In a move toward including environmental, social, and governance (ESG) elements into public reporting, the Securities and Exchange Commission (SEC) started requiring human capital disclosures in regulatory filings as of October of 2020. This modification requires public companies to include, to the extent material, “a description of the registrant’s human capital
resources . . . and any human capital measures or objectives that the registrant focuses on in managing the business” (Code of Federal Regulations).
While this principle-based approach does not require any specific metrics, the purpose is to provide useful information to stakeholders. With that purpose in mind, this article will discuss employee compensation data in human capital disclosures.
Compensation in Human Capital Disclosures
In practice, companies approach this human capital disclosure in a variety of ways. Some of the largest employers in the world include only a few paragraphs on the subject. Meanwhile, other filers fill two to three pages addressing human capital. Many companies leave compensation out of the human capital disclosure entirely. Others simply state that compensation is competitive. Relatively few companies include quantitative metrics such as average hourly wage or minimum wage in their reports.
Comment by the SEC Chairman
While the SEC does not currently require specific metrics in human capital disclosures, that may not always be the case. Gary Gensler, the SEC Chairman, spoke about human capital disclosure at London City Week in June of 2021. He mentioned that he had asked staff to make recommendations on this disclosure and that it “could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety” (Gensler Speech, emphasis added).
ESG Standard Setters
While the SEC requires qualitative disclosures on human capital, ESG standard setters recommend both qualitative and quantitative metrics addressing compensation. Specifically, ESG standard setters call for ratios between the pay of men and women. This is a way to proactively combat the gender pay gap. These organizations are also seeking disclosures that include a comparison of entry-level wage to the minimum or average hourly wage.
Global Reporting Initiative
The 2016 Global Reporting Initiative (GRI) standard 401-1.2.1 recommends reporting “policies or practices covering the relationships under which work is performed for the organization.” The 2016 standard offers guidance that states that compensation can be considered under those policies and practices. While the 2021 GRI standards do not contain the same recommendation established in 401-1.2.1, they do promote new disclosures. For example, GRI recommends disclosing the compensation ratio between the highest paid employee and the median annual total compensation for all other employees. More details about this disclosure are available in GRI 2-21.
World Economic Forum
The World Economic Forum’s (WEF) standard is that “all employees…receive fair treatment with appropriate compensation and benefits.” Quantitatively, the WEF established the following as core metrics:
- Pay equality: Ratio of the basic salary and remuneration for each employee category by significant locations of operation for priority areas of equality: women to men; minor to major ethnic groups; and other relevant equality areas (p. 9).
- Wage level (%): Ratios of standard entry-level wage by gender compared to local minimum wage (p. 9).
The WEF recommended disclosures provide insight into how companies are paying their employees without disclosing specific wage data. Rather than focusing on the financial aspects of compensation, the WEF appears focused on fairness in compensation.
Sustainability Accounting Standards Board
The Sustainability Accounting Standards Board (SASB) generally sets forth standards and metrics based on industry. In its publication Human Capital Bulletin, SASB set forth this metric for companies to report on: “[the a]verage hourly wage and percentage employees earning minimum wage, by region” (p. 6) which is recommended for food retailers, restaurants, hotels, cruise lines, and multiline retailers (e.g., Walmart). This disclosure would give investors an interesting insight into how well these types of companies are compensating their employees. The results of a 2021 Cerulli survey support the idea that adoption of this disclosure could influence investing decisions. Cerulli found that, “While the majority (53%) of affluent respondents indicate that investing in an environmentally responsible firm is important to them, 65% of respondents favor investments in companies that pay their workers a fair/living wage.”
The United Nations (UN) published one indicator regarding compensation as part of its Sustainable Development Goals. It is the “[a]verage hourly earnings of female and male employees, by occupation, age and persons with disabilities.” This metric is part of the UN’s “Decent Work and Economic Growth” goal.
