Further, third party analysis indicates that few companies have analyzed the underlying accounting errors potentially requiring to come a clawback. As such, the benefit of this framework appears minimal. Now, perhaps these issues could have been avoided had the Commission, if not for its haste and not decided to rush in 2022 to adopt a proposal from 2015 leftover from the Obama administration without first perhaps updating its economic analysis, and second, maybe we should have engaged with stakeholders as to how best to implement that rule. Similarly, the recent pay versus performance rule adoption relied on stale economic information. We relied on data that went back as far as 25 years prior to the date of the reopening of the comment period. And moreover, perhaps companies will be relieved to hear this, but we relied on paperwork reduction estimates that were 16 years old. So we assumed that your legal costs were only $400.00 per hour. Now I've been told that that's a blended rate. Since 2006, the Commission has added numerous requirements to the executive compensation disclosure on a piece meal basis without undertaking a review of the overall reporting environment. The Commission is long overdue for review of both the executive compensation disclosure rules from the perspective of what information gets reported, as well as from the lens of whether scale 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 address these concerns and we stated, quote, 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 the shareholders. The Commission's interests and jurisdiction in this area is limited to full and fair disclosure. Unquote. Those words still ring true today. The Commission should refrain from expanding its rule book simply because some may think that executive compensation is too high. So I thank everyone on our staff for their efforts in organizing today's round table. I thank all of you for coming out and attending in person and for all of your future, if you haven't made a submission already, the future submissions as we think about this very important and timely topic. Thank you.
Thank you, Chairman and commissioners, for this remarks. We are not going to waste any time and I'm going to ask our first panel to go to the table. As you can imagine, we have a lot to cover today. So I've asked the moderator and each of the panelists to jump directly into the substance. We are not going to go through BIOS, but their BIOS are on the website. So if you are interested in that, please encourage you to take a look at that. And with that, here I am going to turn it over to you. Thank you so much.
Great. Thank you very much, Sebastian. And again, thanks to all of you for joining us this afternoon. We're going to have a great discussion this morning. We're going to focus really on three questions. We're going to try to answer 3 questions, at least the 1st. And in the context of executive compensation, who sets executive compensation? What are the factors that influence the compensation decision making and the process by which compensation decisions are made, generally incorporating the views of an institutional investors and other parties? I'm joined by a fantastic panel representing public company directors, executive compensation practitioners, executive compensation advisors and of course, institutional investors. I'm thrilled and excited. We have an hour and a half. We can spend 3 hours on this. So what we'll do our best to kind of compress all of the rich discussion that we had in preparing for this, for this discussion today. So Debra, if you don't mind, I may actually start with you, who generally is involved in the process of sending executive compensation at a firm.
Thank you, Keir. Good afternoon everyone. It's an honor to be here I'm sure for all of our panelists. So do you want to just repeat the question and I'll Yes. So who is involved in the process of setting executive compensation at a company? Well, the I'm the chair of the HR committee at PNC and compensation is a really year long continuous process and there are many parties involved at PNC. The board has delegated the leadership for executive compensation to the HR committee or we'll call it the HR committee or the comp committee. And we meet many times per year. We are supported by the management team within the company as well as independent consultants. Everybody on the compensation committee, of course, is an independent director. We engage multiple times throughout the year with people in the risk department, the Chief Human Resources Officer. We also engage regularly with other board members. We report to them. We review market data of course, and we're informed by feedback that we get on compensation trends. We're of course informed also by investor feedback that we receive on a regular basis and those are some of the key participants. We also consider over the, you know, the course of the year management's recommendation about the performance of certain NEOS. We get performance updates as well from from the NEOS and performance evaluations about them.
Very helpful. So year long process management is involved, the board is involved. I'm going to come back to that. We talked about advisors being involved in the process and we've got some great advisors up here. So I'm going to ask some of you to weigh in on that. There are investor perspectives and other members of management. And so Mike, well, maybe I'll turn to you next. Does that align with your experience in terms of who's involved in the process?
