In August of 2022, the Securities and Exchange Commission ("SEC") passed the Pay versus Performance ("PvP") disclosure rules, with implementation effective beginning with the 2023 proxy reporting season.

What Information Is Required in the Pay Versus Performance Disclosure?

Under these rules, companies are required to provide the following information in their proxy statement:

Tabular disclosure of:

  • Summary Compensation Table ("SCT") pay for the Principle Executive Officer ("PEO")/CEO and the other named executive officers ("NEOs");
  • The amounts of compensation actually paid ("CAP") to the PEO and other NEOs;
  • The company's and peer group's total shareholder return ("TSR");
  • The company's net income and another company-selected performance metric ("CSM"); and
  • An unranked list of the most important performance measures used to link executive CAP during the last fiscal year.

Companies must also provide a clear description (graphic, narrative or combination) of the relationship between the CAP and the company's and peer group's TSR, net income and the company's CSM.

SEC Guidance After the First Year of PvP

Following the initial promulgation of the final rules, the SEC has issued numerous Compliance and Disclosure Interpretations ("CDIs") and Staff Comment Letters relating to the PvP disclosures. The overarching theme of these CDIs and Staff Comment Letters is to help clarify the requirements for the disclosures so that companies can accurately meet the requirements for the disclosures while also helping investors so that they can better understand what the disclosed information means. Below are some highlights from the CDIs and Staff Comment Letters that we think are helpful to our clients as they prepare for the second year of PvP disclosures.

How the SEC Guidance Impacts How Companies Should Prepare for the Upcoming Year of PvP Disclosures?

Clarity in PvP Reporting

The SEC issued its first group of 16 Staff Comment Letters in July and August 2023 relating to an initial batch of company PvP disclosures filed in the period immediately after the disclosure rule went into effect. These Letters were issued in response to 16 company filings that the SEC reviewed. The Staff Comment Letters contain specific feedback for the companies listed in each Letter and explain to the companies the issues the SEC found in their respective filings relating to the PvP disclosure requirements. The Letters show that the SEC is focused on ensuring clear disclosure for the PvP section, and each impacted company was asked to respond to their respective Staff Comment Letter and confirm that they would revise their future proxy disclosures in accordance with the topics discussed in their Letter.

Below are six representative examples of the issues the SEC was concerned about in this first batch of Staff Comment Letters:

  1. Provide clear descriptions of the relationship between CAP and net income. The SEC noted that it is not sufficient to state that no relationship exists, even if a particular measure is not used in setting compensation. (Link to Letter A).
  2. When using non-GAAP measures as the Company-Selected Measure ("CSM"), the SEC requires clear disclosure regarding how the CSM is calculated from the company's audited financial statement. (Link to Letter B).
  3. Identify the officers included in the calculations. Specifically, the SEC requires a footnote of the name of the principal executive officer ("PEO") and each NEO included in the calculation of average non-PEO NEO compensation. Additionally, the footnote must indicate which officer is included in each fiscal year calculation. (Link to Letter C).
  4. Ensure that disclosures reflect accurate amounts and correct terminology from the PvP table (Link to Letter D). Here, the SEC noted that a graph titled "Absolute Pay vs. TSR Alignment" showed summary compensation table amounts for the PEO and NEO average even though the vertical bars identified the data as PEO CAP and NEO Average CAP. Additionally, the SEC noted that it was not clear why the title used "Absolute Pay," or why the title referred to TSR but not to Operating Income, which was included in the graph. The SEC reminded the company that the requirements for the PvP disclosure are to describe the relationship between CAP and TSR, and CAP and the Company-Selected Measure, respectively. In this instance, the company did not clearly show the relationship and used confusing and inaccurate terminology.
  5. Confirm the correct summary compensation table amounts are used in the PvP tables (Link to Letter E). The SEC noted that the amounts listed for 2021 and 2022 in column (b) of the PvP table are not the same as the amounts listed for those years in the PEO Total column of the Summary Compensation Table. Similarly, the average of the non-PEO NEO amounts reported in column (d) of the PvP table do not appear to be consistent with the amounts reported in the Total column of the Summary Compensation Table for the non-PEO NEOs. The PvP table is required to show the total amount from the Summary Compensation Table. This is an easy data point for the SEC to check and this letter proves that the SEC is checking for accurate information.
  6. Using accurate table headings and footnotes for the PvP table (Link to Letter F). The SEC noted that the heading used in one of the footnotes to the PvP table was not clear to the SEC. Specifically, the heading used said "Year over Year Change in Fair Value of Equity Awards Granted in Prior Years that Vested in the Year." However, the disclosure requires that equity awards granted in prior years that vest during the relevant year should be valued as the difference between the fair value as of the end of the prior fiscal year and the vesting date, not the "year over year" change in value. The SEC wants the labels used in the disclosure and footnotes to match the language in the regulations. Additionally, the SEC noted that a footnote for the 2022 disclosure of average Summary Compensation Table total for non-PEO NEOs was meant to include two people and three people for 2021. However, the table appears to only include one person's pay and, therefore, the footnote and the data disclosed in the table do not appear to accurately relate to one another.

