SEC Seeks Additional Feedback on Proposed Rules Requiring Pay-Versus-Performance Disclosure

Highlights of the 2015 Proposed Rules

 2022 Requests for Comment or Proposed Revisions to the 2015 Rule Proposal

New Pay-Versus-Performance Table: Overview

In all proxy or information statements in which executive compensation disclosure is required under Item 402 of Regulation S-K, proposed Item 402(v) would require companies to provide a table that includes the following information for each of the last five completed fiscal years:

1. Year
2. Summary Compensation Table Total for PEO
3. Compensation Actually Paid to PEO
4. Average Summary Compensation Table Total for non-PEO Named Executive Officers
5. Average Compensation Actually Paid to Non-PEO Named Executive Officers
6. Total Shareholder Return
7. Peer Group Total Shareholder Return

A company would be required to use the information provided in the table to provide a clear description of the relationship among the measures, but would be allowed to choose how the present the relationships (e.g., graph, or narrative description).

The SEC is considering proposing three additional measures to be disclosed in three new columns in the table:

h. Pre-Tax Net Income (Loss)

i. Net Income (Loss)

j. Company-Selected Measure

The Company-Selected Measure to be disclosed in a new column (j) requires the company to identify the performance measure that, based on its own assessment, represents the most important measure (that is not already included in the table) it used to link compensation actually paid during the fiscal year to company performance, over the time horizon of the disclosure.

If the company’s most important performance measure were already included in the table, it would disclose its next-most important measure as its Company-Selected Measure. If a company did not use any measures other than those already included in the table, it would disclose that fact.

The title of column (j) in the table would be the name of the measure it selects as its Company-Selected Measure, such as EBITDA. Companies would provide the numerically quantifiable performance of the company with respect to the Company-Selected Measure for each of the years in the table.

The SEC is asking if mandated disclosure of the Company-Selected Measure would be useful to investors. It also asks whether it should specifically limit any Company-Selected Measure only to measures that relate to the financial performance of the company or whether it should be broader (e.g., to encompass ESG-related measures). Finally, the SEC is asking whether it should allow companies to disclose different Company-Selected Measures from year to year in the table rather than selecting one Company-Selected Measure that is the most important measure over the time horizon of the disclosure in the table.

In addition to the pay-versus-performance table, the SEC is considering requiring a company to separately provide a tabular list of the five “most important” performance measures used to link compensation actually paid to company performance ranked in order of importance (or less, if the company considers fewer than five performance measures to make compensation decisions).

The SEC believes giving companies flexibility to disclose metrics of their choosing would make it easier for investors to assess which performance metrics drove compensation actually paid and better reflect differences across companies, for example, by revealing which companies link ESG-related measures to executive compensation.  

The SEC noted that companies would be able to cross-reference to existing disclosures elsewhere in the proxy statement that describe various processes and calculations that go into determining NEO compensation as it relates to these performance measures, if they choose to do so.

The SEC is seeking input on the following:

• Whether it should define “most important” for the purpose of the selection of the Company-Selected Measure as well as the ranking of the top five most important performance measures or, alternatively, allow companies to determine what they consider to be “most important” with disclosure explaining how they made their choice
• Whether five is the right number of performance measures to require to be ranked in the table and whether companies should be allowed to disclose fewer than five measures if they consider fewer than five when making compensation decisions
• Whether it should limit the “most important” measure to the measure specifically used by the company to link only PEO compensation actually paid to company performance 
• What disclosure should be required if different measures are important in different years or if different measures determine compensation actually paid to the different NEOs
• Whether an exemption from the requirement should be available if the disclosure would contain sensitive or competitive information

The SEC is also asking about the cost of any computations required to prepare the disclosure and whether compliance would be unduly burdensome. 

Finally, the SEC is asking whether, in addition to or in lieu of the proposed rules and the additional measures it is considering, it should revise Item 402 of Regulation S-K to explicitly require companies to disclose all of the performance measures that actually determine NEO compensation.

1. value equity awards at their fair market value on the vesting date as opposed to the estimated grant date
2. deduct the aggregate change in the actuarial present value of pension benefits
3. add the actuarially determined cost for services rendered by the NEO during the applicable year
4. deduct the grant date value of any stock and option awards granted during the applicable year that are subject to vesting
5. add the value at vesting of stock and option awards that vested during the applicable year, computed in accordance with the fair value guidance in FASB ASC Topic 718

The company would be required to include footnotes explaining each of the above adjustments and the vesting date valuation assumptions used (if materially different from the grant date assumptions disclosed in its financial statements).