Yes, completely. I would say that the answer to that question remains static over time, at least in the the 30 years that I've been doing this work. It's it starts with the board and its compensation subcommittee. To Debra's point, the the compensation subcommittee has taken on a broader remit in recent years to focus on broader HR issues, but it's still does the core compensation approvals, it's the independent consultants to that committee and it's the management team. And when I think about the work that gets focused on and the the committee's remit with respect to compensation items, I think about it really in three buckets. It's sort of very high level principles around compensation philosophy. It's how do you, how do you define the labor market as approximated by a peer group? It's what is your desired position in terms of how you want to pay relative to that peer group. It's the mix of pay elements. It's a broader pay for performance relationship that that we're trying to affect. And then there's there's another category that sort of substantive programmatic things. It's the design of annual and long term incentive plans. It's, you know, important policies around stock ownership requirements, change of control and severance, that type of thing. And then there are there are a lot of items that the committee approves, again with the assistance of the of the consultant and the management team that relate to the normal cadence of setting performance goals on the front end, evaluating performance against those goals in the back end, and figuring out what the compensation consequences of that result are. And then there's a lot of work that goes around, you know, setting compensation prospectively as well. So that's sort of that's my experience. On the, on the management side, it's always the, the CHRO, it's the head of reward, sometimes the head of executive compensation. And then depending on the topic at hand, it could be the CFO, it could be the legal team, including the corporate secretary, could be, you know, all, all of those people. The CEO is involved, obviously, except with respect to the determination of his own, his or her own performance and, and compensation.
So we've had a couple references on this panel to advisors and we have the good fortune of having two advisors who are part of this process, part of this, this discussion that we're having today. I wonder, Ani or Blair, if there's anything you might add to that perspective that's been shared so far?
I can start. So the reference to the independent consultant, that's the role that we play. So during the year long process that Debra was referring to, we are the independent partners to the committee making sure that the right conversations take place at the right times with the right people in the room in the right ways. So if you think through the different discussions that Michael was talking about, you know, we make sure that the principals are there and they've been revisited each year because they do change as your strategy changes. They change if you have new leadership, they change if you have a transaction and you're a different kind of company. So we're making sure that that conversation takes place. We're working with the chair to make sure that the peer group is up to date, that it makes a sense to the external world as the investors are looking at it and it makes sense to the company internally in terms of who they're from and losing people too. We're helping with the how the design part that Michael talked about showing what other companies are doing, thinking about what the strategy suggests. So if you've got a growth strategy, you might have a different set of measures and a different mix of pay. Then if you're a mature company trying to optimize your operations and be highly productive, and all of that suggests different outcomes that it's valuable for the committee to discuss and revisit over the course of time. Goal setting needs tires kicked, so we usually work with management, the finance team and the total rewards had to help make sure that the goals are rigorous and that they reflect the plan and the expectation of the investors. We help test the pay and performance relationship that Michael was talking about. So are we getting the right pay outcomes for the performance that's being delivered? And then finally, are we working with legal and outside of legal advisors in the right way to make sure that we're complying and disclosing things in the right way? So we're, we're a partner throughout that process independently for the committee and, and working with management to make sure that their strategy and also their cultural priorities and talent priorities are reflected.
Ani, what would you add to that?
I would just add that if you've heard, you know, everybody talk about 11 billion people that are engaged in determining CEO pay and figuring out how best to design it. The person who is the least involved is the CEO. I mean, I think we just, I just want to really make that clear that sometimes there might be this, this feeling that it's management and the CEO who's driving CEO pay. But I think that the panelists have made that really clear that in fact that's not the case. I would also say so with a center on executive compensation, we're part of HR policy association, which is the community for chief HR officers of large companies. And this is the one area within their remit that they are so you know, really focused on getting right and having be so rigorous and independent that we had to create an entire center on executive compensation just for them, just for this topic. So I think that really speaks to the focus on on it. We often say at the center, executive compensation is unique because it is a powerful form of communication to a variety of stakeholders. And that's never been truer than now when we have these extensive disclosures that sometimes communicate things we don't want to communicate. So I think that's partially why there's so many resources devoted to this topic.
All right, Ani, Ola Peter, I'm going to come to you in a moment. But I want to I want, I want to challenge something you said, if that's OK. So you said that CEO is the least involved in this process. Now what I heard Michael say was the CEO is not involved in setting his or her own compensation. So can you reconcile those two statements?
Yes. So I should have said in his or her own compensation for sure. CEO is definitely involved in the compensation of his or her direct reports, as you would expect, but not in his or her own pain.
Perfect. Thank you. OK. Ola Peter, you might have a view as an investor.
