On August 25th, the SEC announced that it has approved amendments to implement the pay versus performance provision as required by Congress in the Dodd-Frank Act. Under the newly adopted rules, registrants are required to disclose information about the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance.
The amended rules will enhance the current rulemaking by:
- facilitating shareholders’ access to the consistent, comparable, and helpful information needed to evaluate a public company’s decision-making regarding its executive compensation policies
- allowing for new, more flexible disclosures that enable companies to describe the performance measures it considers most important when determining what it pays executives
The SEC originally proposed amendments to add requirements to Item 402 of Regulation S-K regarding pay versus performance disclosures in April 2015 and reopened the comment period on the proposal in January 2022. The reopening release detailed how the additional disclosures could impact smaller registrants and solicited feedback on ways to reduce the impact on smaller registrants. This included exempting smaller reporting companies (SRCs) from certain aspects of the additional disclosures. Under the new rules, smaller reporting companies will be subject to scaled disclosure requirements.
The new rules would require registrants to:
- provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years
- 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
- 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
- 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
Under the new rules, registrants will be required 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. The rules will apply to all reporting companies, except foreign private issuers, registered investment companies, and emerging growth companies. Importantly, registrants will be required to use Inline XBRL to tag their pay versus performance disclosure. Information about what information must be tagged and how will be forthcoming.
The adopting release will be published on the SEC’s website and in the Federal Register. The final rules will be effective 30 days following the publication’s release in the Federal Register.
Sources:
SEC Adopts Pay Versus Performance Disclosure Rules (sec.gov)
SEC Rule (sec.gov)
Fact Sheet (sec.gov)
