TheCorporateCounsel.net

The new pay versus performance disclosure requirement is a big focus right now, as issuers begin preparing their proxy statements for 2023 annual meetings. As with any new rule, there are inevitably quite a few interpretive questions that come up when trying to apply the SEC’s disclosure requirements to real world situations.

Often (although not always) the Staff in Corp Fin will endeavor to provide guidance on new rules through Compliance and Disclosure Interpretations or some other form of Staff guidance. It is not too late for that to happen in the context of the pay versus performance rules, although many expected Staff guidance to be released some time last month. In the absence of formal Staff guidance, we fortunately still have the good old word-of-mouth method, where members of our community report on conversations that they have had with the Staff on interpretive issues.

One interpretive issue that came up pretty early on relates to the presentation of a peer group TSR in the pay versus performance table. The rule provides two options: (1) the same index or issuers used for purposes of the performance graph; or (2) the companies used as a peer group for purposes of the issuer’s disclosures under paragraph Item 402(b) of Regulation S-K, which presumably is referring to Item 402(b)(2)(xiv), which states “whether the registrant engaged in any benchmarking of total compensation, or any material element of compensation, identifying the benchmark and, if applicable, its components (including component companies).”

The logical conclusion that some drew from this regulatory text was that they could use the companies comprising the peer group discussed in their CD&A as the same peer group for which TSR is presented in the pay versus performance table. However, as we discussed during our November program on CompensationStandards.com “Special Session: “Tackling Your Pay Vs. Performance Disclosures,” the Staff’s initial reaction to that interpretive question was that the peer group disclosed in the CD&A could only be used for the pay versus performance table if that peer group was used for “benchmarking” purposes. For purposes of the CD&A, “benchmarking” refers to the tying of specific elements of compensation to a benchmark, as opposed to, for example, simply using comparable company data as a market check after arriving at compensation decisions based on some other method. Today, most companies avoid “benchmarking” as that term is contemplated in Item 402(b), and instead reference a peer group of companies in the CD&A for broader purposes. As a result, for most companies, this informal Staff interpretive guidance limits the peer group used for the pay versus performance table to the same peer group that is used for purposes of the performance graph.

– Dave Lynn