Sec Proposes Anticipated Rules on Pay-Versus-Performance Disclosure

On April 29, 2015, the SEC, in a 3-2 vote of the SEC Commissioners, approved proposed rules (the “pay-versus-performance disclosure”) that would require an issuer to disclose the relationship between the issuer’s executive compensation and the issuer’s financial performance. The proposed rules would implement a disclosure obligation required under Section 953(a) of the Dodd-Frank Act. Chair White noted, in the SEC press release announcing the proposed rules, that the pay-versus-performance disclosure “would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance.”

In particular, the proposed rules would amend Item 402 of Reg. S-K by adding a new Item 402(v) which would require issuers to disclose, in each proxy or information statement requiring executive compensation disclosure under Item 402 of Reg. S-K, the following:

  • the executive compensation “actually paid” to the issuer’s principal executive officer (“PEO”);
  • the executive compensation “actually paid” to the issuer’s named executive officers (“NEOs” ), expressed as an average for all such NEOs;
  • the issuer’s total shareholder return (“TSR” ); and
  • the TSR of a peer group of issuers.

Like all disclosures required under Item 402 of Reg. S-K, the pay-versus-performance disclosure would be subject to the say-on-pay advisory vote.

Compensation Actually Paid

Under the proposed rules, the executive compensation “actually paid” by an issuer means the total compensation for a particular executive disclosed in the summary compensation table adjusted by certain amounts related to pensions and equity awards. The adjusted disclosure represents an attempt by the SEC to reflect the compensation awarded to, or earned by, such executive officer in a particular year of service. In order to calculate the compensation “actually paid” to a particular executive officer, the total compensation disclosed for such executive officer in the summary compensation table would be adjusted to:

  • deduct the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans reported in the Summary Compensation Table;
  • add back the actuarially determined service cost for services rendered by the executive officer during the applicable year;
  • exclude the grant date value of any stock and option awards granted during the applicable year that are subject to vesting; and
  • add back the value at vesting of stock and option awards that vested during the applicable year, computed in accordance with the fair value guidance in FASB ASC Topic 718.

An issuer would need to include footnotes to the pay-versus-performance summary table (see below for the form table) which describes the amounts excluded from and added to the total compensation reported in the summary compensation and the issuer’s vesting date valuation assumptions used (if materially different from the grant date assumptions disclosed in the issuer’s financial statements).

In addition to the required disclosure, an issuer would be permitted to make disclosures to capture the issuer’s specific situation and industry, provided that any supplemental disclosure is not misleading and not presented more prominently than the required pay-versus-performance disclosure. Examples of supplemental disclosure provided in the proposed rules include the disclosure of “realized pay” or “realizable pay” or additional years of data beyond the time periods required.

Peer Group

The peer group utilized for the TSR comparison would be the same peer group used by the issuer in its stock performance graph or in describing the issuer’s benchmarking compensation practices in its CD&A.


The pay-versus-performance disclosure must be provided in tabular form as set forth below.

Year(a) Summary Compensation Table Total For PEO(b) Compensation Actually Paid to PEO(c) Average Summary Compensation Table Total for non PEO Named Executive Officers(d) Average Compensation Actually Paid to non PEO Named Executive Officers(d) Total Shareholder Return(f)

Peer Group Total Shareholder Return


Following the pay-versus-performance disclosure table, the issuer would be required to describe the relationship between the issuer’s executive compensation actually paid and the issuer’s TSR and the relationship between the issuer’s TSR and the peer group’s TSR.

Issuers will generally need to make the pay-versus-performance disclosure for its five (or three years, in the first applicable filing following the effectiveness of the proposed rule) most recently completed fiscal years.  However, smaller reporting companies will only need to make the disclosure for three years (or two years, in the first applicable filing following the effectiveness of the proposed rule).  In addition, a smaller reporting company would not be required to (i) disclose amounts relating to pensions (consistent with current executive compensation disclosure obligations); nor (ii) present the TSR of a peer group in its pay-versus-performance disclosure.


Companies would be required to tag the pay-versus-performance disclosure using XBRL.  Smaller reporting companies would not be required to comply with the tagging requirement until the third filing in which the pay-versus-performance disclosure is provided.

Companies to which Disclosure Requirement Applies

The proposed pay-versus-performance disclosure rules would apply to all reporting companies, except registered investment companies, foreign private issuers and emerging growth companies.


It is unclear whether the pay-versus-performance disclosure will be adopted (and in effect) in time for the 2016 proxy season.  The SEC is seeking comments on the proposed rules for 60 days following their publication in the Federal Register.

