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SEC Adopts Pay Versus Performance Disclosure Rules – Executive Remuneration

As required by the 2010 Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “DoddFrank Act”), the
Securities and Exchange Commission (the “SEC”) has
adopted final rules requiring most public companies to present
executive pay versus performance (“PVP”) disclosures,
which are intended to help investors more clearly understand the
relationship between executive compensation and company financial
performance in prior years, and make such information readily
comparable across public companies.

Affected companies (excluding emerging growth companies,
registered investment companies, and foreign private issuers) are
required to include significant new executive compensationrelated
disclosures in their proxy statements and information statements,
beginning with 2023 proxy statements and information statements for
companies with fiscal years ending on or after December 16,

Affected companies should begin preparing their PVP disclosures
for their 2023 proxy statements, as the required elements, many of
which are based on historical compensation and may involve departed
executives, require novel calculations and analysis above and
beyond what the executive compensation disclosure rules previously
required. Further, the new PVP disclosures are not strictly
quantitative or tabular in nature. Accordingly, each affected
company will also need to analyze and present new narrative and/or
graphic disclosures describing the relationship between paid
executive compensation and company performance across multiple
fiscal years


On August 25, 2022, the SEC adopted final rules implementing PVP
disclosure requirements as mandated by the Dodd-Frank Act.
Precursor rules were first proposed in 2015 but were never
finalized and remained dormant until the SEC reopened the comment
period in January 2022 to revise and finalize the PVP disclosure

The new rules require most companies to provide tabular,
quantitative disclosure in proxy statements or information
statements of specified executive compensation and financial
performance measures, together with clear descriptions
(graphically, narratively, or both) of the relationships between
certain of the figures included in the table. The new PVP
disclosures are not required to be included in other filings where
disclosure under Item 402 of Regulation S-K is otherwise required,
including Form 10-K and registration statements. The new PVP
disclosure requirements do not PAY VERSUS PERFORMANCE Year (a)
Summary Compensation Table Total for PEO (b) Compensation Actually
Paid to PEO (c) Average Summary Compensation Table Total for
Non-PEO Named Executive Officers (d) Average Compensation Actually
Paid to Non-PEO Named Executive Officers (e) Value of Initial Fixed
$100 Investment Based On: Net Income (h) *[CompanySelected Measure]
(i) Total Shareholder Return (f) *Peer Group Total Shareholder
Return (g) Y1 Y2 Y3 *Y4 *Y5 apply to emerging growth companies,
registered investment companies, or foreign private issuers,
including Canadian filers using the multijurisdictional disclosure
system, and smaller reporting companies (“SRCs”) are
permitted to provide scaled disclosures.


Pay Versus Performance Table

New Item 402(v) of Regulation S-K requires a company to disclose
specified executive compensation amounts and financial performance
measure results for its five most recently completed fiscal years
in substantially the following tabular format (the “PVP
Table”), subject to a phase-in period (a company may provide
three years of data (two years for SRCs) in the first filing in
which it provides this disclosure, and expand the table by an
additional year in each subsequent annual filing until the phase-in
period is exhausted):


For each amount disclosed in columns (c) and (e) of the PVP
Table, the name of each person included as a principal executive
officer (“PEO”) or in the calculation of the average
compensation of the non-PEO named executive officers (“Other
NEOs”), and the fiscal years in which such persons are
included, must be disclosed in footnotes to the PVP Table. If more
than one person served as a company’s PEO during any fiscal
year, columns (b) and (c) must be duplicated in the PVP Table to
provide disclosure for each such additional person (consistent with
the approach the SEC requires for the Summary Compensation Table
(the “SCT”) and related compensation tables, though
different from the combined approach the SEC permits for Pay Ratio
disclosure). SRCs are exempt from disclosing the information in the
columns and rows marked with an asterisk in the above table


