There were more than 700 initial public offerings (IPOs) on U.S.-based stock exchanges in 2019 and 2020 combined. Many of those newly listed companies have benefitted from qualifying as emerging growth companies (EGCs) since their IPO.
EGCs can withhold certain disclosures from public filings; most notably, the executive compensation disclosures in an EGC’s annual proxy statement can be far less rigorous than for a standard public issuer. However, companies lose their EGC status after their fifth fiscal year as a public company, or earlier if they surpass certain thresholds for:
Because many of the companies that went public in 2019 and 2020 have not surpassed these thresholds, they have been able to retain their EGC status. But the upcoming five-year expiration will dramatically increase their executive compensation disclosure requirements for upcoming proxy statements. Enhanced disclosures for companies that lose EGC status can be put into three categories.
When a company loses EGC status and becomes a regular filer, it will need to expand three sections of its next proxy statement (Table 1):
| EGC filer | Regular filer | |
|---|---|---|
| SCT: Number of Reportable Executive Officers | Minimum of three NEOs, or all NEOs if there are fewer than three executive officers
|
Minimum of five NEOs, or all NEOs if there are fewer than five executive officers
|
| SCT: Number of Reportable Years | Two years
|
Three years
|
| SCT: Elements of Compensation Reported | Change in pension value can be excluded | Change in pension value must be included if any value was accrued over the reportable period |
| SCT: All Other Compensation | Details can be provided in text-only narrative format | Generally, details must be provided as a separate table or in a detailed footnote |
| Potential Payments Upon Termination | Details can be provided in text-only narrative format | Must be provided as a separate table, and calculated assuming a termination on the final day of the fiscal year |
| Related Person Transactions | Higher threshold of materiality for disclosure; any board-approved policies on the topic do not need to be disclosed | Lower threshold of materiality for disclosure; any board-approved policies on the topic need to be disclosed |
Companies that lose EGC status and become regular filers need to add several sections to their proxy statements, and many of them will take considerable time, research and coordination with Finance and Legal to complete (Table 2). These include:
| Regular filer | |
|---|---|
| CD&A | Required to provide a clear, concise and understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the NEOs |
| Compensation Committee Report | Committee members are required to report that they have reviewed the CD&A and recommend that it be included in the proxy statement and 10-K |
| Grants of Plan-Based Awards | Summary table showing the most recent fiscal year’s potential cash bonus (annual or multi-year) that could be earned (minimum / target / maximum), PSUs that could be earned (minimum / target / maximum), RSUs granted, and stock options granted with strike price and expiration date for each NEO |
| Change in Pension Value | Contributions, withdrawals, present value of future benefit and/or changes to pension balance values for each NEO in the most recent fiscal year |
| Stock Options Exercised and Shares Vested | Number of shares/options and values realized for each NEO in the most recent fiscal year |
| CEO Pay Ratio | Calculation of a ratio between CEO total compensation (as reported in the SCT) and the compensation of the median company employee, with allowable exceptions and exclusions |
| Pay Versus Performance | Calculation of CEO and average other NEO CAP, and calculation of financial performance (TSR and other goals). |
| Compensation Risk Management | Description of the company’s efforts to balance executive rewards and company risk as well as a summary of any compensation risk analyses conducted by the board in the most recent fiscal year |
Lastly, losing EGC status means the company’s exemption from certain shareholder votes also expires (Table 3), regardless of whether the company is a Smaller Reporting Company or a regular filer. These votes include:
| Full filer | |
|---|---|
| Say on Pay | Non-binding vote on the company’s NEO compensation |
| Say on Pay Frequency | Non-binding vote on how frequently the company should hold a Say on Pay vote |
| Say on Parachute | Non-binding vote on the company’s NEO compensation upon change in control (required only in a merger proxy statement) |
For companies that transition from EGC status, the combination of enhanced and new disclosures can be overwhelming. The new details require significant coordination, research, calculation and decision making by both management and the Compensation Committee.
New inputs for the SCT may involve departments that may not have been included in prior proxy statement reporting, such as retirement and risk management. These internal sources should be identified before the proxy writing process starts, and they should know what details they are expected to provide and on what timeline.
With a three-year lookback, quieter summer periods provide an opportunity to collect the previous two years of information either for the known NEOs holding the roles of Principal Executive Officer (typically the CEO) and Principal Financial Officer (typically the CFO), or a broader group of executive officers.
This is particularly true for the Pay Versus Performance disclosure, which may require companies to go as far back as IPO, to the extent that equity awards granted in prior periods remained outstanding or vested in any of the reportable three years. Equity valuations consistent with those used for Accounting Standards Codification (ASC) 718 are required on multiple measurement dates and may not have been previously prepared.
In addition, the board can review and approve decisions on the CD&A, Say on Pay Frequency, CEO Pay Ratio and Pay Versus Performance disclosures early in the process to get a head start on calculations and writing. Plus, the results of the first Say on Pay vote will give the Compensation Committee feedback on its executive pay decisions to date, potentially affecting its approach to future actions.
Ultimately, the key to success for any company approaching expanded disclosures starts with planning – and planning early – and ensuring you have the right team in place to meet these regulatory requirements.
A company that has been public for five years may lose EGC status but qualify for Smaller Reporting Company (SRC) status, which also allows for limited compensation disclosures in its proxy statements (though a Pay versus Performance table and Say on Pay vote are still required). However, the financial thresholds for SRC status are lower than for EGCs. Most notably, SRCs must have either less than $250m in public float, or a combination of under $100m revenue and under $700m public float. Return to article