Market Conditions

In September 2023, the SEC issued a CDI regarding market conditions and how they affect the fair value of an award (Link to CDI Question 128D.16). The CDI states that in accordance with FASB ASC Topic 718, the effect of a market condition should be reflected in the fair value of share-based awards with such a condition. Additionally, market conditions should be considered in determining whether an award has vested. Until a market condition is satisfied, companies must include the change in fair value of any awards subject to market conditions in the CAP calculation. If the failure to satisfy the market conditions ultimately resulted in the forfeiture of the award, the fair value at the end of the prior fiscal year for the award should be deducted from CAP.

Retirement Eligibility

The SEC issued additional CDIs in September and November 2023 clarifying how to treat awards with retirement eligibility conditions (Link to CDI Question 128D.18). Retirement eligibility conditions are provisions that provide for accelerated or continued vesting upon retirement if an executive meets certain conditions (which can include age and/or years of service, and in some instances, notice). If retirement eligibility is the sole vesting condition (i.e., there are no other forfeiture conditions that could impact whether the awards vest once the retirement eligibility criteria is reached), the CDIs clarify that the award is treated as CAP in the year the holder becomes retirement eligible. However, if retirement eligibility is not the only vesting condition (i.e., the award is still subject to some other forfeiture condition), then the awards other substantive vesting conditions need to be considered when determining when an award has vested. Other substantive vesting conditions include, but are not limited to, a market condition or a condition that results in vesting upon the earlier of the participant's retirement or the satisfaction of the requisite service period.

Index vs. Peer Group Tracking

Lastly, in November 2023, the SEC issued a CDI clarifying which peer group should be presented when the disclosing company changes peer groups from one year to the next (Link to CDI Question 128D.07). Specifically, the CDI addresses a question asking if a company used the same peer group in 2020 and 2021 in its Compensation Discussion & Analysis ("CD&A") but then used a different peer group in its 2022 CD&A, may the company present the peer group TSR for each of the three years using the 2022 peer group in its initial PvP disclosure? The SEC rejected this approach. Specifically, the SEC said the company should present the peer group TSR for each year in the PvP table using the peer group disclosed in the CD&A for such year. The SEC further provides that beginning with 2024 proxy filings (i.e., disclosing 2023 compensation), if the company uses the same peer group for 2023 as it used in 2022, then the company should present its peer group TSR for each of the reporting years using the 2023 peer group. However, if there are changes to the peer group in a subsequent year, the company must provide disclosure of the change in accordance with Regulation S-K Item 402(v)(2)(iv) (Link to Item 402(v)(2)(iv)). This disclosure requires a company to explain in a footnote the reasons for the change and compare the company's cumulative TSR with both the newly selected peer group and the peer group used in the immediately preceding fiscal year.

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