We assume a company will be required to provide the relationship
disclosure described above with respect to all PEOs disclosed in
the PVP Table, including multiple PEOs serving during any one
fiscal year, but further clarifying guidance from the SEC on this
topic is likely needed. Also, SRCs will not be required to provide
the relationship description between Total Shareholder Return
(column (f)) and Peer Group Total Shareholder Return (column

Tabular List of Financial Performance

The new rules also require that a company (other than an SRC)
provide an unranked tabular list of at least three, and up to
seven, financial performance measures that, in a company’s
assessment, represent the most important financial performance
measures it used to link compensation actually paid to its named
executive officers for the most recently completed fiscal year to
company performance (the “Tabular List”). If a company
uses fewer than three financial performance measures for these
purposes, it is permitted to include in its Tabular List just the
financial performance measures it used (or to provide no Tabular
List if a company did not use any financial performance measures
for such purposes).

A company may also include nonfinancial performance measures
(e.g., a safety-related metric tied to fatality count, or other
individual or operational measures) as part of its Tabular List,
provided that it has also disclosed its most important three (or
fewer, as described above) financial performance measures, and
there are no more than seven total measures disclosed in the
Tabular List. Further, a company may disclose two or more separate
Tabular Lists if it chooses to identify differences in the
performance measures used for a company’s PEO, the Other NEOs
as a group, or each Other NEO individually.


“Actually Paid” Compensation

To calculate compensation “actually paid,” a company
satisfying the new rules must make a number of adjustments to total
compensation as otherwise reported in the SCT for the same fiscal
years disclosed in the PVP Table. Specifically, a company must, for
each PEO and Other NEO for each fiscal year:

  • Deduct the aggregate change (if positive) in the actuarial
    present value of the person’s accumulated benefit under defined
    benefit and actuarial pension plans (SRCs are not required to
    comply with this deduction requirement);

  • Add back the aggregate of: (i) the actuarial present value of
    the person’s benefits under such defined benefit and actuarial
    pension plans attributable to services rendered during the fiscal
    year (service cost); and (ii) the entire cost of benefits granted
    to (or credit for benefits reduced for) the person in a plan
    amendment (or initiation) during the fiscal year that are
    attributed by the benefit formula to service rendered in periods
    prior to the amendment (or initiation) (prior service cost), in
    each case calculated using the same methodology as used for a
    company’s financial statements under generally accepted
    accounting principles (“GAAP”) (SRCs are not required to
    comply with this add-back requirement);

  • Deduct the SCT “Stock Awards” and
    “Option Awards” values (including any modification fair

  • Add back for equity awards:

    • the fiscal year-end fair value of stock awards and option
      awards granted during the fiscal year that remain outstanding and
      unvested at fiscal year-end;

    • the fiscal year-over-year change, as of fiscal year-end, in the
      fair value of stock awards and option awards granted in prior
      fiscal years that remain outstanding and unvested at fiscal
      year-end (whether the change is positive or negative, and including
      any modification fair value);

    • for stock awards and option awards granted and vested in the
      same fiscal year, the fair value of such awards as of the vesting

    • – for stock awards and option awards granted in prior fiscal
      years and vested in the applicable fiscal year, the change in fair
      value from the prior fiscal year-end to the vesting date (whether
      the change is positive or negative, and including any modification
      fair value); and

    • the dollar value of dividends or other earnings paid on stock
      awards and option awards in the applicable fiscal year prior to the
      vesting date that are not otherwise reflected in the fair-value
      determinations or any other component of total compensation for the
      applicable fiscal year; and

  • Deduct for any stock award or option award granted in prior
    fiscal years that is determined to have failed to meet applicable
    vesting conditions in the applicable fiscal year, such award’s
    fair value at the prior fiscal year-end.

Each of the amounts deducted or added back as noted above must
be disclosed in footnotes to the PVP Table (disclosing such
deductions and additions for the Other NEOs as averages), together
with a footnote describing any assumptions made in the related
valuations for equity awards that differ materially from those
disclosed as of the grant date of such equity awards. Fair-value
amounts must be computed consistent with the fair-value methodology
used for share-based payments in a company’s financial
statements under GAAP. For equity awards subject to
performance-based conditions, the change in fair value as of the
end of an applicable fiscal year must be calculated based on the
probable outcome of such conditions as of the last day of the
applicable fiscal year.

