Action Items

  • Review the U.S. Securities and Exchange Commission’s (the “SEC’s”) Compliance and Disclosure Interpretations (the “C&DIs”) described below for potential solutions to technical issues confronted while formulating your company’s pay versus performance (“PVP”) disclosure.
  • Consult with legal counsel, compensation consultants, and accountants regarding the impact of the C&DIs on the drafting and presentation of the required tabular, graphical, and/or narrative disclosures for your annual proxy statement.


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:

  • The Company-Selected Measure may be derived from, a component of, or similar to the Registrant’s net income and cumulative TSR. For instance, earnings per share, gross profit, income or loss from continuing operations, or relative TSR are all acceptable.
  • A Registrant’s stock price should not be used as its Company-Selected Measure if it is not used to link compensation actually paid to performance. In particular, if the only impact of stock price on an NEO’s compensation is through changes in the value of equity awards, the Registrant could not include its stock price as the Company-Selected measure. However, if, for example, the Registrant’s stock price is a market condition applicable to an incentive plan award or is used to determine the size of a bonus pool, it may be included as a Registrant’s Company-Selected Measure.
  • The Company-Selected Measure included in the PVP table cannot be measured over a multi-year period. The Company-Selected Measure is the measure which in the Registrant’s assessment represents the most important financial performance measure used by the Registrant to link compensation actually paid to the Registrant’s NEOs, for the most recently completed fiscal year, to company performance.
  • A Registrant that uses a “pool plan” to determine annual bonuses (with the size of the pool determined based on the achievement of a financial metric and awards under the pool discretionarily allocated by the compensation committee) may not eliminate the tabular list, the Company-Selected Measure or the related relationship disclosure, as the financial metric used to determine the pool is used to link the compensation actually paid to the Registrant’s performance.

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.

  • If a Registrant became publicly traded during the earliest year reflected in the PVP table, the measurement period for the relevant TSR calculations should begin on the registration date.
  • The PVP Rule requires “net income” to be included in column (h) of the PVP table. A Registrant must use the net income or loss required to be included in the Registrant’s audited GAAP financial statements pursuant to Regulation S-X. The Registrant is not permitted to use other net income amounts presented in the audited financial statements.
  • If a Registrant changes its fiscal year during the time covered by the PVP table, the Registrant should provide PVP disclosure for the “stub period” and not annualize or restate compensation. The Registrant’s PVP table should include the stub period until there is disclosure for five full fiscal years after the stub period.
  • Where a Registrant emerged from bankruptcy, and a new class of stock started trading, during the period reflected in the PVP table, the Registrant may provide its cumulative TSR and peer group cumulative TSR for the period beginning with the date on which the new stock commenced trading. The Registrant should provide footnote disclosure to explain the approach and its effect on the PVP table.

We Can Help You

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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