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It is hard to believe that preparations for the 2024 proxy season are already underway, and that means that we now must face the pay versus performance disclosure requirements yet again. I always like to point out that the process for new disclosure requirements is often an iterative one – we give it our best shot in the first year that the disclosure is required, and then we learn from what others have done and any guidance that the SEC provides to improve our disclosure in subsequent years. While consistency is an admirable quality for your SEC disclosures, it should not serve as a bar to making improvements when necessary.

Maybe it is just me, but I feel like our efforts toward complying with the pay versus performance disclosure requirements last proxy season were somewhat chaotic. The SEC did not give us a whole lot of time to get ready for the new disclosure requirements, although I am not too sure if more time would have helped all that much. The actual disclosure turned out to be pretty extensive, as compared to other disclosures related to executive compensation, and the valuation aspects turned out to be complex in some instances, adding to the overall burden. With all of that now behind us, we can now look to next proxy season’s disclosures with the wisdom of wizened veterans.

As Meredith recently noted in The Advisors’ Blog on CompensationStandards.com, the SEC Staff has been busy reviewing proxy statements from earlier this year to evaluate how we did with our first shot at pay versus performance disclosure. Overall, the critiques thus far have not been too bad. Compensation Advisory Partners released this summary of the first 16 comment letters. The comments focus on missing required disclosures and issues with calculating “compensation actually paid.” Here are the common topics noted in the memo, separated by disclosure issues and CAP calculation issues:

– Missing required elements of the disclosure, such as a description of the relationships between Compensation Actually Paid (CAP) and the metrics or the list of 3-7 financial performance measures used to link CAP with company performance;
– Including multiple Company-Selected Measures, or not including the Company-Selected Measure in the tabular list of 3-7 most important financial performance measures;
– Failing to provide a reconciliation of non-GAAP measures selected as the Company-Selected Measure (CSM) against GAAP financial statements;
– Using a TSR peer group that does not match either the industry group used for Regulation S-K in the 10-K performance graph or the compensation peer group disclosed in the CD&A; or
– Incorrect footnote descriptions to the table that suggest misinterpretation of the rules.
– Not including or not identifying all NEOs who served in each year in the table;
– Using partial compensation received for the year for individuals in the table (e.g., if an individual is promoted to a Named Executive Officer (NEO) role during the year, only including compensation earned for the period served as an NEO); and
– Footnotes indicating a “year over year” change in fair value for awards that should be valued as of the date of vesting, rather than at year end.

The memo then lists and summarizes each comment letter, ranked by the recipient company’s annual revenue.

Also, as I noted in the blog at the end of last month, the Staff issued nine new Regulation S-K Compliance and Disclosure Interpretations and updated one existing Regulation S-K Compliance and Disclosure Interpretation to provide guidance regarding the pay versus performance disclosure requirements.

Finally, I would like to point out the accumulation of knowledge that we have assembled in the “Pay-for-Performance” Practice Area on CompensationStandards.com, where we have posted the Treatise chapter on Item 402(v) of Regulation S-K along with many memos addressing the disclosure requirements and observations on the first round of disclosures. Armed with these resources, I hope that things will go smoothly with this next round of pay versus performance disclosures!

– Dave Lynn