Kothari and Robert Pozen at the Massachusetts Institute of Technology’s Sloan School of Management, find companies that use non-GAAP earnings end up over paying their C-suite executives. Informs investor understanding of a corporation’s governance more generally,Ī recent study, High Non-GAAP Earnings Predict Abnormally High CEO Pay, by Nicholas Guest of Cornell University’s Samuel Curtis Johnson Graduate School of Management and S.P.
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How to vote on advisory votes on executive compensation mandated by theĭodd–Frank Wall Street Reform and Consumer Protection Act. Source used by investors in evaluating executive compensation, and in deciding The information in the CD&A section is because it “is the most important Measures are subject to the requirements of Regulation G and Item 10(e) of Justify certain levels or amounts of pay, then those non-GAAP financial Purpose, such as to explain the relationship between pay and performance or to Presented in CD&A or in any other part of the proxy statement for any other Levels that are non-GAAP financial measures. Instruction 5 to Item 402(b), “is limited to CD&A disclosure of target Additionally, they want companies to include the required reconciliation in the proxy statement or make it accessible through a hyperlink in the CD&A. Regarding use of non-GAAP metrics for executive compensation aren’t enough.ĬII wrote to the SEC in April 2019 about non-GAAP disclosure, asking the agency to eliminate Instruction 5 to Item 402(b) regarding permitted annualized adjustments and replace it with the requirement that companies using non-GAAP metrics in the proxy statement need to present the information in proper context in the Compensation Discussion & Analysis, and for it be subject to the requirements of Regulation G and Item 10(e) of Regulation S-K. However, they contend current disclosure rules Non-GAAP measures should be allowed for executive pay is the Council of Metrics alone can’t help a firm reach this goal.
With using custom targets, as executive pay plans often combine GAAP, non-GAAPĮxecutive compensation with shareholders’ long-term interests. That is, metrics used for compensation purposes are exempt from the Investors face many of the same issues while evaluatingĬustom metrics in earnings releases, but the problems for compensation areĮxaggerated because of the lower regulatory requirements applicable to proxies. ( Contact us for additional information.) There is limited transparency for investors and analysts when metrics are double-adjusted, and this is especially troubling if companies wouldn’t be able to reach their C-suite compensation targets without double-adjusting the numbers. In 2018, about 30% of the S&P500 companies used metrics that were double-adjusted. Labeling metrics in both earnings releases and executive pay but calculating the Some firms will double-adjust executive compensation metrics by identically Into how the metrics are calculated and which expenses were taken out. This means that investors have little visibility Problems when companies use non-GAAP metrics for compensation purposes.
The second school argues thatĬertain non-GAAP metrics and adjustments are misleading and should be banned. Those metrics need to be transparently disclosed. Suggests companies can use whatever metrics they want, including non-GAAP, but
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Not update Question 108.01 that exempts metrics used for compensation purposesĮxecutive pay metrics centers around two schools of thought. In 2018, more than two-thirds of the S&P 500Ĭompanies used non-GAAP to establish compensation targets. These investors and analysts need to be aware of non-GAAP metrics surrounding the debate, as excessive use of non-GAAP metrics and the aggressive adjustments done to reach compensation targets can suggest these firms are self-dealing and is a sign of poor governance.Ĭorporate use of non-GAAP metrics grew so much since the 2008 financial crisis that the Securities and Exchange Commission (SEC) in 2016, and in 2018 updated its interpretation of Regulation G to clarify the agency’s position when it comes to misleading financial metrics.Ĭompensation purposes increased significantly after 2009, matching the proliferation
For investors who follow environmental, social and governance (ESG) investing philosophy, a significant component of the governance factor is executive compensation and the metrics used to justify that pay. There has been considerable debate about companies that use non-GAAP metrics for executive compensation and whether these firms are manipulating metrics to boost C-suite pay. This article was first available to subscribers of Accounting Quality Insights by Audit Analytics on Bloomberg, Eikon, FactSet, and S&P Global.
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