Legal Alert

SEC Adopts Disclosure Rules on Pay-Versus-Performance

September 19, 2022

Summary

The Securities and Exchange Commission (SEC) has adopted amendments to rules requiring most reporting companies to publish pay-versus-performance information in certain proxy statements and information statements.

The Upshot

  • Most reporting companies will be required to publish data comparing the compensation of the registrant’s CEO and other named executive officers to specified financial performance measures.
  • Registrants must describe the relationship between each of the financial performance measures included in the table and the executive compensation paid over its five most recently completed fiscal years.
  • Registrants with fiscal years on or after December 16, 2022, must make these disclosures in their next proxy or information statement for which executive compensation disclosure is required.

The Bottom Line

Each reporting company will need to begin collecting data for the pay-for-performance disclosures, including company-specific performance measures. Any significant changes to compensation metrics over the past three years should be considered in making the comparative disclosure.

The Securities and Exchange Commission (SEC) last month adopted amendments to rules requiring most reporting companies to publish pay versus performance information in certain proxy statements and information statements.

The new rules now require:

  • A table with data comparing the compensation of the registrant’s CEO and other named executive officers (NEOs) to specified financial performance measures is required to be published for most reporting companies.
  • Registrants must describe the relationship between each of the financial performance measures included in the table and the executive compensation paid over its five most recently completed fiscal years.
  • Registrants with fiscal years on or after December 16, 2022, will have to make these disclosures in their next proxy or information statement for which executive compensation disclosure is required.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law. Among other things, the Dodd-Frank Act added Section 14(i) to the Securities Exchange Act of 1934, as amended (the Exchange Act).

Section 14(i) instructed the SEC to implement rules to require registrants to disclose executive compensation and financial performance data in any proxy statement or information statement in which executive compensation disclosure is required. 

Initial proposed pay versus performance rules were published in 2015 but never finalized. The SEC reopened the comment period for these rules in January 2022, and adopted the new rules promulgated under the Exchange Act in August 2022. The new rules will take effect for reporting companies with fiscal years ending on or after December 16, 2022. These new requirements will apply to all reporting companies except emerging growth companies, registered investment companies and foreign private issuers. Smaller reporting companies (SRCs) have a reduced disclosure requirement.

Section 14(i) instructs the SEC to implement rules to require registrants to disclose executive compensation and financial performance data in any proxy statement or information statement in which executive compensation disclosure is required.

To comply with the new rules, reporting companies must include the following in any proxy statement or information statement for which executive compensation disclosure is required under Item 402 of Regulation S-K:

  • a pay-versus-performance table;
  • a detailed comparison of the executive pay to the reported financial metrics, which include total shareholder return, net income, calculated in accordance with GAAP, and a financial metric selected by the company; and
  • a list of the most important measures used by the company to determine executive pay.

Pay-Versus-Performance Table

The pay-versus-performance table, depicted in the chart below, can be used as a guide for the new disclosure requirements. The footnotes provide a brief explanation for the calculation of each metric required to be disclosed in the table. The new rules give companies time to adjust to these requirements. As such, reporting non-SRCs companies are only required to report three years of data in their first year of disclosure and four years of data in their second year of disclosure. Similarly, reporting SRCs are only required to report two years of data in their first disclosure and three years of data in their second disclosure.

Year

Summary Compensation on Table Total for CEO1

Compensation Actually Paid to CEO2

Average Summary Compensation Table Total for Non-CEO NEOs3

Average Compensation Actually Paid to Non-CEO NEOs4

Value of Initial Fixed $100 Investment Based On:

Net Income7

[Company-Selected Measure]*

Total Shareholder Return5

Peer Group Total Shareholder Return6 *

Y1









Y2









Y3









Y4*









Y5








 

* Not required for SRCs.

1: This number is the CEO’s Total Compensation as reported on the already required Summary Compensation Table (SCT) 
(The sum of the CEO’s salary, bonus, stock awards, option awards, non-equity incentive plan compensation, increase in pension value,  nonqualified deferred compensation earnings, and all other compensation. For SRCs, no pension disclosure is required)

2: Begin with the SCT total for CEO and adjust the values of any equity awards and  pension plan amounts in accordance with Item 402(v)

3: Average the total compensation for all NEOs as defined in 17 CFR 229.402(a)(3) excluding the CEO.

4: Average the SCT total for each NEO other than the CEO, after adjusting the values of  any equity awards and pension plan amounts in accordance with Item 402(v) 

5: The total shareholder return for the company expressed as the value of a fixed investment of $100 scaled by the return 

6: The total shareholder return for the peer group  expressed as the value of a fixed investment of $100 scaled by the cumulative return

7: Calculated in accordance with GAAP

Detailed Comparison of the Executive Pay to Financial Metrics

In addition to the information disclosed in the pay-versus-performance table, registrants must provide detailed comparisons of the executive compensation paid to the financial metrics—total shareholder return (TSR), net income, and another financial measure selected by the company. These comparisons are required to cover the five most recent fiscal years and may be done in a narrative form, graphically, or through a combination of both.

List of the Registrant’s Most Important Measures to Determine Executive Compensation

Finally, registrants are required to provide an unranked tabular list of the most important financial performance measures that the registrant used to determine the executive compensation actually paid. Registrants should provide between three and seven financial performance measures. However, if a registrant uses fewer than three financial performance measures to determine executive compensation, or no measures at all, it is only required to disclose the relevant measures, if any. A registrant may report non-financial measures there if those measures are among the most important in determining executive compensation. Only the most important measures over the latest completed fiscal year need be disclosed, as opposed to the most important measures for all of the years reported in the disclosure. SRCs are not required to provide this list.

What to Do Now

Each reporting company will need to begin collecting data for the pay versus performance disclosures, including selection of the company-specific performance measure. Any significant changes to compensation metrics over the past three years should be considered in making the comparative disclosure. Many companies use non-GAAP financial measures in establishing incentive compensation metrics for executives–the interplay between the GAAP and non-GAAP measures and the reasons for the difference will continue to be important disclosure. 

Our Securities and Capital Markets Group advises private and public companies through all stages of development and capital-raising activities. We also help clients comply with public reporting, proxy statement, and disclosure obligations. Please contact us for more information on the new disclosure requirements.

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