Executive pay: new formulas could fuel confusion

The US Securities and Exchange Commission wants shareholders to register when executives receive windfall pay packages. A change in disclosure formulas, however, could unintentionally reveal them theoretically owing the company money.

Last year, the SEC instituted a new rule requiring annual proxy filings — before annual shareholder meetings to elect directors — to include disclosures on “pay versus performance”. Starting this year, listed US companies must put their total shareholder return numbers alongside executive pay. They must also lay out clearly those operating measures used to determine remuneration.

Add to those disclosures “compensation actually paid”. In previous proxy filings, a typical summary pay table would show the value of cash and shares. But the equity component’s worth would reflect a share price at the grant date. If the stock price rocketed up, under the previous reporting regime, pay would be understated.

Or, in the case of Nvidia’s chief executive, overstated. The semiconductor high-flyer’s shares lost roughly half their value in the US tech crash of 2022. Jensen Huang, its CEO, had “actually paid” remuneration of a negative $4mn, relative to the originally reported value of $21.3mn 

Companies are quick to point out that even these marked-to-market figures are not the final word. Until shares fully vest, and are sold, realised pay remains hypothetical. Companies have also complained that the new calculations and disclosures are unnecessarily onerous.

But increased executive pay information has been mandated by Dodd-Frank reform legislation enacted in the wake of the financial crisis. A few years ago, the SEC required companies to compare the median employee pay to that of the boss. At Nvidia, the typical worker made a healthy $228,000 annually though the chief executive took home nearly 100 times that sum.

The data reveals large stock grants can, unsurprisingly, be volatile. In the previous two years, Huang’s stated pay was altogether just over $40mn But on a market value basis, that figure was above $180mn because of Nvidia’s strong share price performance during that period.

Whether Huang is over or underpaid, given the broader wealth creation under his tenure, is a question for shareholders. But in future working through the tedious maths becomes the company’s responsibility.