SEC Ruling Requires Executive Pay Versus Performance Disclosures
Workspan Daily
August 30, 2022
Key Takeaways

  • SEC passes new exec comp disclosure rules. Under the new rules, U.S. public companies must provide a new table in their annual proxy filings that contains executive compensation and financial performance measures covering a period of up to five years.  
  • Prepare for 2023 proxy season. Companies will have to file the new pay versus performance information for fiscal years 2020 through 2022 beginning in 2023.  
  • The pay versus performance table. Companies must complete a table with information on total shareholder return, indexed total shareholder return for the company’s benchmarking peer group, the company’s net income and a company-chosen financial performance measure.   
  • List performance measures. Companies must list three to seven financial performance measures that the company believes are its most important measures for the most recently completed fiscal year with an allowance for including non-financial measures as well. 

Organizations will be required to disclose information on the relationship between executive pay and performance measures beginning in their 2023 proxy statements.  

In a 3-2 vote on Thursday, the Securities and Exchange Commission (SEC) adopted final rules implementing the pay versus performance disclosure requirement as established by the Dodd-Frank Act, which was intended to discourage financial fraud and better align executive compensation with corporate results.   

Under the rule, U.S. public companies must provide a new table in their annual proxy filings that contains executive compensation and financial performance measures covering a period of up to five years. Companies must comply in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after Dec. 16, 2022. Companies are required to provide information for the previous three years, adding another year of disclosure in each of the two subsequent annual proxy filings.  

“This is one of the most significant SEC developments in the executive compensation arena in the last decade,” executive compensation consulting firm FW Cook wrote in a blog. “Compliance in the first year will no doubt be a challenge for companies; especially around completely new requirements such as identifying the most important financial measures used to link pay and performance and calculating ‘actually paid’ compensation.”  

The rules apply to all reporting companies, except foreign private issuers, registered investment companies and emerging growth companies, per the SEC fact sheet. Smaller Reporting Companies (SRCs) will be permitted to provide “scaled disclosures.”  

The table must include for the principal executive officer and, as an average, for the other named executive officers, the total compensation as presented in the Summary Compensation Table and a measure of “executive compensation actually paid,” which should be calculated according to the rules.  

The table should include the following financial performance measures:  

  • Total shareholder return (TSR) 
  • Indexed TSR for the company’s benchmarking peer group  
  • The company’s net income 
  • Financial performance measure chosen by the company and specific to the company in that, in the company’s assessment, it represents the most important financial performance measure it uses to link compensation actually paid to named executive officers for the most recently completed fiscal year. 

The final rules also require: 

  • A description of the relationships between TSR, each of the financial performance measures included in the table, the executive compensation actually paid to the principal executive officer and named executive officers over the five most recently completed fiscal years; 
  • A description of the relationship between the company’s TSR and that of its peer group;  
  • A list of three to seven financial performance measures that the company believes are its most important measures for the most recently completed fiscal year with an allowance for including non-financial measures as well. 

A previous Workspan Daily article noted that the SEC wants this information because it believes existing disclosures are not sufficiently transparent for shareholders to compare pay for performance analyses across companies. The new Pay vs. Performance table “will present both tactical and strategic considerations for companies.”  

The final rules will become effective 30 days following publication of the release in the Federal Register. 

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