August 26, 2022

Late Summer Surprise: SEC Adopts Pay Versus Performance Disclosure Requirement

Typically, the last two weeks of August are a pretty quiet time on the regulatory front. Not so for the SEC in 2022! At long last, the SEC finally got around to adopting the pay versus performance disclosure requirements that they were directed to adopt by the Dodd-Frank Act over a dozen years ago. The surprise rulemaking action is described in a press release and fact sheet.

Earlier this year, the SEC had reopened the comment period for the rules that had originally been proposed in 2015 to implement Section 953(a) of the Dodd-Frank Act, which would require a comparison of a company’s performance to the compensation actually paid to the company’s principal executive officer and other executive officers. In reopening the comment period, the SEC acknowledged “[s]ince the Proposed Rules were published, executive compensation practices related to company performance have continued to develop and evolve, to the point that we believe interested persons should be given a further opportunity to analyze and comment upon the Proposed Rules.”

New Item 402(v) of Regulation S-K will require that companies provide a table disclosing specified executive compensation and financial performance measures for the company’s five most recently completed fiscal years. This table will include, for the principal executive officer and, as an average, for the other named executive officers, the Summary Compensation Table measure of total compensation and a measure reflecting “executive compensation actually paid,” as specified by the rule. The financial performance measures to be included in the table are:

– Total shareholder return for the company;

– TSR for the company’s peer group;

– The company’s net income; and

– A financial performance measure chosen by the company and specific to the company that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company’s NEOs to company performance for the most recently completed fiscal year.

In addition, Item 402(v) require a clear description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its principal executive officer and, on average, to its other named executive officers over the company’s five most recently completed fiscal years. The company will be required to also include a description of the relationship between the company’s TSR and its peer group TSR.

Item 402(v) also requires a list of three to seven financial performance measures that the company determines are its most important measures. Companies are permitted, but not required, to include non-financial measures in the list if they considered such measures to be among their three to seven “most important” measures.

The pay versus performance disclosure will need to be tagged using Inline XBRL. The disclosure requirements do not apply to emerging growth companies, registered investment companies, or foreign private issuers.

Not surprisingly, Commissioners Peirce and Uyeda did not support the final rule. Commissioner Peirce issued a statement saying the rule “will elicit costly, complicated, disclosure of questionable utility” and Commissioner Uyeda issued a statement questioning the SEC’s compliance with the Administrative Procedure Act by adopting a long dormant rule proposal after issuing an insufficient “reopening” release.

– Dave Lynn