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SEC Releases Final Regulations For Pay Versus Performance – Securities


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On August 25, 2022, the US Securities and Exchange Commission
(SEC) issued final rules setting forth new pay for
performance disclosure requirements originally required by the
Dodd-Frank Act. The final rules are intended to show the
relationship between compensation actually paid to a company’s
principal executive officer (PEO) and its other named executive
officers (NEOs) and the financial performance of the company. This
Advisory reviews the new rules and identifies several areas that
SEC registrants should begin to focus on now in preparation for the
2023 proxy season.

Summary of New Disclosures

The disclosures, which are set forth in new Regulation S-K Item
402(v), will be required to be included in proxy statements or
information statements in which executive compensation disclosures
are required under Item 402.1 In adopting the new
requirements, the SEC noted that although the Compensation
Discussion & Analysis already mandates an explanation of
“all material elements of the registrant’s compensation of
the named executive officers,” the new rules prescribe
standalone disclosures which require a direct comparison of
compensation actually paid to NEOs and specified financial

Tabular Disclosure of Comparative Data: The Item 402(v)
requires a tabular disclosure of the following metrics for each of
the prior five fiscal years:

  • For the PEO (typically the chief executive officer), the total
    compensation as reported in the Summary Compensation Table. If more
    than one person served as a PEO during the covered fiscal year, a
    column should be included for each PEO;

  • The compensation actually paid to the PEO (calculated as
    discussed below);

  • For the NEOs other than the PEO, the average of the total
    compensation reported in the Summary Compensation Table;

  • The average compensation actually paid to the NEOs other than
    the PEO (calculated as discussed below);

  • The cumulative total shareholder return (TSR) of the company,
    as calculated under Item 201(e) of Regulation S-K, which governs
    the preparation of the summary performance graph;

  • The cumulative TSR of a selected peer group;

  • The company’s net income for each fiscal year; and

  • An additional financial performance measure designated as the
    “Company-Selected Measure” (discussed below).

Additional measures may also be provided if they are clearly
identified as supplemental, not misleading, and not presented with
greater prominence than the required disclosure.

The following is the format for the required table:



 Summary Compensation Table Total for PEO

Compensation Actually Paid to PEO 

 Average Summary Compensation Table Total for Non-PEO

 Average Compensation Actually Paid to Non-PEO NEOs
 Value of Initial
Fixed $100 Investment Based On: Net Income 

 Net Income

 [Company-Selected Measure]
Total Shareholder Return  [Peer Group Total Shareholder
(a) (b)  (c) (d) (e)   (f)  (g)  (h)  (i)

The final rules require footnote disclosure of the amounts that
are deducted from, and added to, the Summary Compensation Table
amounts reported in the new table (these adjustments are discussed
below). In addition, companies must identify in footnote disclosure
the individual NEOs whose compensation amounts are included in the
average for each year. Companies may not remove signing bonuses,
severance bonuses, and other one-time payments from the amount of
compensation actually paid.2

Comparative Disclosure: Companies are required to
provide a clear description of:

  • the relationship between the compensation actually paid to the
    company’s PEO and the average of the compensation actually paid
    to the company’s other NEOs, and each of (i) the cumulative TSR
    of the company, (ii) the net income of the company, and (iii) the
    Company-Selected Measure, in each case across the last five
    completed fiscal years; and

  • the comparison of the company’s cumulative TSR and the
    cumulative TSR of the peer group across the last five completed
    fiscal years.

The comparative disclosure can be provided in graphical form,
narrative form or a combination of the two. Companies will also
have the flexibility to decide whether to group any of these
relationship disclosures together, but any combined description of
multiple relationships must be “clear.”3

If any additional measures are included, a similar comparison
must also be provided for each additional measure.

Tabular List of Performance Measures: Companies must
provide an unranked tabular list of at least three, and up to
seven, financial performance measures which represent the most
important financial performance measures used to link compensation
actually paid to its NEOs for the most recently completed fiscal
year to company performance. A company may elect to provide
separate tabular lists for the PEO and the non-PEO NEOs (either
individually or collectively). Non-financial performance measures
may be included if they are among the company’s three to seven
most important performance measures and the company has disclosed
its most important three (or fewer, if fewer than three were used)
financial performance measures. If fewer than three financial
measures were used, then all of the financial measures that were
used, if any, should be included in the tabular list. Although
companies may include non-financial performance measures in the
tabular list, they must select a financial performance measure from
the tabular list as the Company-Selected Measure (described

Compensation Actually Paid

In determining compensation “actually paid” for
inclusion in the prescribed table, the following additions and
deductions should be made to and from the Summary Compensation
Table amounts:

  • For defined benefit and actuarial pension plans, (i) deduct the
    aggregate change in the actuarial present value of the NEO’s
    accumulated benefit under the plans and (ii) add a service cost
    which generally reflects increased benefits to the NEO related to
    the fiscal year;

  • Deduct the amounts reported in the Summary Compensation Table
    for equity grants and then include an amount for stock awards and
    option awards calculated by:

    • adding the year-end fair value of all awards granted during the
      fiscal year that are outstanding and unvested as of the end of the
      fiscal year;

    • adding the change in fair value as of the end of the fiscal
      year (from the end of the prior fiscal year) of any awards granted
      in a prior fiscal year that are outstanding and unvested as of the
      end of the fiscal year;

    • adding the fair value as of the vesting date for awards that
      are granted and vest in the same year;

    • adding the change in fair value as of the vesting date (from
      the end of the prior fiscal year) of any awards granted in any
      prior fiscal year which vest during the fiscal year;

    • subtracting the fair value at the end of the prior fiscal year
      for any awards granted in a prior fiscal year that fail to meet
      vesting conditions during the fiscal year; and

    • adding any dividends or other earnings paid in the fiscal year
      prior to the vesting date that are not otherwise included.