1. exclude changes in actuarial present value of benefits under defined benefit and actuarial pension plans that are not attributable to the applicable year of service
2. value equity awards at their vesting date as opposed to their grant date

In light of commenters’ concerns that the definition of “compensation actually paid” may result in misalignment between the time period to which pay is attributed and the time period in which the associated financial performance is reported, the SEC is asking if there is an alternative approach (including the additional measures of financial performance under consideration) that would reduce the risk of misalignment and allow for greater comparability across companies.

Some commenters noted potential challenges with using the pension service cost (as defined in FASB ASC Topic 715) to determine the amount attributable to pension plans to be included in compensation actually paid. The SEC is asking if there is an alternative measure of the change in pension value attributable to the applicable fiscal year that is better representative of the “actually paid” amount of pension benefits for an executive.

The SEC is also seeking feedback as to how to mitigate potential challenges associated with computing the fair value of options at the vesting date as opposed to the grant date.

The pay-versus-performance table would require disclosure of cumulative TSR for the company, as well as the cumulative TSR of a peer group selected by the company, for each of the last five fiscal years. For this purpose, a company may use the peer group identified in the CD&A section of its proxy statement or used for its Item 201(e) stock performance graph.

• Whether disclosure of additional financial performance measures beyond TSR would be useful to investors and should be required
• Whether there other measures of company performance that it should consider mandating in addition to, or in lieu of, those under consideration
• Whether “Company-Selected Measure” should be defined and, if so, what computations or considerations should be required when calculating the measure and whether companies should be required to disclose the methodology used to calculate the measure
• Whether it should require the “Company-Selected Measure” to be the most important measure used by the company in a performance or market condition in the context of an incentive plan

Acknowledging the increase in companies tying executive compensation to performance metrics related to climate, diversity and other company-specific ESG goals, two SEC Commissioners encouraged commenters to provide details about how ESG measures are used in executive compensation decisions and asked whether the increased flexibility intended in the reopening release would help investors analyze the use of ESG metrics and targets in compensation plans. 

Using the information in the pay-versus-performance table, the proposed rules would require a company to clearly describe the relationship between (1) the executive compensation actually paid to the NEOs and the company’s cumulative TSR and (2) the company’s cumulative TSR and the cumulative TSR of the company’s self-selected peer group, for each of the company’s five most recently completed fiscal years.

The proposed rules would give companies the flexibility to choose the format in which to present the relationship, which could be a narrative description, graph, chart or any combination of these formats. 

Under the proposed rules, companies must provide the pay-versus-performance disclosure in tagged data format using XBRL to increase the information’s comparability and usefulness to investors.

The proposed rules would require companies to separately tag the values disclosed in each column of the pay-versus-performance table and to separately block-text tag any footnotes to the table and the description of the relationship between executive compensation and financial performance. The tagged data would have to be filed as an XBRL exhibit to the proxy or information statement in which the same disclosure is included. 

The pay-versus-performance disclosure requirements would apply to all companies with securities registered under Section 12 of the Exchange Act, with the exception of emerging growth companies, foreign private issuers and registered investment companies.

The proposed rules would permit a smaller reporting company (SRC) to provide scaled disclosure by: (1) allowing it to provide three years of data rather than five, (2) removing the requirement to make pension plan adjustments when calculating executive compensation actually paid and (3) removing the requirement to disclose peer group TSR.

Since the SEC expanded the definition of “smaller reporting company” in 2018, it estimates that SRCs would account for 45% of all companies that would be subject to the proposed rule’s requirements (up from 40% in 2015).

In addition to the scaled disclosure for SRCs proposed in 2015 and available under existing requirements, the SEC is proposing scaled disclosure requirements for SRCs with respect to certain of the additional measures that it is considering as discussed in the reopening release. Specifically, the SEC is considering not requiring SRCs to disclose a Company-Selected Measure (column (j) in the pay-versus-performance table) and a table listing their five most important performance measures. Unlike pre-tax net income and net income, these are new disclosure obligations that SRCs would not be able to satisfy by drawing upon or cross-referencing to existing disclosures.

The SEC seeks input on whether this scaled disclosure is appropriate for SRCs, whether requiring SRCs to disclose pre-tax net income and net income would be useful for investors and whether there are different financial measures that would be more appropriate for SRCs.

Finally, the SEC asks whether it should exempt SRCs from the Inline XBRL detail tagging requirements it is considering for pay-versus-performance disclosures. 

In the first proxy or information statement in which such disclosure is required, companies (other than SRCs) would be permitted to provide three (rather than five) years of data, and would disclose an additional year of data in each of the next two applicable filings until five years of data is ultimately reported.

SRCs would be permitted to provide two (rather than three) years of data in the first proxy or information statement in which they are required to provide pay-versus-performance disclosure.

A new reporting company would not be required to provide pay-versus-performance disclosure with respect to fiscal years prior to the last completed fiscal year if it was not a reporting company pursuant to Section 13(a) or 15(d) of the Exchange Act at any time during any such prior fiscal year.