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SEC Issues Pay Versus Performance Compliance & Disclosure Interpretations

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In August 2022, the Securities and Exchange Commission adopted a final rule requiring certain SEC registrants, excluding emerging growth companies (each, a “Registrant”), to provide certain tabular, narrative, and/or graphical disclosures describing the relationship between a Registrant’s executive pay and its financial performance for previous fiscal years (the “PVP Rule”). See Proxy Update for our general overview of the PVP Rule.

As with many new disclosure obligations, it appears that the early trend is to include the minimum necessary disclosure required to comply with the PVP Rule. However, even in attempting to prepare the minimum necessary disclosure required to comply with the PVP Rules, technical questions have arisen. On February 10, the SEC issued more than a dozen new C&DIs relating to the PVP Rules. The C&DIs are organized in a question-and-answer format. Below we have summarized the key take-aways of those C&DIs.

Summary of C&DIs

No Form 10-K Disclosure. The C&DIs confirm that the PVP Rule does not require the PVP disclosure to be included in the Form 10-K. Rather, the PVP disclosure must be provided in connection with any proxy or information statement for which disclosure under Item 402 of Regulation S-K is required. The PVP disclosure will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

Named Executive Officers. The C&DIs make two clarifications with respect to named executive officers (“NEOs”). First, where an NEO is new to an annual proxy statement’s Summary Compensation Table (“SCT”), a transition rule typically applies such that only the most recently completed year’s compensation information is reported. However, for PVP disclosure purposes, there is no similar ability to exclude prior years’ compensation for purposes of the various required calculations. In particular, equity awards granted in years before inclusion of an NEO in the SCT must still be considered in the PVP disclosure. Second, if a Registrant has multiple principal executive officers (“PEOs”) in a fiscal year, the PVP Rules require a separate column for each PEO in the PVP table. If not misleading to investors, the Registrant may aggregate (i.e., use the total sum of) the compensation of such PEOs in a given year for purposes of the narrative, graphical, or combined comparison between compensation actually paid and total shareholder return (“TSR”), net income, and the Company-Selected Measure.

Company-Selected Measure. Under the PVP Rule, a Registrant’s Company-Selected Measure must be a financial performance measure other than the Registrant’s net income and cumulative TSR, which are already required to be disclosed. With respect to the Company-Selected Measure, the C&DIs provide:

Footnote Disclosures. In several instances, the PVP Rule requires additional footnote disclosure relating to amounts disclosed in the PVP table. The C&DIs clarify the footnote disclosure requirement in two ways. First, in reporting “compensation actually paid,” the PVP Rule mandates footnote disclosure of the amounts added or subtracted, generally amounts related to equity awards and pension benefits, to or from SCT reported compensation. For the initial PVP table, the footnote disclosure should apply to all years reflected. After the first year, footnote disclosure for years other than the most recent fiscal year is required only if “material to an investor’s understanding” of the PVP disclosure. Second, in compiling the footnote disclosure reflecting amount added or subtracted to or from SCT reported compensation, a Registrant cannot disclose only an aggregate amount for equity award and pension benefits. Rather, each amount must be separately identified.

Peer Groups. With respect to the peer groups used in preparing the PVP disclosure, the C&DIs provide that, for purposes of calculating the Registrant’s peer group TSR, the Registrant is permitted to use a peer group disclosed in its Compensation Discussion & Analysis (“CD&A”) that is used in making executive compensation determinations, even if not used specifically for benchmarking purposes. Further, with respect to changing peer groups, the C&DIs require that, in the situation where a Registrant used one peer group in its 2020 and 2021 CD&A, but used a different peer group in its 2022 CD&A, the peer group TSR should be presented for each year using the peer group disclosed in the CD&A.

PVP Table Requirements. Finally, the C&DIs further elaborate on a few other aspects of the PVP table.

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We thoughtfully approach each of our client’s annual proxy statements and provide individually tailored solutions to help our clients both meet developing legal requirements and strengthen their investor relations. Please contact us if you would like to discuss the PVP Rule or your annual proxy statement.


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