New “compensation actually paid” rule reveals millions of dollars of differences in total CEO pay

CEO pay is an important metric for many investors. However, reported compensation often has been a snapshot in time that may not always reflect the complete pay package – until now.

The Securities and Exchange Commission last August enacted a rule requiring disclosure of “compensation actually paid” for executives, accounting for changes in stock award values as prices fluctuate. The rule already has shown that the true value of some pay packages can differ from traditionally reported total compensation, sometimes by tens of millions of dollars.

For example, Olivier Le Peuch, CEO of oilfield services company Schlumberger Ltd., saw the value of his pay jumped nearly $24 million last year, driven by a sharp rise in the company’s share price. By contrast, equity awards for Daniel Florness, CEO of nut and bolts maker Fastenal Co., lost nearly half of their value in 2022.

The old approach, still in use, requires companies to show pay for top executives as it was valued when they received it. Stock options and restricted stock are valued as of the day of grant, often a year or more before they are disclosed and several years before they vest. Companies generally haven’t detailed how award values change during that period.

Now, alongside the old measure, typically in annual proxy statements, companies are revealing changes in value over the course of the year, starting with fiscal years ending in late December 2022. At least 65 companies, including 23 in the S&P 500, had disclosed the new measure through late last week.

The resulting compensation actually paid is listed for the most-recent three years, alongside company performance measures, including total shareholder return and net income. Similar pay figures for other top executive also are averaged for each year. The objective of policymakers is to help investors understand how well executive pay tracks company performance.

Critics of the rule argue that disclosure is costly and unnecessarily complicated. Pay industry professionals and corporate governance analysts have long calculated similar numbers themselves and agree it can be complex, but many are watching the new disclosures closely.

“It puts it right in front of the investor — it puts everyone’s calculations apples-to-apples,” says Terry Adamson, a partner at Infinite Equity, a consulting firm specializing in stock-based pay. “I think poor pay practices will really stand out.”

Read more: Wage gap between C-suite and low-paid workers growing

Institutional Shareholder Services, a proxy advisory firm, has said it won’t use the new numbers when scoring pay-for-performance practices at public companies this year. However, analysts may take the new disclosures into account when assessing individual pay packages, said Rachel Hedrick, the company’s associate director of U.S. executive compensation research.

“Most of our institutional clients are hoping that the disclosure can provide some insight into how the boards are thinking about pay and performance,” she says. “I wouldn’t say that we’ve seen it yet.”