Thank you. Yeah, we get involved increasingly so I would say, and not only just before the shareholder meeting, but throughout the year. But before I go into that, a big thanks to the SEC for setting up this round table. And thanks to everyone participating here and on the stream. Thanks for inviting me and my institution, the Norwegian Fund which reaps the benefits of investing in the United States. The majority of our global equity portfolio is invested here in America. And one of the things we love if if you can say that or I can say I like in the like in in the US is how companies emphasize equity based pay and how CEOs owns stock in the company. We like it in particular when that stock commitment is long term and irrevocable. However, it has become slightly more complex for companies over the last say 20 years. You could say the freedom for companies to pay in such simple stock structures have become curtailed and it's all almost become a market norm that equity based pay or the majority of it should be paid in much more complex performance share units. Another concern that we can come back to and discuss is that the companies that lock in those shares for longer than the usual three years don't get the credit they deserve for that. And that's a little bit strange because that's one thing many investors would like to see a long term lock in of equity based pay. So you could say executive compensation has gotten more complex, more intricate and maybe even to the point where you could discuss how well say on pay works today. So this is a question we will, I guess, come back to and discuss through this panel whether any updates to the disclosure rules, which is maybe part of the the the issue here can help us out of this sub optimal situation. So we can come back to the all that. I just wanted to provide you with a little bit of a flavor on why we get involved in discussing pay with individual companies we own, as well as in the broader discussion on market practices here in the US. So thank you.
I want to throw down a pin for a couple things that you said that I want to make sure we come back to. One of the things that you mentioned was the that it's harder to use simple stock structures and you refer to PSU specifically. And so I'd like to come back to that, whether the disclosure rules are influencing that that difficulty or whether it's investor behavior or something else. So that's one thing. You also mentioned the role that that the disclosures play in your investing decisions and proxy decisions with certainly a topic. We'll come back to one of the one of the phrases that one of the commissioners mentioned earlier. What's this idea of a tree falling in the woods? If a tree falls in the woods, so if disclosure disappeared, that's the tree falling in the woods, would that make a difference for your investment in voting decisions? And I'd love to come back to that later if we could. Before we do that though, Debra, I want to come back to you in your in in your remarks, you mentioned and and I'm asking you this in your in your role as chair for the human resources committee at PNC from that vantage point, you mentioned earlier the role of the compensation committee versus the rest of the board. And I wonder if for the audience, if you can unpack that a little bit more. What's that relationship like?
Yes. So, so the relationship is very similar to the other major committees that investors would be familiar with, which is the Board is really delegating to a a skilled sort of experience subset of directors the oversight and management of executive compensation. And certainly under our charter, which is very clear about our scope of responsibilities, other parts of compensation within the firm. And I would just describe it as we are doing the heavy lifting on behalf of the board, ultimately on behalf of the shareholders to recruit, retain and motivate the key employees of the organization. And we then do the heavy lifting. We it's a very rigorous process. We spend a lot of time like most of the other committees, the chair would pre meet to understand the agenda, the content, the materials, the analysis that would be presented to the committee. Then the committee would meet and talk about whatever the content of that particular agenda item is. And that happens maybe 6 to 8 times a year. And then at every board meeting, the we present a cheers report to the full board that explains what happened in the meetings, give the board, the other board members a chance to ask questions. I try to make sure we educate the board members who may be experts in technology, but not an executive club, what these decisions mean for the corporation, for the NEOs. And then the directors who aren't on the comp committee have a chance to engage and ask questions. And when we would talk about the CEO comp, we often do that outside the presence of the CEO. And so that's how it, how it works. Just like you would expect with audit or a technology committee or governance committee, we're doing the detailed deep work that we can then do on behalf of the board, on behalf of the shareholders.
It's very helpful. I wonder, I want to emphasize a couple things you said there. You mentioned 6 to 8, six to eight meetings in addition to the regularly scheduled meetings. Does that well, 6 to 8 HR committee meetings. But then as chair, there's always a pre meeting, so you can multiply. So that's twelve. Yeah, so, so 12 to 16 meetings. And the reason I, I wanted to emphasize that is just that you mentioned you use the word heavy, it's a lot of work. If you're a member of a compensation committee, I think often there's an assumption audit committee has the heaviest lifting and that may be true ton of work, it sounds like for a compensation committee. So I just thank you for sharing that. Very helpful. So I'm curious, I mean, I'm looking at you as I say this. What are you seeing? Is that is that consistent with the industry?
