The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

August 26, 2022

Pay vs. Performance: SEC Adopts Final Rules – Effective For ’23 Proxies!

Yesterday, by a 3-2 vote, the SEC announced the adoption of final rules on “Pay Versus Performance” disclosure, which are required under the Dodd-Frank Act and had been a long time in the making. Here’s the 234-page adopting release – which I’ll be studying today in order to make sure we cover the most critical takeaways & action items during our upcoming “Proxy Disclosure & 19th Annual Executive Compensation Conferences.”

Even though the Pay vs. Performance rules were flagged as a near-term item on the Reg Flex Agenda, the announcement came as a surprise because there was no open meeting and the last few weeks of August are typically quiet at the SEC. In his statement, Commissioner Uyeda also criticized the SEC’s process in adopting this rule via a “reopening release” rather than a full-fledged re-proposal with new data & analysis.

However, there’s not really time for companies to focus on that – because the new Item 402(v) disclosure will be required in 2023 proxy statements! Dave blogged on TheCorporateCounsel.net this morning about the details around the compliance date and phase-in disclosure. Here are more details from the fact sheet (also see Dave’s overview on TheCorporateCounsel.net):

The rules will apply to all reporting companies, except foreign private issuers, registered investment companies, and Emerging Growth Companies. Smaller Reporting Companies (“SRCs”) will be permitted to provide scaled disclosures.

New Item 402(v) of Regulation S-K will require registrants to provide a table disclosing specified executive compensation and financial performance measures for the registrant’s five most recently completed fiscal years.

Registrants will be required to include in the table, for the principal executive officer (“PEO”) and, as an average, for the other named executive officers (“NEOs”), the Summary Compensation Table measure of total compensation and a measure reflecting “executive compensation actually paid,” calculated as prescribed by the rule.

The financial performance measures to be included in the table are:

– Total shareholder return for the company;

– TSR for the company’s peer group;

– The company’s net income; and

– A financial performance measure chosen by the company and specific to the company that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company’s NEOs to company performance for the most recently completed fiscal year.

New Item 402(v) also will require a registrant to provide a clear description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its PEO and, on average, to its other NEOs over the registrant’s five most recently completed fiscal years. The registrant will be required to also include a description of the relationship between the registrant’s TSR and its peer group TSR.

A registrant will also be required to provide a list of three to seven financial performance measures that the registrant determines are its most important measures (using the same approach as taken for the Company-Selected Measure). Registrants are permitted, but not required, to include non-financial measures in the list if they considered such measures to be among their three to seven “most important” measures.

Registrants will be required to use Inline XBRL to tag their pay versus performance disclosure.

In addition to Commissioner Uyeda’s procedural complaints, Commissioner Peirce issued a statement accusing the rules of being too prescriptive and going beyond what the Dodd-Frank Act required, without a cost-benefit analysis.

Meanwhile, Chair Gensler’s statement applauds the “consistent, comparable and decision-useful information” that the rule will provide and says the final version is actually more flexible than what was originally proposed. The flexibility he’s most likely referring to is the fact that the final rule allows companies to include non-financial performance measures in their list of the 3-7 “most important” measures and also disclose those measures in a table as they see fit, as called out in Commissioner Crenshaw’s supporting statement. By contrast, financial measures are required to be disclosed if companies are linking pay and performance to them. Commissioner Lizárraga also supported the final rules.

Honestly, I’m still processing the tight implementation schedule here. I had to read this cruel “fake out” part of the release about 6 times:

In order to give companies adequate time to implement these disclosures, we are requiring registrants to begin complying with Item 402(v) of Regulation S-K in proxy and information statements that are required to include Item 402 disclosure for fiscal years ending on or after December 16, 2022.

In light of this timeframe, I urge anyone who hasn’t registered for our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” to claim their spot now! This virtual event is only 6 weeks away – and we’ll be discussing key steps you need to take to comply with these new rules in a dedicated panel with Bindu Culas of FW Cook, Howard Dicker of Weil Gotshal, Renata Ferrari of Ropes & Gray and Maj Vaseghi of Latham. We’ll also be addressing Pay vs. Performance during “The Top Compensation Consultants Speak” and “SEC All-Stars: Executive Pay Nuggets” panels.

Here are the full agendas for the Conferences – 18 critical sessions over the course of 3 days. To claim your spot, you can sign up online, email sales@ccrcorp.com, or call 1-800-737-1271. Let us equip you with the practical action items you need to face this avalanche of SEC rulemaking!

Liz Dunshee