On August 25, 2022, the Securities and Exchange Commission adopted a pay versus performance rule in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule requires a registrant to disclose, in a proxy statement or an information statement in which executive compensation disclosure is required to be included, how executive compensation actually paid by the registrant to its named executive officers is related to the financial performance of the registrant. The new rule is intended to “provide investors with important and decision-useful information for comparison purposes in one place when they evaluate a registrant’s executive compensation practices and policies, including for purposes of the shareholder advisory vote on executive compensation, votes on other compensation matters, director elections, or when making investment decisions.”
The new disclosure requirements do not apply to emerging growth companies, foreign private issuers and registered investment companies, and smaller reporting companies are permitted to provide scaled disclosure.
New Disclosure Requirements
In addition to the executive-pay summary compensation table that is currently required in proxy and information statements, registrants are now required to include a new table that provides a five-year history of pay versus performance-related metrics, subject to the transition rules set forth below. See Appendix A for the format of the new table.
The following information must be disclosed in the new compensation table for named executive officers, including a registrant’s principal executive officer:
- Total shareholder return for the registrant;
- Total shareholder return for the registrant’s peer group;
- The registrant’s net income; and
- A financial performance measure selected by and specific to the registrant (the “Company-Selected Measure”) that the registrant determines is the most important metric it uses to link compensation actually paid to its named executive officers with company performance.
Registrant’s will also be required to provide a description of the relationships between each of the financial performance measures included in the table and the executive compensation paid to its named executive officers. Furthermore, a registrant will be required to provide a list of three to seven financial performance measures that it determines are its most important measures (using the same approach as taken for the Company-Selected Measure). Finally, a registrant will be required to include a comparison of its’ total shareholder return and peer group total shareholder return. A registrant may, but is not required to provide, non-financial measures in the list if it considers such measures to be among the three of seven most important measures.
There is no required location for the pay versus performance disclosure, however, all pay versus performance disclosure will require iXBRL tagging.
Scaled Disclosure for Smaller Reporting Companies
Smaller reporting companies will be subject to scaled disclosure which will require them to provide disclosure for the most recent three years. In addition, smaller reporting companies will not be required to provide peer group total shareholder return or the Company-Selected Measure, and the calculation of executive compensation actually paid may exclude amounts relating to pensions. Furthermore, smaller reporting companies may avail themselves to phrase-in rules with respect to iXBRL tagging. Specifically, a smaller reporting company does not need to comply with the iXBRL tagging requirement until the third filing in which it provides pay versus performance disclosure.
Compliance Period and Transition Rules
Companies must begin to comply with the pay versus performance disclosure requirements in proxy and information statements for fiscal years ending on or after December 16, 2022. Under the transition rules, companies (other than smaller reporting companies) will only be required to provide disclosure for three years in the first proxy or information statement in which disclosure is provided, adding one additional year of disclosure in each of the two subsequent annual proxy filings that require such disclosure. Under the transition rules, smaller reporting companies will only be required to provide disclosure for two years in the first proxy or information statement in which disclosure is provided, adding one additional year of disclosure in the subsequent proxy or information statement filing that requires such disclosure.
The pay versus performance rule will be effective 30 days after its publication in the Federal Register. The final rule is available here and the fact sheet summarizing the rule is available here.
This publication, which we believe may be of interest to our clients and friends of the firm, is for general information only. It should not be relied upon as legal advice as facts and circumstances may vary. The sharing of this information will not establish a client relationship with the recipient unless Sheppard Mullin is or has been formally engaged to provide legal services.
PAY VERSUS PERFORMANCE
|Year||Summary Compen-sation Table Total for PEO||Compen-sation Actually Paid to PEO||Average Summary Compen-sation Table Total for Non-PEO NEOs||Average Compen-sation Actually Paid to Non-PEO NEOs||Value of Initial Fixed $100 Investment Based On:||Net Income||[Company Selected Measure]* (i)|
|Total Share-holder Return||Peer Group Total Shareholder Return|
* The title of column (i) of the table, “Company-Selected Measure,” should be replaced with the name of the registrant’s most important measure, and that column should include the numerically quantifiable performance of the registrant under such measure for each covered fiscal year.