SEC Adopts Pay Versus Performance Disclosure
On August 25, the SEC adopted rules requiring U.S. public companies to disclose information reflecting the relationship between executive compensation actually paid and the company’s financial performance. The Commission originally proposed pay-for-performance disclosure in 2015 but took no action. Comment on the 2015 proposals, with some modifications, was re-opened earlier this year. See SEC Wants to Hear More About Pay-For-Performance Metrics, January-February 2022 Update.
The pay versus performance rules will require companies to provide a table disclosing executive compensation and financial performance measures for the company’s five most recent fiscal years. With respect to compensation, this table must include, for the principal executive officer (“PEO”) and, as an average, for the other named executive officers (NEOs) in the Summary Compensation Table (required under the SEC’s compensation disclosure rules), total compensation as it appears in the Summary Compensation Table and a measure reflecting “executive compensation actually paid,” calculated as prescribed by the rule. With respect to performance measures, the new table must include:
Total shareholder return (“TSR”) for the company.
TSR for the company’s peer group.
The company’s net income.
The company-selected measure. This is a company-chosen and company-specific financial performance metric that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to NEOs to company performance for the most recently completed fiscal year.
The new rules will also require a “clear description” of the relationships between each of the financial performance measures included in the table described above and the executive compensation actually paid to the PEO and, on average, to the other NEOs during the prior five years. The company must also describe the relationship between the company’s TSR and its peer group TSR.
Finally, companies will be required to provide a list of the three to seven financial performance measures that are the most important measures in linking compensation actually paid to company performance. Companies may include non-financial measures in the list if they consider such measures to be among the three to seven most important measures.
The rules will apply to all SEC reporting companies, except foreign private issuers, registered investment companies, and emerging growth companies. Compliance will be required in proxy and information statements beginning for fiscal years ending on or after December 16, 2022.
At most companies, both the audit committee and the compensation committee will likely play a role in overseeing compliance with the pay versus performance disclosure rules. While the substance of how the company links pay and performance falls in the compensation committee’s realm, oversight of the procedures and controls that will be necessary to support the new disclosures is within the audit committee’s mandate.