SEC Mulls Simplifying “Frankenstein Patchwork” of Exec Compensation Disclosure Rules

Reportedly, Meta CEO Mark Zuckerberg has attempted to lure top talent from leading artificial intelligence companies by offering pay packages worth more than $100 million to work on his new “superintelligence” lab.

That may sound like a lot, but according to Securities and Exchange Commission Chair Paul S. Atkins, the rules for disclosing such compensation packages are also excessive and could use a good bit of refinement.

With Atkins at the helm, the SEC has once again turned its attention to streamlining executive compensation disclosure rules. For example, the agency hosted a roundtable on June 26 to discuss potential changes to the requirements, which Atkins called a “Frankenstein patchwork” that has grown in size and complexity over the last 90 years.

“​​The volume and complexity of these rules may be just as scary to a law firm associate performing a ‘form check’ of a proxy statement, as the monster was to Dr. Frankenstein himself when the monster opened its eyes,” Atkins said.

The two Republican SEC commissioners in attendance, who along with Atkins comprise the commission’s GOP majority, said they agree that executive compensation disclosure rules have become increasingly unwieldy. Commissioner Mark T. Uyeda said the agency has added “numerous” layers to executive compensation disclosure requirements on a “piecemeal basis” without undertaking a review of the overall reporting environment. He suggested that the commission “refrain from expanding its rulebook simply because some may think that executive compensation is too high.”

Similarly, commissioner Hester M. Peirce said the rules focus “excessively on random trees rather than giving a realistic view of the forest,” highlighting items that  “entertain the onlooker rather than educate the investor.” Peirce contended that preparing lengthy and complex disclosures “eats up lots of resources,” such as managerial oversight and billable hours for accountants and attorneys.

Roundtable participants generally concurred that the rules could benefit from an effort to reduce complexity and cost. However, some stakeholders – specifically those representing investors – called for more disclosure. They stressed that the existing rules resulted from the 2008 financial crisis and are intended to prevent similar situations in the future. (“That to us portends a brewing battle,” global law firm Cooley wrote in its recap of the SEC roundtable.)

Uyeda and Peirce targeted two rules in particular: the pay-versus-performance rule, which requires public companies to disclose the relationship between executive compensation and a company’s financial performance, and the pay ratio rule, requiring that companies disclose the ratio of a CEO’s compensation to the median compensation of other employees. Regarding the pay-versus-performance rule, Peirce said feedback indicates it is seen as 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, tables, and graphs that produce nothing but yawns of disinterest from investors,” Peirce lamented.

Meanwhile, Uyeda said the pay ratio disclosure requirement is one example of a rule that has “dubious purposes.” He said there appears to be “little nexus to investor protection concerns.” Instead, some aspects of the pay ratio rule and the underlying Dodd-Frank statutory provision “seem to have a ‘name and shame’ motivation.”

Another rule that sparked discussion during the roundtable involves the treatment of executive security services as a perk. Peirce said some companies may have decided not to provide security for executives because that “perk” appears on a 2006 SEC list that “incidentally declines to define” what a perk is. According to a report published on June 25 by Directors & Boards, 37% of S&P 500 companies disclosed enhanced security services for their CEOs in 2024. That’s up from 28% in 2023 and more than double the 18% that disclosed protective services ten years ago. “This increase underscores the heightened focus on executive security amidst growing transparency around corporate activities and visibility of business leaders,” the report said.

David Lynn, a partner at Goodwin Procter and formerly chief counsel of the SEC Division of Corporation Finance, served as a panelist at the roundtable. In a post about the event, he explained that before the executive compensation disclosure rule changes and interpretive guidance were released in 2006, companies would occasionally argue that all security arrangements were necessary benefits provided to executives and not perks. Companies would bolster their arguments by providing “security studies” to support the determination of whether the benefit must be taxed as income to the executive, according to Lynn. He noted the SEC decided to draw a line in the sand in 2006 so that the “tax outcome does not necessarily have any bearing on the disclosure outcome under Item 402 of Regulation S-K, creating very different outcomes for benefits like personal security and personal use of corporate aircraft.”

While the ultimate outcome of the push to simplify executive compensation disclosure rules remains uncertain, it appears the effort is gaining steam. Cooley has said it plans to offer comments on the rules. “What is clear coming out of the roundtable is that the process currently unfolding presents a once-in-a-generation opportunity to shape the rules governing public disclosure of executive compensation,” the firm wrote in a memo.