Total Shareholder Return

To calculate Total Shareholder Return (“TSR”) (column
(f)) and Peer Group Total Shareholder Return (column (g)),
companies must use essentially the same methodology used to
calculate TSR for purposes of the Regulation S-K Item 201(e)
performance graph required to be included in annual reports (the
“Performance Graph”). For the peer group TSR, companies
(other than SRCs) may use either: (i) the same index or entities
they use for the Performance Graph or (ii) the entities they use as
a peer group for named executive officer compensation comparison
purposes (the “peer group”), as described in each
company’s Compensation Discussion and Analysis disclosure.
Footnote disclosure of (or cross-reference within the applicable
document to) the constituent entities in the peer group is required
if the peer group is not a published industry or lineof-business
index, and the TSR of each peer group entity must be weighted based
on the entity’s market capitalization as of the beginning of
each period for which a return is indicated.

If changes are made to the peer group from one fiscal year to
the next, the reason for such changes, plus a comparison of a
company’s cumulative TSR to the cumulative TSR of both the
prior peer group and the new peer group, must be provided in a
footnote. Practically speaking, to reduce or avoid additional
disclosures related to year-over-year changes, companies may find
it most efficient to use the same index or entities used for the
Performance Graph for the peer group TSR, as such peer group is
generally less variable from year to year compared to the peer
group used for named executive officer compensation comparison

Company-Selected Measure

A company (other than an SRC) must use as the CompanySelected
Measure what it believes represents the most important financial
performance measure from the Tabular List (not otherwise required
to be disclosed in the PVP Table) it uses to link named executive
officer compensation actually paid to company performance, in each
case for the most recently completed fiscal year. If a
company’s most important financial performance measure is
already included in the PVP Table, then a company would select its
next-most-important financial performance measure from the Tabular

For purposes of the rules, “financial performance
measures” means only measures that are determined and
presented in accordance with the accounting principles used in
preparing a company’s financial statements, any measures that
are derived wholly or in part from such measures, and stock price
and TSR. It is not necessary for the Company-Selected Measure to
actually be presented within a company’s financial statements
or SEC filings. Disclosure of a Company-Selected Measure that is
not presented in accordance with GAAP will not be subject to
Regulation G or Item 10(e) of Regulation S-K, but a company will be
required to disclose in plain English how results under such
Company-Selected Measure are calculated from its audited financial

Companies may, under certain conditions, provide additional
voluntary disclosure about important nonfinancial performance
measures in connection with the required tabular and relationship
disclosure, but such voluntary disclosure may not be misleading or
obscure the required information, and it may not be presented with
greater prominence than the required disclosure. The
Company-Selected Measure may be changed from filing to filing;
however, absent contrary guidance from the SEC, year-over-year
changes to the Company-Selected Measure will necessitate revisiting
and revising prior-year disclosures, as the new rules indicate that
the Company-Selected Measure for the most recent fiscal year must
also be disclosed for the other fiscal years included in the PVP


The new rules provide companies flexibility in determining where
in the proxy statement or information statement to provide the new
required disclosures. The new disclosures are clearly not required
to be included in a company’s Compensation Discussion and
Analysis disclosure but should appear together with a company’s
other executive compensation disclosures in the applicable proxy
statement or information statement.


Companies are required to use Inline XBRL to tag their new PVP
disclosures, with SRCs obligated to comply with this requirement by
their third filing (regardless of when such filing occurs) under
these new rules


Companies with fiscal years ending on or after December 16,
2022, will first be required to comply with these new rules in
their 2023 proxy statement and information statements.


