New Intelligize Report Delves into Non-GAAP Measures Influencing Exec Comp

Last year’s high-profile labor strife in the entertainment and auto industries brought a renewed focus to executive compensation. The PR campaigns waged in these battles echoed familiar beats from similar disputes of the past. Namely, rank-and-file workers decried the hefty pay packages doled out to C-suite occupants, while executives fired back with arguments that their performance and value to their companies justified their compensation.

The Securities and Exchange Commission has sought to shed light on companies’ executive compensation policies with its Pay Versus Performance (PvP) rule. Proposed in 2015 and adopted in 2022, the rule mandates that companies disclose the performance measures used to determine the compensation actually paid to their executives. Importantly, the rule carves out space for a company-selected measure, which may include non-GAAP performance measures.

A new Intelligize report attempts to provide a richer understanding of the controversy by taking a closer look at the performance measures used by select brand-name corporations in determining executive compensation. The research detailed in “Pay Versus Performance: A Look at Non-GAAP Financial Performance Measures” used the Intelligize platform to collect information on PvP disclosures in the proxy statements of eight prominent companies: Microsoft Corp., Nvidia Corp., Eli Lilly & Co., Alphabet Inc., Mastercard Inc., Tesla Inc., UnitedHealth Group Inc., and The Proctor & Gamble Co.

Some examples of the company-selected measures cited by the eight corporations included Proctor & Gamble’s organic sales growth and automaker Tesla’s revenue. Tech giant Alphabet (the parent of Google) highlighted the company’s one-year total shareholder return relative to the S&P 100.

In its report, Intelligize uncovered 71 comments sent by the SEC to companies regarding PvP disclosures in their proxy statements in the two-month period starting July 27. The use of non-GAAP measures was one of the primary topics. In cases in which registrants use non-GAAP measures as their company-selected measures, the PvP rule calls for them to show how the measures are calculated from their audited financial statements. That, according to the report, led the SEC to issue “numerous” comment letters requesting that registrants show their work regarding such non-GAAP measures.

The report also looks at the controversy surrounding the use of non-GAAP measures. The SEC itself has published guidance around potentially misleading non-GAAP disclosures, a sign of the agency’s own misgivings about the use of non-GAAP measures. Meanwhile, the Council of Institutional Investors, an association that represents U.S. institutional asset owners, pointed out in a 2023 letter to the SEC that non-GAAP disclosures “typically paint a more positive picture of corporate performance than comparable GAAP disclosures.”

Looking ahead, the Intelligize report points to an important question regarding the effect of the PvP rule: As the rule sheds light on how companies link performance measures to executive compensation, will fewer companies use non-GAAP measures in determining executive compensation?