Executive pay: new formulas could cause confusion

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The US Securities and Exchange Commission wants shareholders to sign up when executives receive extraordinary pay packages. However, a change in the disclosure formulas could inadvertently reveal that they theoretically owe the company money.

Last year, the SEC instituted a new rule that requires annual proxy filings before annual shareholder meetings to elect directors to include disclosures about “pay versus performance.” Starting this year, publicly traded US companies are required to put their total shareholder return numbers alongside executive pay. Likewise, they must clearly establish the operational measures used to determine the remuneration.

Add to those disclosures “compensation actually paid.” In previous power of attorney filings, a typical summary pay table would show the value of cash and stock. But the value of the equity component would reflect the price of the shares on the grant date. If the stock price were to skyrocket, under the previous reporting regime, the pay would be understated.

Or, in the case of the Nvidia CEO, over the top. High-flying semiconductor stocks lost about half their value in the 2022 US tech crisis. Jensen Huang, its CEO, had “actually paid” negative $4 million in compensation, relative to the originally reported value of $21.3 million.

Companies are quick to point out that even these market-adjusted numbers are not the last word. Until the shares are fully vested and sold, the payment made remains hypothetical. Companies have also complained that the recalculations and disclosures are unnecessarily burdensome.

But increased reporting on executive pay has been mandated by the Dodd-Frank reform law enacted in the wake of the financial crisis. A few years ago, the SEC required companies to compare the median salary of employees with that of the boss. At Nvidia, the typical worker made $228,000 a year, though the CEO took home almost 100 times that amount.

The data reveals that large equity grants can, unsurprisingly, be volatile. In the previous two years, Huang’s reported pay totaled just over $40 million. But on a market value basis, that figure was over $180 million due to the strong performance of Nvidia’s stock price during that period.

Whether Huang is overpaid or underpaid, given the broader wealth creation under his tenure, is a question for shareholders. But in the future, working with the tedious mathematics becomes the responsibility of the company.