On June 26th, the SEC will be hosting roundtables focusing on executive compensation disclosures. One of the anticipated discussion points will be Pay versus Performance and the definition of “Compensation Actually Paid.” We believe this is a timely opportunity to revisit the strengths and weaknesses of alternative definitions of compensation.
Pay versus Performance disclosure is not just a compliance exercise; it is a crucial opportunity for companies to demonstrate how their executive compensation programs align with shareholder returns. We believe three core principles should guide these disclosures:
1. Transparency – Any calculation methodology adopted should be fully transparent to both issuers and investors. The current reliance on ASC 718 and other GAAP standards is valuable precisely because it provides a consistent, rule-based framework with minimal gray areas. Departing from that framework could introduce subjectivity and reduce investor confidence.
2. Minimal Complexity Without Compromising Accuracy – Disclosures should be as simple as possible to prepare but not so simple that they sacrifice comparability or accuracy. Striking this balance is difficult. Simplified disclosures, such as those based solely on intrinsic value, can overlook important nuances in how executive compensation operates. These oversimplifications may lead to greater reliance on third-party interpretations instead of fostering more independent investor assessments.
3. Clear, Narrative-Driven Disclosures – The objective of any executive compensation disclosure should be to tell a story investors can follow: how much executives were paid and how that pay aligns with TSR performance over time. We believe there is significant room for improvement in how companies communicate this narrative. Infinite Equity has published five recommendations to enhance the clarity and usefulness of executive pay disclosures.
Currently, there are many disparate methodologies for calculating “compensation,” each with distinct assumptions and applications of Reported, Realized, or Realizable pay. These differing approaches can be seen in disclosures by consulting firms, proxy advisors like ISS and Glass Lewis, and in principles-based disclosures in company proxies.
We believe it’s critical to adopt a rules-based approach to standardize calculations, enhance transparency, reduce reliance on third parties, and empower investors to make more informed decisions when evaluating performance and casting proxy votes.
Commonly Suggested Alternatives for “Compensation Actually Paid”
| Type of Pay | Definition | Infinite Equity Commentary |
|---|---|---|
| Reported Pay |
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| Realizable Pay |
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| Realized Pay |
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| Compensation Actually Paid |
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Critical Decision Points for Defining “Compensation Actually Paid”
In evaluating these alternative definitions of compensation, we believe three critical decisions should be considered:
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When does the transfer of ownership occur? Should the calculation distinguish between compensation decisions (by the committee) and investment decisions (by the employee)? Should vesting be the dividing line?
Infinite Equity Commentary: We believe that the transfer of ownership should occur at the vesting date, consistent with tax and accounting definitions. Further, we believe that there should not be distinctions in compensation if one executive exercises a stock option at a different time than another executive, and the compensation committee has given the two distinct executives an identical compensation opportunity.
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Should the measure use fair value or intrinsic value? Intrinsic value simplifies calculations, especially for performance awards, but reduces precision.
Infinite Equity Commentary: Intrinsic value might simplify reporting but is inconsistent with GAAP and established financial theory. For example, at-the-money or out-of-the-money options would be valued at zero, which does not reflect their actual potential value. We would fear that it could lead to plan designs of immediately vested at-the-money options, which would be a poor outcome for stakeholders.
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How should compensation be compared with performance, given the timing mismatch? Compensation is often earned over multi-year periods, while TSR performance is typically measured annually. This mismatch requires thoughtful reconciliation.
Infinite Equity Commentary: An alternative approach to do this is to amortize the new fair value over the remaining requisite service period, and therefore the re-valuation would be spread over time. Consistent with ASC718 reporting the change in fair value would have a cumulative catchup at the timing of the re-valuation. This approach would not change the ultimate Compensation Actually Paid, instead would just change the timing. We believe this alternative is theoretically feasible and addresses some the existing concerns at the expense of introducing further complexity.
Since its adoption in 2022, the SEC has selected the most theoretically sound answers to these questions in its definition of “Compensation Actually Paid.” Infinite Equity supports this current methodology and we believe the existing rules thoughtfully respond to the questions above. However, we also believe the presentation of this information—particularly within the table—can be simplified. We summarized our proposed improvements in a comment letter dated May 16, 2025.
We encourage the SEC to continue engaging the market and refining PvP disclosures with simplicity and investor utility in mind.
