SEC Issues Final Rule on Pay Versus Performance Disclosure

The Securities and Exchange Commission (SEC) has released final rules implementing the pay versus performance requirement as required by Congress in the Dodd-Frank Act. The rules will require registrants to disclose, in proxy or information statements in which executive compensation disclosure is required, how executive compensation actually paid by the registrants related to the financial performance of the registrants over the time horizon of the disclosure. SEC stated that the new, more flexible disclosures allow companies to describe the performance measures it deems most important when determining what it pays executives. SEC proposed pay versus performance disclosure rules in 2015 and reopened the comment period on the proposal in January 2022.

The final rules are intended to:

Specifically, the "New Item 402(v) of Regulation S-K" will require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. With respect to the measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income, and a financial performance measure chosen by the registrant. Using the information presented in the table, registrants will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. A registrant will also be required to provide a list of three to seven financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance. Smaller reporting companies will be subject to scaled disclosure requirements under the rules.

Registrants must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.