Final SEC Pay-Versus-Performance Rule Will Require Extensive New Disclosures in 2023 Proxy Statements

Year

Summary Compensation Table Total for PEO

($)

Compensation Actually Paid to PEO

($)

Average Summary Compensation Table Total for Non-PEO Named Executive Officers

($)

Average Compensation Actually Paid to Non-PEO Named Executive Officers

($)

Value of Initial Fixed $100 Investment Based On:

Net Income

($)

[Company-Selected Measure]*

Total Shareholder Return

($)

Peer Group Total Shareholder Return

($)*

Year
1

Year
2

Year
3

Year 4*

Year 5*

Topic

Item 402(v) Requirements

New Pay-Versus-Performance Table: Overview

In all proxy or information statements in which executive compensation disclosure is required, Item 402(v) will require companies to provide a table that includes the following information for each of the past 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 NEOs
5. Average Compensation Actually Paid to Non-PEO NEOs
6. Total Shareholder Return
7. Peer Group Total Shareholder Return
8. Net Income (Loss)
9. Company-Selected Measure

The Company-Selected Measure to be disclosed will require 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 to its NEOs during the most recently completed fiscal year to company performance. If the Company-Selected Measure is a non–GAAP measure, the company must disclose how the measure is calculated from the company’s audited financial statements. Disclosure of the measure is not otherwise subject to Item 10(e) of Regulation S-K or Regulation G.

If the company’s most important performance measure was 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.

A company will be required to provide following the Pay-Versus-Performance Table a clear description of the relationship between the compensation actually paid to its PEO and other NEOs and each of the company’s cumulative TSR, net income, and the Company-Selected Measure (and any supplemental measures voluntarily provided by the company, if applicable). Item 402(v) provides companies with flexibility to determine how best to present the relationships (e.g., graphically, narratively, or a combination of the two).

A company will also be required to include a comparison of the company’s cumulative TSR and the TSR of the peer group selected by the company.

Tabular List of the Three to Seven Most Important Company Financial Performance Measures for Determining Executive Compensation

In addition to the Pay-Versus-Performance Table, companies will be required to provide a tabular list of at least three (unless the company considers fewer than three financial performance measures), and no more than seven, of the “most important” financial performance measures used to link compensation actually paid to company performance. The “most important” determination is made on the basis of the most recently completed fiscal year.

A company may include non-financial-performance measures it used to link compensation actually paid to its NEOs to company performance if it determines that such measures are among its three to seven most important performance measures and it has disclosed its most important three financial measures (or fewer, if the company uses fewer than three).

Timeframe

A company must provide information in the table for each of its past five completed fiscal years or, in the case of an SRC, three years, subject to the phase-in periods described below.

Summary Compensation Data

Under the existing requirements of Item 402 of Regulation S-K, a company must provide the summary compensation data for the NEOs. In the Pay-Versus-Performance Table, the data must be presented separately for each individual who served as PEO during the year and as an average for the other NEOs.

Multiple PEOs During Fiscal Year

If more than one person served as a company’s PEO during a fiscal year covered by the Pay-Versus-Performance Table, the company must include additional columns in the table to separately disclose the summary compensation table total and compensation actually paid to each person who served as PEO during such fiscal year.

“Executive Compensation Actually Paid”

To reflect the meaning of “executive compensation actually paid,” Item 402(v) will require disclosure of a compensation metric that starts with the total compensation reported in the summary compensation table, as adjusted to

