SEC Issues Additional Guidance Related to Pay Versus Performance

Capital Markets

On September 27, 2023, the U.S. Securities and Exchange Commission (the “SEC”) updated its compliance and disclosure interpretations (“C&DIs”) on pay versus performance disclosures (see the Regulation S-K C&DI page on the SEC’s web site). These additional C&DIs will provide much-needed guidance to issuers as they prepare for a second year of pay versus performance disclosures.

As background, on August 25, 2022, the 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. As described in our September 2022 client alert, the final rule added a new Item 402(v) to Regulation S-K, requiring companies to disclose certain information regarding the relationship between executive compensation “actually paid” by the company to named executive officers and company financial performance, or pay versus performance.

These new C&DIs provide further answers to questions that issuers encountered while complying with these disclosure rules during their inaugural year of implementation. C&DIs were also previously provided in February 2023. The most recent C&DIs expound further, focusing on award calculations, including:

• the treatment of awards granted prior to an equity restructuring and how to handle their inclusion in the calculation of compensation actually paid (C&DI 128D.14);
• the treatment of the fair value of awards granted prior to an IPO (C&DI 128D.15);
• the meaning of “vesting” of awards with regards to market conditions and how to handle their calculation (C&DI 128D.16); 
• the meaning of when awards “fail to vest” and how to handle their calculation and impact on compensation actually paid (C&DI 128D.17);
• awards that have vesting conditioned on retirement eligibility and how to handle the calculation and impact on compensation actually paid (C&DI 128D.18);
• how to account for awards where vesting is determined by certain certification requirements (C&DI 128D.19);
• appropriate equity valuation methodologies with regards to fair value (C&DI 128D.20 and 128D.21); and
• guidance on details with regards to the disclosure of awards in the required pay versus performance footnote to the extent that such disclosure would result in competitive harm to the issuer and sets forth guidelines for alternative disclosure required in that scenario (C&DI 128D.22).

Lorna Knick and Holly Wagner are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their 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.

Wyrick Robbins 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.