Yes. And not only my voice is so loud, you can probably hear me anyway, but I'll turn the mic on. Not only is it consistent, I would say that the comp committee chair, well, personally, I think they have the heaviest lift, but I think that what we find among our members is that there's then all of these meetings that are occurring to prepare for the prep meeting with the comp committee chair. So you can actually now add another at least dozen meetings onto that because where everybody's having a prep call for that. One of the things I just, you know, I think it's clear from what Deborah said is that although management may be very engaged in the process in bringing to bear, you know, all kinds of data and talking about the company culture and the philosophy among our members, there is a very deep and strong understanding that the comp committee is the one making the decision and that the comp consultant is employed directly by the comp committee. So I just also wanted to mention that there's AI think among our members, certainly a very, very strong understanding of that. And that's why they want to make sure they have every single bit of information that either the comp consultant or the comp committee chair would need.
So we've mentioned a couple of outside helpers, help mates, so to speak for the executive compensation practice. You mentioned we talked about advisors. So that's one I heard law firm or another one. What about some of the calculations? So you think about the either the pay ratio table or the the pay for pay versus performance. Are there other players that are part of that process? And that's really maybe a question for the group.
Yeah, I'll take a first pass that I think most of the calculations are done internally by the management team. It is it requires a Herculean effort to produce all of the numbers that go into the tables. There are certain tables that generally require outside assistance. When I think about the papers performance table that requires the revaluation of the ball outstanding equity awards and equity awards can be quite complicated. So you're not just valuing the award when it's granted and as it appears in the in the grants of plan based awards table or in the summary comp table, it's being revalued every single year to reflect the experience that has happened since the grant date. That's got to be done for every single award, every stock option, every every PSU that's got a market condition that's share price based relative TSR etcetera that that is expensive and it requires a lot of a lot of outside assistance.
And I'm curious who, who who's who's providing that assistance. Obviously we know Blair, that your firm among other firms provides that kind of work, but are there other, you know, whether it be, you know, actuaries account CPA, like who is that constellation of service providers that executive compensation experts like you rely on and doing the calculations or other disclosure preparation?
So we actually don't do the valuation work there outside firms that do that work that are that are not the standard independent compensation consulting firms. And then the other people who come in or accounting experts and tax experts as you're trying to structure different compensation arrangements and they have different implications than those people have to be brought in as well. And that often creates extra meetings, at least for the chair. But often for the committee as well, it's very helpful.
And I'm, I'm going to go back to a theme for this panel going off script a little bit. How much of this is driven by the rules and how much of it is driven by practice? Just what we've talked about so far,
I think I'm comfortable in saying that 100% of the work on the pay versus performance table is driven by the rules. So I think that there's almost no company that I know of that would be doing those calculations in that way. If it wasn't for that rule. I would say something similar for the tables that follow the summary compensation table. It's not that nobody is using them now, but the question you asked was why are we doing these calculations? It's because the rule is requiring it. The third one I would say is even with the the Dodd Frank pay ratio. So when that came up, you know, there was a question of I, I think some policy makers said, well, you know, what do you mean? You don't know what the median employee globally makes. And the reason we didn't know that is because there was no business reason to calculate pay the way they were defining it and then figure out who that meeting employee was globally. So no company was doing that. So then again that's a calculation we had to pay for. That was solely because of the SEC rule.
Very helpful. OK. There is one more set of stakeholders we haven't mentioned in this conversation, which are the proxy advisory firms. And so I'd love, you know, Michael, maybe I'll start with you on this one. What role do the proxy advisory firms play in this overall process of setting executive compensation?
Yeah, I would say that it's, it's a tangential role. Most companies in my experience, do certainly consider the policy guidelines that the proxy advisors publish. If you don't sort of do it at your own, at your own peril, I don't think it, I don't think it dictates what companies do, but it's, it's certainly a consideration. In my experience, a lot, a lot of companies, including companies that I've worked for do avail themselves of the consulting services that they, that they offer. So, you know, and, and there, there are software tools, including pay for performance modelers that essentially replicate the policy guidelines for some of the diagnostic tests that you can, you can pay to use. So it would be, you know, it's imprudent to to ignore that. I don't think that it, like I said, I don't think it dictates what companies do, but it's a consideration just like, just like pure practices are consideration. We try to triangulate answers based on all of the available information and then we make it bespoke for the company specific objectives.
