Insights

SEC Adopts Pay Versus Performance Disclosure Rules

By S. Blake Leger, Donald R. Reynolds

Capital Markets

On August 25, 2022, the Securities and Exchange Commission (“SEC”) adopted a final rule implementing the “pay versus performance” disclosure required by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC had initially proposed “pay versus performance” disclosure rules in 2015, but nothing was adopted at the time. However, in January 2022, the SEC reopened the comment period on such proposed rules.

The final rule adds a new Item 402(v) to Regulation S-K, requiring companies to disclose certain information regarding the relationship between executive compensation “actually paid” (discussed in further detail below) by the company to named executive officer and company financial performance. Most companies will be required to include the new disclosures in their 2023 proxy statements.

  1. Pay Versus Performance Table

New Item 402(v) requires companies to complete the below “Pay Versus Performance” standardized table (“PVP Table”). This section provides a summary of each disclosure required to be included in the new PVP Table.

Total Compensation Paid

Companies must include, for each fiscal year covered in the PVP Table, (i) the total compensation of its Principal Executive Officer (PEO) and (ii) the average total compensation for all of the company’s other Named Executive Officers (“NEOs”), in each case as such amounts are reported in the Summary Compensation Table (“SCT”) for the covered fiscal year. Companies must also identify, by footnote disclosure, the names of the individual NEOs whose compensation amounts are included in the average NEO compensation calculation for each fiscal year.

Compensation Actually Paid

Companies must disclose, for each fiscal year covered in the PVP Table, (i) the compensation “actually paid” to the PEO and (ii) an average of the compensation “actually paid” to the company’s other NEOs. The compensation “actually paid” to a named executive officer is calculated by adjusting total compensation (as reported in the SCT) for certain amounts related to (i) defined pension benefit plans and (ii) equity awards.[1]

Financial Performance Metrics

Companies must disclose (i) their total shareholder return (“TSR”) and (ii) the TSR for the company’s peer group[2], based, in each case on a fixed investment of $100 and in the same manner as calculated under Item 201(e) of Regulation S-K. The measurement period for which TSR (and peer group TSR) will be calculated, begins at market close of the last trading day before the company’s earliest fiscal year listed on the PVP Table and ends on the last day of the most recent fiscal year.

Companies must disclose their net income for the covered fiscal year.

Companies must include in the PVP Table at least one “company selected-measure” from the Tabular List of Financial Performance Measures (as described in more detail below). The company-selected measure(s) should represent the company’s must important financial performance measure(s) that it uses to link compensation actually paid to its NEOs to company performance for the applicable fiscal year. The company-selected measure may change from year to year.

  1. Comparative Disclosures

Companies will be required to provide a clear description of the relationship between the compensation actually paid to the PEO (and the average of the compensation actually paid to the other NEOs) and the following performance metrics from the PVP Table: (i) company cumulative TSR, (ii) net income and (iii) the company-selected measure. Such disclosures may be in narrative or graphical form, or a combination of the two.  

Companies will also be required to provide a comparative disclosure of the relationship between its total TSR and its peer group TSR during the five most recently completed fiscal years.

  1. Tabular List of Financial Performance Measures

Lastly, pursuant to the final rule, companies will be required to provide an unranked list of up to 7 financial performance measures that the company deems to be the most important performance measures it uses to link compensation actually paid to the NEOs to company performance. The tabular list may be presented as (i) one list for all NEOs, (ii) two lists (one for the PEO and one for the other NEOs) or (iii) separate lists for the PEO and each NEO. The company only needs to disclose the measures actually considered. Additionally, a company may also include non-financial performance measures provided the company determines that such measures are among its 3 to 7 most important performance measures.

  1. Smaller Reporting Companies and Other Exemptions

Pursuant to the final rule, Smaller Reporting Companies (“SRCs”) are subject to the following scaled disclosures:

  • Only required to provide PVP Table disclosure of the three most recently completed fiscal years instead of five
  • No requirement to provide peer group TSR in the PVP Table
  • No requirement to provide a company-selected measure in the PVP Table
  • Exempt from requirement to provide the Tabular List of Financial Performance Measures
  • No requirement to account for adjustments related to defined pension plans when calculating the compensation “actually paid” to NEOs

Emerging Growth Companies, Registered Investment Companies and Foreign Private Issuers are all exempt from providing disclosures under the final rule.

  1. Effectiveness and Implementation

The final rule will become effective 30 days following publication in the Federal Register. Companies will be required to abide by the new rules in their proxy statements, information statements, or other filings that require disclosure of executive compensation for fiscal years ending on or after December 16, 2022. Therefore, most companies will be required to comply with the new disclosures in their 2023 proxy statements.

In the first proxy statement or information statement for which the new disclosures are made, a company need only provide information for its three most recently completed fiscal year, adding another year of disclosure in each of the next two years. An SRC need only provide information for its two most recently completed fiscal years in the first proxy statement or information statement for which the new disclosures are made.

[1] While a detailed analysis of the formula used to adjust total compensation and calculate the compensation “actually paid” to NEOs is beyond the scope of this article, the full formula can be found in Item 402(v)(2)(iii) of Regulation S-K.

[2] The “peer group” to be used for purposes of this disclosure must be either (i) the peer group used by the company in the stock performance graph disclosed in annual filings or (ii) the peer group used in the company’s Compensation Discussion & Analysis (CD&A) section of its annual meeting proxy statement. If the peer group used by the company changed from the previous fiscal year, the company must provide footnote disclosure of (i) the name of any companies added or removed from the peer group from the prior fiscal year, (ii) an explanation for such change and (iii) a comparison of the company’s total TSR with both the newly selected peer group and the peer group used in the immediately preceding fiscal year.

Blake Leger and Donald R. Reynolds are members of the Capital Markets practice group of Wyrick Robbins, which represents public company clients across a broad range of industries in connection with their SEC reporting and corporate matters, and significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.