Defining Issues | September 2022

 

Insight

SEC issues final rule on pay vs performance disclosures

New disclosure requirements link executive compensation and financial performance.

In August 2022, the SEC issued its final rule which amends Regulation S-K to require listed companies to disclose the relationship between executive compensation and certain measures of financial performance of the registrant for the five most recent fiscal years (phased in over the first three years and scaled for SRCs).

Applicability

  • Public companies (exceptions for foreign private issuers, emerging growth companies and registered investment companies)

Relevant dates

  • The final rule becomes effective 30 days after publication in the Federal Register.
  • Compliance with the final rule is required in proxy and information statements that require executive compensation disclosures (under Item 402) for fiscal years ending on or after December 16, 2022. 

Key impacts:

The final rule requires executive compensation information to be presented alongside four specific financial performance measures (FPMs) in a tabular format (called the ‘PvP table’) for each of the five most recent years. 

In addition to the PvP table, the rule requires disclosure of the relationship between executive compensation actually paid and the FPMs, and a tabular list of the three to seven most important FPMs used by a registrant to link executive compensation actually paid to company performance for the most recently completed fiscal year.

The PvP table

  • Requires disclosure of total compensation as reported in the Summary Compensation Table (SCT), compensation actually paid, and four specific FPMs.
  • Executive compensation to be included in the disclosures is for the principal executive officer (PEO) and for the non-PEO named executive officers (NEOs) as an average.
  • The determination of compensation actually paid requires various adjustments to the amounts included in the SCT; for example,  inclusion of the service costs portion of pension benefits and the annual change in fair value of equity awards during the vesting period.
  • The four FPMs are the registrant’s total shareholder return (TSR), peer group TSR, net income, and the most important company-specific performance measure (CSM).

Other disclosures

  • Requires description in narrative or graphical format of the relationship between executive compensation actually paid and (i) the registrant’s TSR, (ii) net income and (iii) the CSM, as well as between the registrant’s TSR and the peer group TSR.
  • Requires a tabular list of the three to seven FPMs that the registrant determines are its most important measures. A registrant is permitted, but not required, to include nonfinancial measures in the list.
  • Companies may need to update systems or work with external advisors to capture the new information required under the final rule.

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