OK, I'm going to challenge that if that's OK. So my it's been, it's been my experience, not completely challenged by the way, not but but it's been my experience that when you're designing your program overall, you're thinking about the elements of compensation, the design of your plans, for example, that the proxy advisor guidelines could actually play a pretty significant role in the things that you're deciding to, to establish just from a framework perspective, even if the individual decisions themselves may be more bespoke. What what do you think about that? Or if others have a perspective on that, I'd welcome them as well.
Yeah, I mean, I agree with you then. And that's kind of why I was saying that I think it's a consideration. So when you think about the strong preference for what's deemed performance based compensation, I think that that probably does affect the way in which companies structure a long term incentives. You know, generally, and I'm not going to call out any specific proxy advisor, but you know, in general stock options are not considered performance based. Restricted stock units are not considered performance based. And if there's a preference to have at least half of the long term incentive portfolio being performance based, you know that you can't have more than 50% in RSU's and stock options or or you risk, you know, you know, you risk problems in terms of sound pay vote recommendations.
Ola Peter yeah, I'm happy to provide the perspective on that. From our perspective as a diversified investor, we're holding 1800 U.S. companies in our portfolio, almost 9000 companies globally. Clearly the proxy advisors are necessary and useful for us in gathering information, presenting them it to us in a readable quasi standardized format and also which is not the topic today, but of course quite important in helping us execute our vault intentions across the globe. So they are super important, very helpful service. But on this item, I, I must say we strongly disagree with their policy that you just spoke about Michael. I was not touched on in my first remarks where they have quite a strong preference for the majority of an equity based pay to be provided in the form of rather complex, at least more complex than the alternative performance share units. And I think you're, you're right here that this has an influence on what's which elements are chosen which by companies and how they're emphasized. And that is a peculiar thing because from our knowledge, from our knowledge to all to our knowledge, there is no evidence that PSUs work better in driving performance than simpler stock grants. The the little data that's out there On the contrary shows the opposites. But I was, I would emphasize there is little data out there. But when we run our data across 1800 U.S. companies, we do the same find, make the same finding that there there is no basis for the the intuition that I agree many people have that multi year performance conditions drive performance. So I think this is one of the reasons why pay has become more complex than in our review. It need to be and it provides some causes, some distractions, sometimes some problems. We also eager to hear what you were saying about that, Deborah and Michael, from the corporate perspective when things turns out different than you had expected. Thank you.
Here. Can I just add two other examples or three or three of how proxy advisors might specifically influence the board and management in pay design? I I think really what's influencing is maybe some not so much the policy itself, but the recommendation that the proxy advisor is making on the say on pay vote specifically. So the policy leads to the recommendation on the say on pay vote. The recommendation on the say on pay vote is correlated to about a 25 to 30% swing in say on down pay. This is a significant swing for boards and for companies. It absolutely will influence how they design pay. And although the larger investors, you know, will say, hey, we're not, you know, voting right in lockstep with with proxy advisors, I think we know that some of the smaller investors might be more likely to be doing that and that's why you're seeing that swing. So because of that, a couple of things. As an example, proxy advisors generally have a list of pay practices which they view as problematic under any circumstance that is has been extremely influential on management and companies in terms of just avoiding those practices altogether. So whether or not they think it's best for the company, if it's going to single handedly drive a negative proxy advisor recommendation, it essentially goes, which is why we've seen such a homogenization of executive pay, you know, over the past 10 to 15 years. I think it's impossible to ignore that there's just much, much less difference between companies than there used to be. The choice of option versus performance share, you know, would be another. I think the third example is the ubiquitous use of relative TSR as a performance metric. So I think you'll find that before the proxy advisors kind of zeroed in on that as sort of the definition of pay by which we're going to do our pay performance analysis and thereby come by a recommendation, then you saw companies feeling obligated to include relative TSR as a metric in their pay plan, even if it wasn't necessarily what they would have come to on their own. So from that perspective, I think I think it's been quite influential.
Deborah, I noticed you nodding your head. Does that consistent with your experience as chair for the PNC Human Resources Committee?
I'm just offering emotional support. Thank you, I appreciate that. Certainly the the proxy advisors, their policies, their practices are important contextual information amongst a host of important contextual information including investor feedback. And there is overlap in those two subjects. And so it's important for the comp committee to understand that context to to understand the decisions that are being made in that context and how things will appear to investors and proxy advisors. But at the end of the day, the role of the committee and the board is to make the right decisions for the company at that time to drive shareholder value.
