SEC Issues Guidance on New "Pay Versus Performance" Disclosure Rules

The SEC Division of Corporation Finance updated its Regulation S-K Compliance and Disclosure Interpretations ("C&DIs") to include guidance on the new pay versus performance disclosure rules under Regulation S-K Rule 229.402(v) ("Executive Compensation - Pay versus Performance").

Executive Compensation Disclosure Rules

On October 11, 2022, the SEC's new disclosure rules on executive compensation under Regulation S-K went into effect. As previously covered, the new rules require most reporting companies to provide specific disclosure concerning the relationship between executive compensation "actually paid" to their named executive officers and the companies' financial performance. The new rules also require the compensation information to be compiled into a new table and tagged with interactive data, including (i) compensation "actually paid" to the company's principal executive officer and, as an average, the compensation "actually paid" to the company's other named executive officers, (ii) the total shareholder return for the company and the company's peer group, (iii) the company's net income, and (iv) a company-selected financial performance measure.

New Guidance

The updated Regulation S-K C&DIs provide, generally, that:

• pay versus performance disclosure made pursuant to Rule 229.402(v) does not need to be included in a Form 10-K, but must be provided in a proxy or information statement in which executive compensation disclosure is required pursuant to Rule 229.402;

• changes in value for equity awards granted to a named executive officer ("NEO") prior to the first year of their being included as a NEO should be considered in calculating the individual's Compensation Actually Paid (the "CAP") as one of the relevant equity award adjustments;

• footnote disclosures describing the adjustments included in the CAP calculation for the principal executive officers ("PEO") and non-PEO NEOs for previous years reported in the pay versus performance table are generally only required if the prior year's information would be materially relevant to investors to understand the information for the most recent fiscal year;

  • for 2023 disclosures (or the registrant's first pay versus performance table), a CAP-related footnote should be included for each of the years presented in the table;

• as part of the CAP footnote, the deductions and additions related to pension value adjustments and those related to equity award adjustments should be disclosed separately;

• a compensation peer group disclosed in the registrant's Compensation Discussion & Analysis ("CD&A") may be used as the peer group for purposes of reporting the total shareholder return of a peer group as part of the pay versus performance table, even if the compensation peer group was not used for actual "benchmarking" purposes by the registrant's compensation committee;

• for a registrant that went public during the earliest year being reported in the pay versus performance table, the cumulative total shareholder return should be measured beginning on the date that the securities were registered under SEA Section 12 ("Registration Requirements for Securities");

• if a registrant's compensation peer group in 2022 (as disclosed in the CD&A) was different from its compensation peer group in 2020 and 2021, it may not rely on the 2022 peer group for all three fiscal years when calculating peer group total shareholder return, rather the peer group total shareholder return for each year should be reported using the peer group applicable to that year;

• no other net income amounts presented in the audited financial statements should be used as the "net income" amount in the pay versus performance table, other than the net income or loss reported in the registrant's audited GAAP financial statements as required by Regulation S-X;

• any financial performance measure that differs from net income or total shareholder return and otherwise meets the applicable criteria may be used as a "Company-Selected Measure," even if derived from, a component of, or similar to net income or total shareholder return (such as earnings per share, gross profit, income or loss from continuing operations, or relative total shareholder return);

• stock price cannot be used as Company-Selected Measure if the registrant does not actually use share price to tie compensation to company performance (such as using share price as a market condition for performance-based vested equity awards);

• a Company-Selected Measure cannot be measured over a span longer than the applicable fiscal year for purposes of reporting the value in the pay versus performance table, even if performance-based awards are measured by the registrant over a multi-year period;

• the use of a "pool plan" to determine annual bonus awards still constitutes the use of a financial performance measure to determine compensation actually paid, and the measure or measures used to determine the level of "pool" funding would qualify as financial measures that are disclosable in the registrant's required "Tabular List" of financial performance measures; and

• if a registrant has multiple principal executive officers in a fiscal year, it may aggregate their compensation for a given year in the narrative portion of the disclosures (but not in the pay versus performance table) as long as doing so does not mislead investors.