The Securities and Exchange Commission (SEC) recently reopened the comment period for its previously issued proposal that would expand what companies include in their “pay versus performance” disclosures under the Dodd-Frank Wall Street Reform Act of 2010. This action expanded on its 2015 proposal and would require an extensive tabular disclosure of the performance measures that are most important to companies. This may prompt companies to reassess how they present the details of their pay programs in their compensation discussion and analysis (CD&A) for the 2023 proxy, as a more uniform, required table common to all companies may make CD&As less relevant to shareholders.
Under the recent proposal, public companies would need to provide a tabular disclosure of “compensation actually paid” to their CEOs/named executive officers (NEOs) compared with absolute and relative total shareholder return (TSR) as well as the generally accepted accounting principles (GAAP) metrics of “pre-tax net income” and “net income,” plus a “company-selected measure” that represents the “most important performance measure used by the registrant to link compensation actually paid during the fiscal year to company performance.”
Further, the SEC is considering requiring a tabular disclosure listing the five most important performance measures that drove “compensation actually paid.”
Comments on the proposal are due on or before March 4, 2022; therefore, it is possible that calendar-year companies will need to include this disclosure on their 2023 proxy.
In 2006, the SEC revised how executive pay would be presented on company proxies by requiring a single depiction of CEO/CFO/NEO pay as Total Compensation on the Summary Compensation Table (SCT). Rather than create a new regime for determining pay, the SEC instructed companies to value cash compensation as amounts earned during the year (roughly akin to FICA wages); for equity and pensions, it would look to existing GAAP measures of compensation. Equity grants would be shown on the SCT at the full grant date ASC 718 (FAS 123R, at the time) value, not spreading the value over the vesting/performance period as per the required presentation on company financial statements.
One downside was that showing the full grant date value of equity almost always would be a different value than the executives ultimately received, and many companies were left to explain that fact to shareholders and then demonstrate they paid for performance. Within a few years, many companies added a CD&A pay for performance presentation of “realizable pay” or “pay realized” compared with absolute and/or relative TSR to better reflect the true value of the compensation granted to executives. Over time, these presentations became an expected part of CD&As.
Dodd-Frank was enacted in 2010, mandating that the SEC require proxy disclosure of “information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions.” However, the SEC did not propose regulations for this disclosure until 2015 when it sought a tabular disclosure that compared CEO and average NEO SCT compensation (with some adjustments) and compensation “actually paid” to both absolute and relative TSR, over a five-year period.
Below are details on how to complete the proposed table. The 2015 proposal includes extensive descriptions of how the mechanics of each of these calculations will work. The final regulations are expected to provide even more guidance.
Year | Summary Compensation Table Total for PEO | Compensation Actually paid to PEO | Average Summary Compensation Table Total for non-PEO NEOs | Average Compensation Actually Paid to non-PEO NEOs |
---|---|---|---|---|
(a) | (b) | (c) | (d) | (e) |
Y1 | ||||
Y2 | ||||
Y3 | ||||
Y4* | ||||
Y5* |
Year | Total Shareholder Return | Peer Group Total Shareholder Return* | Pre-Tax Net Income (Loss) | Net Income (Loss) | [Company-Selected Measure]* |
---|---|---|---|---|---|
(a) | (f) | (g) | (h) | (i) | (j) |
Y1 | |||||
Y2 | |||||
Y3 | |||||
Y4* | |||||
Y5* |
Five Most Important Company Performance Measures for Determining NEO compensation | ||
---|---|---|
1. | Measure 1 | |
2. | Measure 2 | |
3. | Measure 3 | |
4. | Measure 4 | |
5. | Measure 5 |
The new Pay vs. Performance Table, if mandated, will present both tactical and strategic considerations for companies:
Companies can begin taking steps now to start planning for the disclosure requirements:
Title | File Type | File Size |
---|---|---|
Insider March 2022 | 5.5 MB |