1. deduct the aggregate change in the actuarial present value of pension benefits
2. add an amount representing the actuarial present value of the NEO’s pension benefits that are attributable to the NEO’s service during the covered fiscal year (and, in certain circumstances, prior fiscal years), with such amount to be determined using the same methodology used for financial statement reporting purposes
3. deduct the grant date fair value of any stock and option awards granted during the applicable year
4. add the fair value as of fiscal year-end of any stock and option awards granted during the applicable year that remain subject to vesting as of the applicable year-end
5. add the change, measured from the end of the prior fiscal year to the end of the most recently completed fiscal year, in the fair value of any stock and option awards granted in prior years that remain subject to vesting as of the applicable year-end
6. add, for awards granted and that vest in the same year, the fair value as of the vesting date
7. add the change, measured from the end of the prior fiscal year to the vesting date, in fair value of stock and option awards granted in prior years that vested during the applicable year
8. deduct the fair value as of the end of the prior fiscal year for any awards granted in any prior fiscal year that fails to meet the applicable vesting conditions during the applicable year
9. add the dollar value of any dividends or earnings paid on stock or option award in the covered fiscal year prior to the vesting date that are not otherwise included in total compensation for the covered fiscal year

Under the disclosure rule, in the event of a modification of an outstanding equity award, the excess fair value, if any, of such modified award over the fair value of the original award as of the date of modification would also be included in the total of compensation actually paid.

Companies will be required to compute the fair value of the equity awards in a manner consistent with the methodology used for financial statement reporting purposes. Finally, for awards subject to performance-based vesting conditions, companies will be required to assess the probable outcome of the underlying performance conditions as of the last day of each year when calculating the fair value for such awards.

Measures of Financial Performance

The Pay-Versus-Performance Table will require disclosure of cumulative TSR for the company, the cumulative TSR of a peer group selected by the company, the net income of the company, and the company’s performance with respect to a Company-Selected Measure, in each case, for each of the past five fiscal years.

For purposes of the Pay-Versus-Performance Table, cumulative TSR will be measured from the market close on the last trading day before the company’s earliest fiscal year in the table through and including the end of the fiscal year for which TSR is being calculated.

The peer group used to measure cumulative TSR must be either the peer group identified in the company’s Compensation Discussion and Analysis for the applicable year or the peer group used for the company’s Item 201(e) stock performance graph.

Clear Description of the Relationship Between Executive Compensation and Financial Performance

Using the information in the Pay-Versus-Performance Table, Item 402(v) will require a company to clearly describe the relationship between the executive compensation actually paid to the PEO and the company’s other NEOs and each of (1) the company’s cumulative TSR, (2) the company’s net income, (3) the company’s performance with respect to the Company-Selected Measure, and (4) if applicable, any supplemental measures voluntarily provided by the company, in each case, for each of the company’s five most recently completed fiscal years.

Item 402(v) gives companies the flexibility to choose whether to describe the relationship graphically, narratively, or as a combination of the two.

A company will also be required to include a comparison of the company’s cumulative TSR and the TSR of the peer group selected by the company.

Voluntary Supplemental Disclosure

Item 402(v) allows a company to supplement the required pay-versus-performance disclosure provided that such supplemental disclosure is clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure.

Data Tagging

Under Item 402(v), companies must provide the pay-versus-performance disclosure in tagged data format using Inline XBRL.

Item 402(v) will 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 must be filed as an XBRL exhibit to the proxy or information statement in which the same disclosure is included.

Applicability; Scaled Disclosure for Smaller Reporting Companies

The pay-versus-performance disclosure requirements 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. Pay-versus-performance disclosure is not required to be included in registration statements, including registration statements filed in connection with a company’s initial public offering.

Item 402(v) will permit a 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, (3) removing the requirement to disclose peer group TSR, (4) removing the requirement to include a Company-Selected Measure in the Pay-Versus-Performance Table, and (5) removing the requirement to provide a tabular list of the three to seven most important financial performance requirements.

Item 402(v) also provides that SRCs will not be required to comply with the Inline XBRL detail tagging requirements applicable to the pay-versus-performance disclosures until the third filing in which they provide such disclosures.

Phase-In Periods

In the first proxy or information statement in which such disclosure is required, companies (other than SRCs) are permitted to provide three (rather than five) years of data, adding a year in each of the two subsequent years’ proxy or information statements. SRCs will initially be required to provide information for two years, adding an additional year in the subsequent year’s proxy statement or information statement.