In November 2024, the Financial Accounting Standards Board finalized its Disaggregation of Income Statement Expenses (DISE) standard. Beginning in 2028, public firms will have to break out employee compensation from each functional expense item on the face of their income statements, including cost of goods sold (COGS) and selling, general, and administrative expense (SG&A). The reform comes in response to complaints that the face of an income statement tells investors what a firm spends money on by function, but almost nothing about the labor, materials, and other inputs that drive those functions.
Public companies were not persuaded of the wisdom of the reform. In comment letters to the FASB, Starbucks, Pfizer, General Motors, Boeing, CIGNA, Uber, Marathon Oil, and other firms argued that the required breakdown is (i) more detailed than investors need, (ii) poorly aligned with how they manage their businesses, and (iii) too costly to justify the benefit. While we cannot precisely estimate the cost argument, in a new paper, we test their objection that disaggregated labor-cost information is not useful enough to be worth disclosing.
In a recent post on this site, the authors showed that one dimension of disaggregation carries information: Firms that voluntarily separate selling costs from administrative costs reveal economically distinct activities. We examine a complementary dimension that the new standard targets: the labor content of expenses, and how finely it should be disaggregated before it helps investors.
Measuring labor costs is hard precisely because firms do not disclose them. We use data from Revelio Labs, which standardizes millions of public employment records to estimate firm-level compensation, to build wage measures for roughly 25,000 firm-years from 2009 to 2022. The data let us split labor into three functional categories, general and administrative (G&A), sales and marketing (S&M), and research and development (R&D), a detail that no mandated financial-statement data currently provide. We validate our wage estimates against three benchmarks: voluntarily disclosed staff expense, median employee pay from proxy statements, and an industry-imputed wage measure based on voluntary disclosures. We caution that the Revelio measures are estimates, not audited figures, and are subject to selection and measurement error. Both sources of noise bias our tests toward finding smaller effects, so our estimates should be read as a conservative floor on the usefulness of audited labor-cost information.
Our first finding is that detail matters, and the useful detail is functional. Separating SG&A into aggregate wage and nonwage components yields only modest gains in predicting future performance. The larger gains arise when wages are split by function. The three components behave in economically distinct and intuitive ways: S&M wages track near-term revenue growth, R&D wages are the most informative about long-horizon revenue growth and future SG&A intensity, and G&A wages are comparatively uninformative about future fundamentals. These patterns persist when we control for the matched nonwage expense within each function, so labor is carrying information that nonlabor costs do not. Additionally, the gains are largest among firms with smaller workforces, where hiring choices map more directly onto commercialization and innovation.
The information also has capital-market consequences. Periods of high wage volatility, particularly in G&A and R&D wages, are associated with larger analyst revenue-forecast errors and with greater market illiquidity. Firms that voluntarily disclose aggregate wages attenuate some of the G&A-related uncertainty, but the effect is imprecise and does not fully resolve the forecasting errors or liquidity costs tied to more forward-looking inputs such as R&D. Taken together, the evidence is consistent with labor-cost disaggregation providing information that analysts and investors do not already have, and the usefulness of both aggregate and disaggregated labor costs.
What does this mean for the standard? The companies’ empirical premise does not hold up: Labor-cost information is useful, and the market prices its absence. More important, our evidence cuts in a second direction that the debate has largely missed. The standard requires compensation to be disclosed within the functional captions firms already present, but it does not require firms to separate R&D, S&M, and G&A on the face of the income statement, meaning that the labor-cost disaggregation our results find most useful may not be disclosed. Because the largest predictive gains come precisely from splitting labor functionally, a rule that stops at compensation-within-existing-captions is a step forward, but it can be improved by requiring firms to report R&D, S&M, and G&A in the income statement.
We caution that we speak only to the benefits side of the ledger. We do not observe firms’ compliance and preparation costs, and a complete cost-benefit verdict will have to wait until the standard has been in force for several years. On the benefit side, however, the data provide support for more disaggregated labor-cost disclosure and a reason to think the FASB can go further in the future.
Yue Chen is an assistant professor at The Chinese University of Hong Kong, Kalash Jain is an assistant professor at Columbia Business School, Nan Li is an assistant professor at Rotman School of Management, and Shivaram Rajgopal is a professor at Columbia Business School This post is based on their recent paper, “Decision Usefulness of Disaggregated Labor Costs: Ex-Ante Evidence and Implications for the FASB’s Expense Disclosure Mandate,” available here.