On January 27, 2022, the Securities and Exchange Commission (“SEC”) announced that it was reopening the comment period on the pay-versus-performance rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), which were previously proposed in 2015 but never finalized. The SEC is also considering adding new disclosure rules in the final pay-versus-performance rules. The SEC stated that the reopening of the comment period was due in part to regulatory and market developments since 2015, including developments in executive compensation practices. The new comment period closed on March 4, 2022.
Section 953(a) of the Dodd-Frank Act provides for the SEC to adopt rules requiring registrants to disclose how the executive compensation actually paid by the registrant relates to the financial performance of the registrant.
In 2015, the SEC proposed a new Item 402(v) of Regulation S-K to implement the required pay-versus-performance disclosure. Under the proposed rules, a registrant would be required to include in its proxy or information statement a new Pay Versus Performance table that includes the following information for each of the five most recently completed fiscal years (three years for smaller reporting companies):
- the Summary Compensation Table Total for the CEO;
- the compensation actually paid to the CEO;
- the average Summary Compensation Table Total for the NEOs other than the CEO;
- the average compensation actually paid to the NEOs other than the CEO;
- the cumulative total shareholder return (“TSR”) of the registrant; and
- for registrants other than smaller reporting companies, the cumulative TSR of the registrant’s peer group.
The compensation actually paid would be based on the Summary Compensation Table Total, but adjusted as follows:
- the value of equity awards would be included at the time of vesting instead of grant; and
- any changes in the actuarial present value of pension benefits that are not attributable to services provided in the applicable year would be excluded.
Following the table, registrants would be required to disclose the relationship of the compensation actually paid to its executives shown in the table compared to the registrant’s financial performance as reflected by its TSR, and the relationship of the registrant’s TSR to the TSR of its peer group.
Registrants would be allowed to supplement the disclosure to reflect the registrant’s particular circumstances and industry, such as supplemental measures of compensation or financial performance (e.g., realized pay or realizable pay), so long as the supplemental information is identified as such and is not misleading.
New Comments Requested
In addition to requesting comments on the 2015 proposed rules, the SEC’s 2022 release requested comments on the following:
- whether registrants should be required to disclose additional performance measures beyond TSR;
- whether pre-tax income and net income would be useful additional financial measures;
- whether registrants should be required to disclose the measure that in its assessment represents the most important performance measure used by the registrant to link compensation actually paid during a fiscal year to company performance; and
- whether registrants should also be required to disclose a tabular list of its five most important performance measures used to determine compensation actually paid.
Only three comment letters were received by the SEC in response to the SEC’s 2022 release, in contrast to the dozens received in 2015.
We now wait for the SEC to issue new proposed or final rules on pay-versus-performance disclosure and to see what they provide.
In October 2021, the SEC reopened the comment period on the proposed rules for the clawback of incentive-based compensation. The comment period for those rules has also ended and new proposed or final rules are expected.
We will monitor these proposals and provide updates as appropriate. In the interim, if you have any questions about the proposals, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group at 585.232.6500 or 716.853.1616.