On August 25, 2022, the Securities and Exchange Commission (the “SEC”) adopted final rules on pay versus performance disclosure under Section 14(i) of the Securities Exchange Act of 1934 (as added by Section 953(a) of the Dodd-Frank Act).
Contained in new Item 402(v) of Regulation S-K, the new rules become effective 30 days after publication in the Federal Register. The rules will apply to all reporting companies except foreign private issuers, registered investment companies and emerging growth companies, and will apply to proxy and information statements for fiscal years ending after December 16, 2022. Calendar-year-end companies should start considering how they will comply with this rule for the 2023 proxy season to avoid headaches this winter.
Pay Versus Performance Table
Under the final rules, a company will be required to disclose information about the compensation of its principal executive officer (“PEO”) and its other named executive officers (“other NEOs”) and the company’s financial performance for the five most recently completed fiscal years (the three most recently completed fiscal years for smaller reporting companies) in tabular format.
Specifically, the Pay Versus Performance table will include the following:
- the total compensation from the Summary Compensation Table for the PEO and the average for the other NEOs for each fiscal year;
- a measure of the “executive compensation actually paid” to the PEO and the average paid to the other NEOs, as calculated under the rules, for each fiscal year;
- the company’s total shareholder return (“TSR”) for each fiscal year;
- the TSR for each fiscal year of the company’s compensation peer group;
- the company’s net income for each fiscal year; and
- a “Company-Selected Measure” of the most important financial performance measure, based on the company’s assessment of the most important financial measure it uses to link compensation actually paid to the NEOs to company performance for the most recently completed fiscal year.
The format of the new table is set forth at the end of this LEGALcurrents.
A company may choose where to include the newly required information in its proxy or information statement, though the CD&A is likely the most logical location.
Narrative Disclosure
The company will also need to:
- clearly describe (using the information in the table) the relationship between each of the financial performance measures in the table and the “executive compensation actually paid” to its PEO and the average “executive compensation actually paid” to its other NEOs over the five most recently completed fiscal years;
- describe the relationship between the company’s TSR and that of its peer group; and
- list three to seven financial performance measures that the company believes are its most important financial performance measures for the most recently completed fiscal year (using the same approach taken for the Company-Selected Measure in the table), and if the company so chooses, any non-financial measures that the company believes to be among the most important.
Transitional Relief
To implement the new rules, reporting in the first proxy or information statement will only be required for the three most recently completed fiscal years, with an additional fiscal year added in each of the two subsequent proxies or financial statements. For smaller reporting companies, reporting in the first proxy or information statement will only be required for the two most recently completed fiscal years, with an additional fiscal year added in the subsequent proxy or financial statement.
Implementation of the new rules will be complicated, particularly calculating the “executive compensation actually paid” in each fiscal year, identifying the most important financial performance measures and describing the relationship between each financial performance measure and the “executive compensation actually paid.” Companies will want to start working on the new disclosure soon and allow ample time to complete it.
If you have any questions about the final rules on pay versus performance disclosure, please contact a member of Harter Secrest & Emery’s Employee Benefits and Executive Compensation or Securities and Capital Markets groups at 585.232.6500 or 716.853.1616.
| Value of Initial Fixed $100 Investment Based On: | ||||||||
| Year (a) | Summary Compensation Table Total for PEO (b) | Compensation Actually Paid to PEO (c) | Average Summary Compensation Table Total for non-PEO NEOs (d) | Average Compensation Actually Paid to non-PEO NEOs (e) | Total Shareholder Return (f) | Peer Group Total Shareholder Return (g) | Net Income (h) | Company- Selected Measure (i) |