On August 25, 2022, the Securities and Exchange Commission adopted pay versus performance disclosure rules originally mandated by the Dodd-Frank Act 12 years ago. These rules require public companies to disclose the relationship between the executive compensation actually paid and the financial performance of the company and will apply to most companies starting with 2023 proxy statements.
The new rules were proposed in April 2015 pursuant to Section 953(a) of the Dodd-Frank Act. In January 2022, the SEC reopened the comment period for the rules proposed in 2015, as well as several additional requirements that the SEC was considering.
The new disclosure requirements are reflected in Item 402(v) of Regulation S-K. Companies will have to provide a new table in their proxy statement disclosing specific executive compensation and financial performance measures for the company’s five most recently completed fiscal years. The table must provide the specified information for the principal executive officer, individually, and an average for the other named executive officers. The amounts of compensation for each must be the Summary Compensation Table measure of total compensation and a measure reflecting “executive compensation actually paid,” calculated as prescribed by the rule. The following financial performance measures must also be included in the table:
- Total shareholder return for the company;
- Total shareholder return for each of the companies in 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 named executive officers to company performance for the most recently completed fiscal year.
The new rule also requires that the company provide a description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its principal executive officer and, on average, to its other named executive officers over the company’s five most recently completed fiscal years. The company is also required to include a description of the relationship between the company’s total shareholder return and its peer group total shareholder return.
Additionally, the company will be required to provide a list of three to seven financial performance measures that the company determines are its most important measures. Companies may, but are not required to, include non‑financial measures in the list if they consider those measures to be among the three to seven “most important” measures.
Companies will also be required to use Inline XBRL to tag their pay versus performance disclosure.
The new rules will apply to all reporting companies except foreign private investors, registered investment companies, and emerging growth companies. Smaller reporting companies will be permitted to provide scaled disclosures, as discussed below.
The new rules will become effective 30 days following publication in the Federal Register, and public companies must begin to comply with these disclosure requirements in filings that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.
Companies other than smaller reporting companies will initially have to provide the relevant disclosures for three years, adding another year of disclosure in each of the two subsequent annual proxy filings that require this disclosure. Smaller reporting companies will initially be required to provide the information for two years, adding an additional year of disclosure in the subsequent annual proxy or information statement that requires the disclosure. Additionally, a smaller reporting company will only be required to provide the required Inline XBRL data beginning in the third filing in which it provides pay versus performance disclosure, instead of the first.
We recommend that companies begin developing this new disclosure as soon as they can. While the compensation programs that will be reflected in the initial pay for performance table are for the most part settled, the new disclosures may be relevant for variable compensation decisions related to the current year. Also, companies may identify changes to their executive compensation programs that would address concerns with the disclosure that could be adopted for 2023.