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In connection with last week’s Special Session: “Tackling Your Pay Vs. Performance Disclosures” over on CompensationStandards.com, I put together some model disclosure that we discussed during one of the three panels. During the program, I described the process of drafting the model disclosure as “psychologically painful,” because the new rule is very prescriptive and elicits quite a bit of disclosure – perhaps more than many had anticipated! As you put “pen to paper” in the coming weeks to draft your new pay versus performance disclosure, I thought I would share some of my five key takeaways from the drafting process.

1. It is a lot of disclosure! My initial thought was that maybe this new disclosure will be similar to the Summary Compensation Table – multiple columns with some footnotes, along with narrative describing the relationships. That was definitely not what the disclosure turned out to be once it was drafted – our model disclosure goes on for 7 pages, which is made up of the main table, an extensive series of footnotes to that table and narrative analyzing the information in the table, which includes a series of graphs comparing the data. For many companies, this would be about the same number of pages of the proxy statement that are dedicated to all of the executive compensation tables combined.

2. The footnotes have footnotes. Item 402(v) is very prescriptive and calls for a great deal of detail to support the figures that are presented in the Pay Versus Performance Table. As a result, our model disclosure has about two and a half pages of footnote disclosure associated with the table itself, with some of the footnotes including more detail in tables that themselves have more footnotes associated with them. There is certainly some opportunity for streamlining here with careful drafting, but the overall takeaway is that there is inevitably going to be a lot of dense footnote disclosure to navigate with the Pay Versus Performance table, no matter how you slice it.

3. “Compensation actually paid,” explained. One of the biggest challenges with the Pay Versus Performance table is trying to explain the complex “compensation actually paid” calculation and providing the supporting data in a manner that is understandable for investors. The “compensation actually paid” concept is something that is entirely new, so investors are going to need a pretty clear roadmap to understand why the numbers came out the way they did given your company’s particular circumstances.

4. Let the disclaimers begin. The concept of “compensation actually paid” is a new one as I mentioned, and it also does not really represent the actual amount of compensation that was earned by or paid to the principal executive officer and the other named executive officers as a group in the years presented. For that reason, our model disclosure included the following disclaimer language: “The dollar amounts reported in column (c) represent the amount of “compensation actually paid” to [the PEO], as computed in accordance with Item 402(v) of Regulation S-K. The dollar amounts do not reflect the actual amount of compensation earned by or paid to [the PEO] during the applicable year.” I believe that it is important to include some sort of disclaimer language along these lines to put the information in context and to convey that, despite the title, “compensation actually paid” is just another theoretical number like realized pay, realizable pay or even the total compensation column of the Summary Compensation Table.

5. Don’t forget the analysis! As Mark Borges pointed out during last week’s program, with so much focus on calculating “compensation actually paid” and preparing the Pay Versus Performance table, it is easy to overlook the importance of preparing “clear” descriptions of the relationships between the various measures of performance included in the table and the “compensation actually paid.” This is the part of the disclosure that will require some careful drafting and consideration of the information about pay versus performance that is discussed in the CD&A. In our model disclosure, we use a combination of narrative and graphics to provide the required “clear” descriptions of the relationships.

If you missed the live event last week, you can still purchase the recording by contacting a member of our Sales Team at Sales@CCRcorp.com or 800.737.1271. Archive sales end November 30, 2022.

– Dave Lynn