SEC ReOpens Comment Period For Pay Versus Performance

On January 27, 2022, the SEC re-opened the comment period on proposed rules under the Dodd-Frank Act requiring disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance (“Pay vs. Performance”).  The rules were previously proposed in April 2015, and have languished since then (see HERE).  In addition to re-opening the comment period on the 2015 proposed rules, the SEC has expanded the proposal to include additional performance metrics.

The SEC administration under Gary Gensler has been actively tacking compensation and insider trading related issues recently including re-visiting executive compensation clawback rules (see HERE); publishing new guidance on disclosures and accounting for spring-loaded compensation awards (see HERE); proposing amendments to Rule 10b5-1 insider trading plans (see HERE); and proposing new share repurchase program disclosure rules (see HERE).


Section 953(a) of the Dodd-Frank Act added Section 14(i) to the Securities Exchange Act of 1934 (“Exchange Act”). Section 14(i) requires the SEC to adopt rules mandating issuers to disclose, in any proxy or consent solicitation material for an annual meeting of shareholders, a clear description of any compensation required to be disclosed Item 402 of Regulation S-K.  Item 402 sets forth the disclosure requirements related to executive compensation.  Section 14(i) would add Item 402(v) to require that the disclosure include the relationship between executive compensation actually paid and the financial performance of the company taking into account any change in the value of the shares of stock and dividends of the company and any distributions. Section 14(i) further provides that the disclosure may include a graphic representation of the information required to be disclosed.

Although the current rules require many metrics and details on executive compensation, none previously have required a specific disclosure on the relationship between pay and performance.  The Compensation Discussion and Analysis (CD&A) required by Item 402(b) requires an explanation of “all material elements of the registrant’s compensation of the named executive officers” and requires general discussions of performance including disclosure of any bonus structures and performance-based compensation.  The new disclosure requirements will supplement this information by providing a factual description of how the executive compensation actually paid related to the financial performance of the company.

Proposed Rules

In accordance with the proposed rules, a company must include a new table disclosing compensation “actually paid” to the principal executive offer or CEO and to the other named executive officers and the corresponding “total compensation” amounts for the prior five fiscal years or three fiscal years for smaller reporting companies.  The five- or three-year look-back, as applicable, is subject to a phase-in period for the new rules.  The table must include:

  • The total executive compensation of the principal executive officer (“PEO”) and the average of the total compensation of other named executive officers (“NEO”) as reported in the summary compensation table (note the summary compensation table is already a required Item 402 disclosure in proxy and information statements);
  • The executive compensation “actually paid” to the PEO and the average of the executive compensation actually paid to the other NEO.  The new proposed rules delineate the required elements and calculation for this disclosure;
  • The cumulative total shareholder return (TSR), calculated in the same manner as the performance graph already required by current SEC rules.

Item 402 defines the NEOs for whom disclosure is required as: (i) all individuals serving as the registrant’s principal executive officer (“PEO”) or acting in a similar capacity during the last completed fiscal year, regardless of compensation level, (ii) all individuals serving as the registrant’s principal financial officer (“PFO”) or acting in a similar capacity during the last completed fiscal year, regardless of compensation level, (iii) the registrant’s three most highly compensated executive officers other than the PEO and PFO who were serving as executive officers at the end of the last completed fiscal year, and (iv) up to two additional individuals for whom Item 402 of Regulation S-K disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the registrant at the end of the last completed fiscal year.

The new proposed disclosure requirements will not apply to emerging growth companies or foreign private issuers.  In addition, smaller public companies will have a scaled back disclosure requirement – for a refresher on the definition of a smaller reporting company, see HERE.

Disclosure of compensation “actually paid”

The proposed new rules delineate the elements of and calculation for the required compensation “actually paid” disclosure.  For smaller reporting companies, the compensation “actually paid” is the executive compensation reported in the Summary Compensation Table disclosure already required to be disclosed in the proxy and information statements in accordance with existing Item 402.  All companies other than smaller reporting companies must then modify the disclosed amount to exclude changes in actuarial present value of benefits under defined benefit and actuarial pension plans that are not attributable to the applicable year of service, and to include the fair value of equity awards at vesting rather than when granted.

Relationship with Total Shareholder Return (TSR)

The new rules require companies to measure financial performance using TSR as defined in Item 201(e) of Regulation S-K and to make a comparison with the TSR of the company and the compensation actually paid for both the CEO and an average of all the other named executive officers.  Using the values disclosed in the table, the company must disclose the relationship between the executive compensation actually paid and the company’s TSR. The company can make the disclosure either using a narrative discussion, a graph or a combination of both.  Interestingly, the company has flexibility as to the location of the discussion and it is not required to be included in the CD&A section.  Companies that are not smaller reporting companies must also provide disclosure on the relationship between the company’s TSR and the TSR of a peer group as chosen by the reporting company.

In addition to TSR, the SEC is considering requiring a tabular disclosure of pre-tax income, net income and a company selected measure that would be specific to each registrant.  A company would be required to provide a clear description of the relationship among the measures provided in the tabular form (including these three additional measures we are considering requiring), but would be allowed to choose the format used to present the relationship, such as a graph or narrative description.

Additional and Supplemental Disclosure

The reporting company may provide additional and supplemental disclosure to the extent that such additional disclosure is useful to an understanding of the pay vs. performance discussion.  As with any information, the additional information cannot be misleading or detract from the basic disclosure elements required by the new proposed rules.

Inline XBRL Tagging

The new disclosure must be tagged using Inline XBRL.


The rule allows for a phase-in period.  In the first filing following the effectiveness of the proposed rule, companies will only be required to provide two years of disclosure and will need to add an additional year of disclosure for each subsequent year’s filing until the required number of years of disclosure has been achieved (3 years for smaller reporting companies and 5 years for all others).

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