OK, before we lose, can I just make a comment?
Of course, you know, having done that approximately, I was going to say, Bob, I wasn't going to call you out, but I'm glad you said. And as a, as a user of price advisor information at at Fidelity, it's interesting the the influence is thrown around based on very limited data. I would say the biggest investors use multiple proxy advisors. The voting results have been about 1 to 2% failure rate and the recommendations against have been 8 to 14% of the last 10-12 years. So there's a clear disconnect I think to the points of their policy. It's not the tail wagging the dog because both firms engage frequently with their their clients to find out what their clients think about the various issues, right. So if their policies to vote against the board because they repriced options that investors aren't doing that because the proxy advisors told them to, they're doing that because that's their policy. And I know that was when I was at Fidelity, that was a policy before the proxy advisors even had that policy. So I think there's obviously some influence and I think it is on the recommendations, but I think it's more about when they make a recommendation against the investors, then use that as a means to look more closely at the issue. If there was more of a pure alliance, we would see a much higher vote against. And on the types of equity vehicles, I think that comes down to a philosophy that's also often pointed out as an error of, you know, Glossosus ISS, their, their their reports have errors because they say these grants are not performance based. It's really a a philosophical difference, which is borne out by other clients view these issues. So I think that's the way they've approached it. But in terms of, you know, the interactions I've had when I was at Glass Lewis have been always really constructive with companies. But I always asked, you know, what are your investors saying? And, and if our recommendation was against and the overwhelming vote was in favor, I would kind of scratch my head and said, what are we missing? But I know there's at least one company here that uses restricted shares, not performance based at all and Glass who was engaged with them quite constructively and would support their program. So that's a benefit engagement and I think that's something we haven't talked about yet is the engagement with shareholders. They'll probably get to that anyway. But I just want to clarify, the role of proxyvizers is not to set comp, not to step into the shoes of their, their clients, but really to provide information and data to their clients who many of whom have helped the proxyvizers set their own policy.
So Bob, I'm so grateful for that comment one because you're, you're always thoughtful and so I appreciate your thoughtfulness, but also it's a great segue to the next question. The next question was going to be what role do actual investors play in this executive compensation setting process? And I'm not going to double up on you, but maybe I'll come back to you after that. But Michael, I love your perspective. Like you. So we talked about proxy advisory firms, one of many factors that are considered in setting compensation. I know investors are another huge stakeholder in that process. Can you talk a little bit about, about what that engagement looks like?
Yeah. I mean the annual engagement cycle happens during the proxy season and then there's usually an off-season engagement as well. During the proxy season, the engagement tends to relate specifically to the proposals that are in the proxy statement. Investors of course, are at liberty to ask whatever questions they want. I will say that in recent years, it's been my experience that there's been pretty little interest in compensation in terms of the questions that have come up during investor engagement. I think that it tends to spike in years following a difficult say-on-pay outcome. And that's when you get most of the compensation related questions. But in recent years, what I've seen is a lot of the questions that didn't relate to the specific proposals in the proxy statement related to broader governance concerns. It was things like board refreshments, director selection, overboarding, things like that. So comp has been pretty quiet at least in my experience the past three years. Blair, I would imagine that you have many clients that get you engaged before their engagement, no pun intended with investors. Tell us a little bit about that.
Yes. So I think that the engagement, if you do have a reason to talk about your compensation, is an opportunity to set the table about how your programs are aligned with your strategic priorities and your talent needs and your culture. It's also an opportunity to share some of the decision making process that you have. So a lot of the work that we do as we work with our clients is to say, how do we help the investor understand how and why we made the decisions and what the business context was so that that can be conveyed in the discussions. And there can be a dialogue with the investor to understand, does the investor get the storyline here? Do they see some holes in it? And hopefully, we come to a constructive place. So the whole purpose of all of this is to set up dialogue and to try to provide more transparency into the process. Now, of course, there are rules about how much you can disclose before it is actually in your public disclosure. So there are also some decisions to make about whether you actually file the documents you're going to use, etc. And we go through those decisions, but by and large, we're trying to figure out the best storyline. And I think all of this sets the stage, what Michael was talking about and I see Debra nodding for the story you're going to tell in the proxy. And if we come back to why we're here today, I think investors want to know the rationale for why you made the decisions you did and what the inputs were. And so both the engagement and the prep for your CD&A can help with that. So I'm going to take my moderator hat off for a moment and just share as a former corporate secretary. And as I look at this audience, particularly, I look at Drew Hambley, who's going to be on another panel, who when I was at a prior company in that corporate secretary role, we engaged quite extensively. I'm looking at John Rowe, same thing. And as we had our conversations around executive compensation and preparing for not just for the proxy, but really thinking more broadly as an organization, the feedback that we got from investors, I found incredibly useful and valuable in informing our management team around what our top investors thought about best practices, etc. And so just wanted to say, we've talked about proxy advisors, we've talked a little bit about the role that investors themselves play, but that one-to-one engagement opportunity, and I mentioned to you, Ola Peter, we engage with your team extremely, extremely valuable in the process. Do you want to add to that?
