Pay versus performance: navigating the SEC’s newly adopted rule

The Securities and Exchange Commission (SEC) announced on August 25 that it has adopted regulations requiring companies to report the relationship between executive compensation and business performance (known as pay versus performance). Public companies with fiscal years ending on or after December 16 must comply with the new disclosure requirements in their next proxy statements—which means preparing for the 2023 proxy season is now a bit more complicated.

What you need to do

First proposed in 2015, the pay versus performance regulations require a new table containing specific data points—initially for a company’s three most recently completed fiscal years and eventually for the five most recently completed fiscal years. The first four columns of the table will show the difference between the compensation reported in the Summary Compensation Table for the top executives and the compensation paid to those individuals during the year. The next four columns will disclose the company’s total shareholder return, total shareholder return for a peer group, the company’s net income, and results for an additional company-selected financial performance measure.

In addition to the table, companies must provide a “clear description” of the relationship between their reported financial performance and the compensation paid to their executives. This can be done in a narrative form, with graphics, or using a combination of words and graphics.

Finally, companies must provide a list of the three to seven performance measures (at least three of which must be financial) they deemed the most significant for determining executive pay in the most recent fiscal year. This table may be accompanied by a discussion, but that is not required.

The disclosure requirements for Smaller Reporting Companies are less demanding. Click here for the complete SEC fact sheet.

Challenges you may face

Our experts have been anticipating the adoption of this rule since it was first proposed. We understand this presents challenges, particularly in the first year.

For instance, providing a “clear description” of the relationship between executive compensation and financial performance will require a carefully crafted strategy that provides appropriate context for the required table.

Similarly, companies will need to decide how, if at all, to explain their list of additional performance measures. If the list changes in a future proxy, that may warrant additional explanation.

Finally, the rules do not specify where the new disclosure should appear in proxy statements. Companies will need to decide whether to expand their CD&A sections, add the new disclosure to the end of their compensation tables (as many have done with the CEO pay ratio disclosure), or follow a middle ground—offering highlights in the CD&A but providing the full disclosure with the compensation tables.

We are ready to help you navigate this new disclosure and address compliance challenges for 2023 and beyond.

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By |2022-10-21T17:39:09-04:00September 21st, 2022|Categories: Articles, Lab Insight|Tags: , , , , |Comments Off on Pay versus performance: navigating the SEC’s newly adopted rule
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