Mar. 4, 2022
To the Members of the Securities and Exchange Commission: My name is Judy Samuelson, and I'm writing to comment on the proposed 'Pay versus Performance' proposing release [Release No. 34-94074; File No. S7-07-15]. As Executive Director of the Aspen Institute Business & Society Program, I've worked for decades with my colleagues on aligning business decisions with the long-term health of society. Executive pay is a particular focus for us: you can view our recent research on executive pay, produced with Korn Ferry, here. [“The Modern Principles for Sensible and Effective Pay,” released September 2020.] The original 2015 proposal to include consideration of TSR in determining pay may have been well intentioned; it reflected the then-current philosophy that tying executive pay to share price was the best means of ensuring fair compensation based on CEO performance. However, in the seven years since, the conversation on pay has moved forward significantly, and it's now apparent that TSR is a deeply flawed measure of an executive’s performance. TSR is impacted by many factors, many of which are outside of the direct control of executives. Over shorter time horizons of less than 5 years, it is very difficult to confidently attribute changes in TSR to executive decisions or to determine whether those changes in TSR are durable. Often positive TSR is achieved by externalizing costs on to society because the stock market rewards behaviors like laying off workers. If the market has already priced a company’s stock appropriately, even the best and most responsible CEOs may find it hard to generate more TSR and pressuring them to do so could invite risky or nefarious behavior. Further, a focus on TSR distracts from the actual job of corporate executives, which is to exercise good judgment across a complex and constantly shifting set of relationships, not merely focus on the demands of shareholders. Narrowly focusing executives on TSR encourages dangerous myopia and short-termism, which is often at the heart of the most dangerous corporate scandals from Boeing’s 737 Max tragedies to Wells Fargo’s fraud. Lastly, when TSR is the dominant signal in an executive's pay package, CEOs are incentivized to pursue share buy-backs. Buybacks produce returns for shareholders but they come at a steep cost, depriving the firm of resources needed to invest in talent and innovation, or even simply to survive a downturn. At a time when companies should be investing massively to transform technologies and business models in order to avert climate disaster, or to pay workers more in order to reverse historic levels of economic inequality, they have instead spent the past decade aggressively using capital to buy back shares and reward shareholders. Between 2010 and 2019, 93% of all S&P 500 profits have been used on buybacks and dividends, leaving only 7% of those profits to address some of the most pressing challenges of our time. A review of data on share repurchases for S&P 500 companies showed that buybacks exceeded the annual climate related spending in the Bipartisan Infrastructure Bill several times over. And in the wake of the 2017 corporate tax cuts, one analysis found that Fortune 500 companies spent 149 times as much on buybacks as they did on worker wages and bonuses. Do we really need to encourage corporate executives to focus even more on TSR? The good news is that better measures are now gaining prominence. If you look at the headlines around pay in the 2022 proxy season, they read like this recent piece in the Financial Times: "US companies add environmental and social targets to executive bonuses." There's a growing recognition that business needs to prioritize planetary survival and a fair shake for employees over return to shareholders—and that recognition is being reflected in today's pay package designs. To be sure, this raises questions all its own that can and should be debated—for example, is pay a blunt tool for companies to address matters as complex as climate change? Nonetheless, that is where the conversation should be in 2022—not on TSR. I would be happy to offer further commentary or information, if useful. Very truly yours, Judy Samuelson Executive Director - Aspen Institute Business & Society Program –- NYC