Yeah, happy to add to that. And for us, the most interesting and relevant engagement is the engagement that does not happen in the last two weeks ahead of the shareholder meeting. So we're very happy to and we spend a lot of time on engaging with our key holdings. I must admit we're not able to engage with all 1800 US names we hold in our portfolio, but the vast majority in terms of value we engage with and we're very happy to do that throughout the year and with decision makers at the company in addition to our regular often quarterly updates with management on how the business is going. And we do that for several reasons when it comes to compensation. One is that we want to get a better understanding of the real incentives of management. So what is actually happening in terms of compensation that might be a little bit more complex than what's on paper, even though it was on paper, it's complex enough 40 to 70 pages often in the proxy statement. So that is quite important for us to try to really understand what's driving the management in terms of monetary incentives. Second, we want to discuss with decision makers what good incentives look like. So we want to try and understand what they're doing to commit especially the CEO to the stock long term and to the degree they are using multi-year performance conditions, which is not our preference. We're still interested in discussing how they are chosen, weighted, calibrated and followed up on. So that is very much in our interest to do. But I must say we're also quite often hearing comp committee members, board chairs, others, telling us when we have discussed kind of the principled approach to compensation that wow, we would have liked to do it as simple as you suggest, even maybe open to making the stock lock in longer than one to three years, but it's very difficult given the environment we're in and the risk of negative recommendations by the proxy advisors.
Thank you, very helpful. So I'm going to pivot. So we've talked a little bit about the stakeholders in the decision making process. Now we're going to change our focus to the decision making process itself and the elements of compensation that are decided on as part of that decision making process. And so Blair and Michael, start with you. So how do companies determine the breakdown between cash compensation and equity compensation as well as guaranteed comp versus compensation that's at risk? Do one of you want to kick that off?
So this gets back again, I feel a little bit like a broken record to the strategy and culture that you're trying to drive. So if you are a company who is a startup or high growth, then you might decide to have a mix of pay that's lower in cash and higher in equity. If you are a more mature company, you might find that you want a more balanced mix of elements. It's still going to be heavily weighted towards equity, but it's not going to have the high upside that perhaps a high growth company might have. So that's one distinction you might make. So understanding what type of company you are, where you are in your life cycle and what your opportunities are for growth is an important input. You know, we do look at competitive data, but that would not be, it's not a benchmarking exercise where we say if peers do this, then we need to do this. But we do want to know how we compare and if we're going to be different, does it make sense that we're different? Have we made that decision deliberately and is it helping us in the marketplace both with talent and with our results? So those are the kinds of decisions that go into the cash versus equity mix. Now when we go and we think about the types of equity vehicles we use, they're similar inputs. Stock options happen to be very good for companies that are on a growth trajectory. So you'll find those stock options in industries that have higher growth or are newer in the marketplace and they can be a very good vehicle for that. You find restricted stock can be very good for stability. So companies going through turnaround or more mature companies, it just provides a stable part of the equation. And then performance shares, which they clearly have pros and cons, as Ola Peter has pointed out, but they can be particularly good at directing performance and highlighting priorities for a business at a time of change. So if you put a new strategy in place and it has several priorities out there for the company and you align those must-have objectives in your PSU program design, it can be very effective. Where it's less effective is if you're just using sort of standard measures. So what you want to make sure as a committee is that what the CEO is saying and what you're trying to communicate in your investor days about your priorities are directly captured in those programs. And when done well, then they actually can drive performance.