Significant Preparation Work

Although the new rules provide for a phase-in period, companies
are still required to provide three years (two years for SRCs) of
data in their initial filing that includes the new PVP disclosures.
Companies will have to revisit compensation data back to at least
2020 (including for departed officers) and perform significant new
analyses and adjustments on such historical information. This
process is expected to be even more challenging and time-consuming
for companies that have had named executive officer turnover
(especially within the PEO position) over the past three years
because those companies will need to analyze different sets of
current and departed executives.

Further, the new rules do not just require a new table and
footnotes but also significant additional relationships disclosure
regarding paid compensation and financial performance measures
(including TSR) results over multiple years. The content of and
format for this required relationships disclosure (including
potentially new graphical disclosures) may take significant time
for companies to prepare and review with management and directors
ahead of filing. The new rules may also require companies to
perform significant additional work to determine TSR results for
peer companies. This work likely was not conducted in past years.
Finally, the Inline XBRL requirements for the new disclosures
create yet an additional cost and could impact timing of preparing
the applicable filings.

Novel and Complex Calculations

The calculations and adjustments required for determining
“actually paid” compensation are complex and
significantly different from those that have historically been
required as part of executive compensation disclosures, including
preparation of the SCT and related compensation tables. Preparing
the PVP Table will not be simply a matter of inserting readily
available or previously calculated numbers into a new format.
Instead, the PVP Table will require revisiting historical
information and making new calculations and adjustments,
particularly with respect to pension benefits and equity awards.
For equity awards, companies may need to examine precisely when
persons covered by the PVP Table vest in (or have an unconditional
right to) their equity awards, including under accelerated or
continued vesting provisions of such equity awards, as well as when
such awards fail to vest, in order to make the new calculations.
While the equity-related calculations may be something that can be
handled in-house, companies may need to outsource certain of the
pension-related calculations and engage third-party actuarial
services at additional cost.

Consistent Use of Financial Performance

Companies will need to consider how their existing disclosures
around key performance indicators and current and historical
executive compensation programs fit together with the
Company-Selected Measure and the financial performance measures
included on the Tabular List. Metrics selected for companies’
annually implemented incentive programs arguably should be related,
in whole or in part, to the financial performance measure results
if they were selected specifically to link named executive officer
compensation to company performance for the applicable year. In
that case, companies may find that their Tabular Lists largely
align with annual incentive program metrics (both financial and
nonfinancial) and performance-based long-term incentive program
metrics. However, this will be a good time for companies to
re-evaluate their disclosures and the degree to which they pay for
performance, and consider any adjustments to incentive program
design that may be needed ahead of granting future years’
incentive awards.

Investor and Other Stakeholder Scrutiny

The disclosures required by the new rules are expected to lead
to increased investor and other stakeholder scrutiny of executive
compensation changes over time and the particular performance
metrics (including the calculation of such metrics) that comprise
companies’ executive compensation programs, including any
adjustments to such metrics that differ from GAAP-determined
financial measures, such as Net Income. The requirement to provide
these disclosures may drive companies to shape their future
executive compensation programs differently, including by selecting
metrics that they believe will be more favorably viewed by
investors and other stakeholders (e.g., environmental, social, and
governance metrics) or that are likely to have results that more
closely track anticipated changes in executive pay (rather than
those metrics that they truly believe are the most important
drivers of financial, operational, and individual performance).

The full release detailing the new rules can be found
on the SEC’s website.


  1. Management teams should advise their boards regarding the new
    disclosure requirements and the potential future impacts of the

  2. . Companies should start preparing disclosure now for 2023
    proxy statements, as the required disclosures are novel and
    complex, and may require significant internal socialization before

  3. Companies should be cognizant of how the disclosure
    requirements and their compensation programs will (or will not) fit
    together to present a consistent and logical snapshot of what is
    driving financial performance and executive compensation decisions.
    Incentive program design changes may be needed ahead of granting
    2023 (and future years’) incentive awards.

  4. Companies should anticipate increased scrutiny of executive
    compensation changes over time and executive compensation program
    metrics, particularly components of the Tabular List, as well as
    possible pressure from investors to select different metrics if
    actual pay is not viewed as commensurate with performance over
    multiple years.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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