Disclosure Pendulum May Start Swinging Back

During the last decade, I have been continuously amazed with the increasing level of public company regulation.  The general direction of the Sarbanes-Oxley Act and the Dodd-Frank Act, and naturally the SEC rules implementing these acts, has always been more and more disclosure (the more granular and detailed — the better).  It seemed like the disclosure pendulum was swinging higher and higher towards overregulation and that it would never go back.  But the report on public company disclosure issued by the SEC on December 20, 2013, as mandated by the JOBS Act, gives a lot of hope that the disclosure pendulum may eventually start swinging back. 

This Report on Review of Disclosure Requirements in Regulation S-K, which largely follows the concepts outlined by SEC Chair Mary Jo White in her October speech before the National Association of Corporate Directors, recommended to Congress a comprehensive review of SEC disclosure rules and forms focusing on the following potential areas:

  • modernizing and simplifying Regulation S-K requirements in a manner that reduces the costs and burdens on companies while still providing material information;
  • eligibility for further scaling of disclosure requirements and definitional thresholds for smaller reporting companies, accelerated filers and large accelerated filers;
  • evaluating whether Industry Guides still elicit useful information and conform to industry practice and trends;
  • reviewing financial reporting requirements of Regulation S-X and financial statement disclosure requirements of Regulation S-K (e.g., annual and quarterly selected financial data disclosure and the ratio of earnings to fixed charges); and
  • disclosure requirements contained in SEC rules and forms (e.g., Forms 10-Q and 8-K).

The Staff provided detailed guidance on its suggested review of Regulation S-K, which would address the following issues:

  • principles-based approach as an overarching component of the disclosure framework (e.g., using a disclosure model of current MD&A requirements) (which may have an unintended consequence of leading to more disclosure rather than less);
  • current scaled disclosure requirements and whether further scaling would be appropriate for emerging growth companies or other categories of issuers;
  • filing and delivery framework based on the nature and frequency of the disclosures (e.g., a “core” disclosure or “company profile” filing with information that changes infrequently, periodic and current disclosure filings with information that changes from period to period, and transactional filings that have information relating to specific offerings or shareholder solicitations); and
  • readability and navigability of disclosure documents (e.g., the use of hyperlinks) as well as replacing quantitative thresholds (e.g., Item 103 (Legal Proceedings), Item 404 (Transactions with Related Persons, Promoters and Certain Control Persons) and Item 509 (Interests of Named Experts and Counsel) with general materiality standards.

In addition to these issues, the Staff identified the following specific areas of Regulation S-K disclosure that could benefit from further review:

  • risk-related requirements, such as risk factors, legal proceedings and other quantitative and qualitative information about risk and risk management, with potential consolidation into a single requirement;
  • relevance of current requirements for the description of business and properties;
  • corporate governance disclosure requirements (to confirm that the information is material to investors);
  • executive compensation disclosure (to confirm that the required information is useful to investors);
  • offering-related requirements (in light of the changes in offerings and the shift from paper-based offering documents to electronically-delivered offering materials); and
  • exhibits to filings (to confirm whether the required exhibits remain relevant and whether other documents should be added).

I cannot wait for the SEC to start proposing rules implementing these suggestions and creating a more effective disclosure mechanism that would work for the 21st century.   


How should companies evaluate whether there is a conflict of interest related to the compensation consultant’s work?

Tomorrow, on July 27, 2012, a new Regulation S-K, Item 407(e)(3)(iv), disclosure requirement focusing on the conflicts of interest of compensation consultants will become effective.  Item 407(e)(3)(iv) disclosure should be addressed in any proxy or information statement for a meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.

Pursuant to the new requirement, public companies will have to disclose the nature of the conflict of interest, if any, related to the compensation consultant’s work on executive and director compensation and how the conflict of interest is being addressed.  To comply with this requirement, one of the threshold questions that a public company should ask is whether there is a conflict of interest.

In order to evaluate whether such conflict of interest exists, public companies should act now to establish controls and procedures for obtaining conflict of interest information. For example, the company should:

1. Establish internal procedures and processes to track:

(i)  all services provided to the company by the compensation consultant and the entity that employs the consultant starting from the last completed fiscal year; and

(ii) the amount of fees paid by the company to the entity that employs the compensation consultant.

2. Request from the compensation consultant, or from the entity that employs the consultant, the following information:

(i) the percentage that the amount of fees received from the company by the entity that employs the compensation consultant represents to the total revenue of such entit; and 

(ii) direct or indirect ownership of the company’s stock by the compensation consultant, and

(iii) policies and procedures of the entity that employs the compensation consultant that are designed to prevent conflicts of interest.

3. Add the following question to the company’s Directors’ and Officers’ Questionnaire:

Do you have a business or personal relationship with the compensation consultant or the entity employing the compensation consultant?   ___ Yes  ___ No         

If “yes,” please describe: