SEC issues new guidance on pay versus performance proxy disclosure rules

On February 10, 2023, the Securities and Exchange Commission (SEC) issued Compliance & Disclosure Interpretations (CD&Is) providing guidance on pay versus performance (PVP) disclosure requirements under Regulation S-K. Much of the guidance is aimed at companies that are newly public, changing their fiscal year or emerging from bankruptcy. The guidance also explains how bonus pool plans are disclosed and how total shareholder return (TSR) calculations should focus on the peer group used for each single disclosure year.

The guidance also confirmed what measures can and cannot appear in the company-selected measure column and what data must appear in the net income column.

Notably, the SEC clarified the following:

• The peer group used for the TSR disclosure can be 1) the peer group used on the 10-K performance graph (other than broad market indices); 2) the peer group mentioned in the Compensation Discussion and Analysis (CD&A) for compensation benchmarking practices; or 3) any other peer group disclosed in the CD&A to help determine executive pay, even if it is not used for “benchmarking” (e.g., the relative Total Shareholder Return plan peer group).
• For the initial filing, each year of the disclosure — 2020, 2021 and 2022 — must disclose the appropriate peer group used for that year. A company cannot use the peer group for 2022 for the 2020 or 2021 disclosure if the peers have changed.
• Extensive footnote disclosures of the equity and pension adjustments between the Summary Compensation Table and Compensation Actually Paid (CAP) columns are required for the initial year of disclosure, aligning with the different component calculations set out in the rule. Thereafter, the breakdown need only be disclosed for the most recent year added to the table. These footnote disclosures cannot be aggregated (e.g., the sum total of all equity adjustments for CAP calculations).
• A company can choose a company-selected measure that is derived from, a component of or similar to these required measures, such as earnings per share, gross profit, income or loss from continuing operations, or relative total shareholder return. These measures also could be included as financial performance measures in the Tabular List. The CD&Is also clarified that the data in the company-selected measure column cannot be multiyear in nature.
• Stock price itself cannot be used as the company-selected measure, unless the company has a specific stock-price-related performance goal applicable to an incentive plan award or used to determine the size of a bonus pool.

The CD&Is apply to the current proxy season. As other aspects of the PVP disclosure rules remain open to interpretation, additional guidance may be issued in the future.

Authors

---

Heather Marshall

Senior Director, Executive Compensation and Board Advisory

email Email

---

Steve Seelig

Senior Director, Executive Compensation

email Email phone +1 703 258 7623

---