The Advisors' Blog

One of the most significant aspects of the SEC’s new pay vs. performance disclosure rules – in terms of the effort that will be required – is that companies will need to calculate changes in equity award fair values every year, from grant until vesting. This Willis Towers Watson memo lays out several new & unexpected challenges that this requirement will create:

– The number of valuations required each year to be prepared by internal or external valuation resources will significantly increase.

– In-flight valuation of stock option awards will be required to reflect changes in assumptions that consider current fiscal year economic conditions and how much the options are in or out-of-the-money.

– In-flight valuation of relative total shareholder return (RTSR) awards will be required to reflect changes in assumptions that consider current fiscal year economic conditions and actual TSR performance for the company and peers to date.

– Other market-condition awards (e.g., stock price hurdle vesting) will face similar challenges.

– Companies will be required to disclose changes in valuation assumptions between the grant date and the PVP measurement date.

– For non-market-condition awards (e.g., awards subject to conditions tied to financial or non-financial goals), while complex valuation models will not be required, internal alignment will be needed on updated probability achievement factors and a shared understanding around the disclosure of this information in a new way.

The memo includes a chart that shows the calculation methodology based on the various combinations of grant timing (during the covered fiscal year or during a prior fiscal year) and vesting (outstanding and unvested at end of covered fiscal year, vested during the fiscal year, or failed to meet applicable vesting conditions during the covered fiscal year). It also walks through specific implications and examples for stock options, relative TSR awards, and other types of grants.

For a hypothetical company that grants stock options with 4-year graded vesting and relative TSR units with a 3-year performance period, the memo shows that a whopping 44 valuations will be required in the 2023 proxy statement! Wow. The memo concludes:

Given the significant number of valuations that potentially need to be prepared, we strongly suggest starting to figure out who will be able to perform these analyses and how they will be done, as soon as possible. A finite amount of time will be available to perform these calculations after year-end and at a time when the valuation resources are already busy working on other things, including valuations of new grants for the current year. Valuations for prior measurement dates should be prepared now to reduce the burden after year-end. These earlier valuations will also allow companies to establish processes to prepare the valuations at year-end.

Make sure to join us next week at our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” to get your game plan in order for this rapidly approaching disclosure requirement. Then, join us on November 10th for a 3-hour “special session” – where we’ll take a deeper dive into interpretive & accounting issues, guidance on understanding the “big picture” impact, and a walk-through of sample disclosures.

– Liz Dunshee