Any valuation assumptions used in valuing equity awards that are
materially different from the grant date assumptions that are
otherwise disclosed must also be included in a footnote.


TSR will be calculated on the same cumulative basis as is used
in Item 201(e) of Regulation S-K (which governs the performance
graph) in the table through and including the end of the fiscal
year for which TSR is being calculated. Both TSR and peer group TSR
should be calculated based on a fixed investment of one hundred
dollars at the measurement point.

For purposes of determining the peer group for the peer group
TSR calculation, a company must use the same index or issuers used
for the summary performance graph under Item 201(e)(1)(ii) of
Regulation S-K, or, if applicable, the companies it uses as a peer
group for disclosing benchmarking practices in its Compensation
Discussion & Analysis. If the peer group utilized is not a
published index, the companies in the peer group must be disclosed
in a footnote or, if disclosed in prior filings, incorporated by
reference. The returns of each component issuer of the group must
be weighted according to the respective issuers’ stock market
capitalization at the beginning of each period for which a return
is indicated. If the company uses a different peer group from the
peer group used by it for the immediately preceding fiscal year, it
must explain in a footnote the reason(s) for the change and compare
the company’s cumulative total return with that of both the
newly selected peer group and the peer group used in the
immediately preceding fiscal year. Note that companies may need to
provide somewhat lengthy explanatory disclosures to explain any
misalignments between compensation and TSR.

Company-Selected Measure

The Company-Selected Measure for the required table is a measure
that, in the company’s assessment, represents the most
important financial performance measure (not already required to be
disclosed in the table) that is used to link compensation actually
paid to the NEOs for the most recently completed fiscal year to
company performance. If the company’s “most
important” measure is already included in the tabular
disclosure, it would select its next-most important measure as its
Company-Selected Measure. In addition, the Company-Selected Measure
may change from one filing to the next. If a Company-Selected
Measure is not a financial measure under generally accepted
accounting principles (GAAP), the company must disclose how the
measure is calculated from the company’s audited financial
statements. However, such measure will not be subject to Regulation
G or Item 10(e) of Regulation S-K, which governs the use of
non-GAAP financial information.

Effective Time and Transition Rules

The final rules are effective 30 days following the publication
in the Federal Register, and companies are required to include the
new disclosures in applicable filings in fiscal years ending on or
after December 16, 2022. Accordingly, the final rules will apply to
the 2023 proxy season. In the first year of disclosure, companies
may provide information for the pay versus performance table for
the prior three fiscal years and may provide an additional year of
disclosure in each of the next two subsequent annual filings.

Smaller Reporting Companies

Smaller reporting companies have more limited disclosure
obligations. Smaller reporting companies are only required to
report information in the table for the three prior fiscal years,
with only two fiscal years required to be provided in the first
year of disclosure, and a third year provided in the next
subsequent annual filing pursuant to the transition rules. Smaller
reporting companies are also not required to include pension
amounts in the calculation of compensation “actually
paid” or provide the disclosure of peer group TSR, the
Company-Selected Measure, or the tabular list of most important

Emerging Growth Companies, Foreign Private Issuers and
Registered Investment Companies

Emerging growth companies, registered investment companies, and
foreign private issuers are excluded from the disclosure
requirements under the new rules.

Key Takeaways

  • With significant new disclosures required to be included in the
    2023 fiscal year proxy statements and other information filings
    requiring executive compensation disclosures, Compensation
    Committees should be educated on the new requirements as soon as

  • Compensation Committees should begin evaluating company
    financial and non-financial performance metrics to include in the
    list of 3-7 financial measures as well as the Company Selected
    Measure for the comparison table, keeping in mind that different
    measures may have been used for evaluating/determining different
    components of compensation.

  • Compensation Committees should also consider how to approach
    peer group selection for the TSR comparisons and whether to utilize
    the services of a compensation consultant to assist with that

  • Compensation Committees should be mindful of the new disclosure
    requirements when deciding compensation structures for the 2023
    fiscal year and beyond.


1 The final rules provide companies flexibility in
determining where in the proxy or information statement to provide
the required disclosure.

2 Companies are required to separately tag in Inline XBRL
each value disclosed in the table, the footnote and relationship
disclosure, and specific data points (such as quantitative amounts)
within the footnote disclosures.

3 The relationship disclosure could include, for example,
a graph providing compensation actually paid and change in the
financial performance measure(s) (TSR, net income, or
Company-Selected Measure) on parallel axes and plotting
compensation and such measure(s) over the required time period.
Alternatively, the relationship disclosure could include narrative
or tabular disclosure showing the percentage change over each year
of the required time period in both compensation actually paid and
the financial performance measure(s) together with a brief
discussion of how those changes are related.

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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