Compensation Disclosure in Practice
Although the organizations discussed have different disclosure standards, employee compensation is a material topic. Many companies have included employee compensation details in their human capital disclosures, both qualitatively and quantitatively, in 10-Ks filed since October 2020. To gain insight into companies' practices, the author reviewed the 10-Ks of 30 companies. The companies were primarily selected based on their workforce size. Among the 30 10-Ks reviewed, only three reported wage data in terms of dollars per hour. Of these three, one reported the average employee compensation while the other two reported the minimum. Other companies mentioned compensation qualitatively in 10-K filings and provided more data in their ESG or Corporate Social Responsibility (CSR) reports, which were not included in the 10-K filings. None of the 30 companies included pay ratios between men and women in their 10-K filings. However, many included these disclosures in their ESG or CSR reports.
Below are examples of how different companies are including employee compensation in 10-K filings and voluntary ESG reports.
In its March 2022 10-K, Target included seven paragraphs in its human capital disclosure under the heading Human Capital Management. The company had several subheadings, including Compensation and Benefits, in which it disclosed, “[o]ur compensation packages include a starting wage of at least $15 per hour for U.S. hourly team members (who comprise the vast majority of our team)”.
Target is one company that is leading the way in compensation disclosures by including quantitative data in its human capital disclosure in its SEC regulatory filings.
In its March 2022 10-K, Kroger discussed compensation in its Rewarding Our Associates subheading. Kroger declared “we invested more than ever before in our associates to raise our average hourly wage to $17 and our average hourly rate to over $22 with comprehensive benefits included.” Kroger also used its disclosure as an opportunity to express its commitment to its associates. The company has invested $1.2 billion over the past four years in wages and training. Kroger has also committed to invest $1.8 billion more over the next four years.
Synchrony Financial, in its February 2022 10-K, disclosed its minimum wage saying, “In 2021, we raised the minimum wage to $20 per hour for all hourly employees in the U.S. and Puerto Rico and conduct a regular market pay analysis.” This disclosure provides insight into Synchrony’s compensation on a quantitative level, while also providing some assurance that the company will continue to be competitive.
Hewlett Packard Enterprise
Hewlett Packard discussed compensation in a meaningful way without directly stating the minimum or average wage that it was paying employees. This may be a good approach for companies with highly skilled workforces or that prefer not to disclose wages for other reasons. In its December 2021 10-K, Hewlett Packard said, “[t]otal direct compensation is generally positioned within a competitive range of the market median, with differentiation based on tenure, skills, proficiency, and performance to attract and retain key talent.” This statement makes it clear that the company is providing value to its employees while adding more information compared to simply saying that compensation is competitive.
As the largest non-government employer in the world, employee compensation is undoubtedly material to Walmart. Its human capital disclosure from its March 2022 10-K says, “[o]ur focus on providing a path of career opportunity for our associates through robust training, competitive wages and benefits, and opportunities for advancement creates a strong associate value proposition” (p. 12, emphasis added). Walmart’s disclosure does well to mention the associate value proposition. However, the lack of quantitative compensation data may leave readers wanting to know more. Reading further in the 10-K, the company provides some added direction by saying, “[a]dditional information about how we invest in our associates' well-being, including wage structure and pay, can be found in our Human Capital brief in our most recent ESG reporting, which is available on our corporate website.”
On page 17 of Walmart’s 2022 ESG Summary, much more quantitative data is provided. In addition to hourly wage data, Walmart discusses leave, 401(k) contribution plans, and stock ownership plans. Walmart makes wage disclosures by segment (Walmart U.S., Sam’s Club U.S., and Supply Chain for those two segments). The Walmart U.S. segment, the lowest compensated of the three segments, has an average hourly wage of $16.50 and average total hourly compensation of $21.25. This data is presented in a table in the toggle below.
Together, Walmart's 10-K and ESG report successfully address the guiding principle of these disclosures, which is to provide useful information to stakeholders.
Since the SEC started requiring human capital disclosures in regulatory filings in October 2020, companies have responded in a variety of ways. In terms of compensation, some companies only state that their compensation is competitive. Other companies provide a generic statement supplemented by a second report, while others report quantitative measures such as minimum wage within 10-K filings. Regardless of the approach, the principle is the same: to provide material human capital resources information to the company’s stakeholders.