Key Takeaways

• SEC reopens comment period on “pay versus performance” proposal from 2015
• SEC may require disclosure of three additional measures of performance: pre-tax net income, net income and a measure chosen by the company
• SEC may require companies to list the five most important performance measures they use to link compensation actually paid to company performance
• Comments are due by March 4, 2022

The Securities and Exchange Commission (SEC) on January 28, 2022, reopened the comment period with respect to its pending “pay versus performance” proposal (Proposed Rule), which would generally require public companies to disclose how the executive compensation of named executive officers (NEOs) relates to the financial performance of the company. The Proposed Rule was previously discussed in our May 7, 2015 OnPoint.

The Proposed Rule, originally published in 2015, was issued pursuant to Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 953(a) requires disclosure of the relationship between executive compensation “actually paid” and a company’s financial performance, taking into account any change in the value of the company’s shares plus dividends or other distributions. In his statement on the reopening of the comment period, SEC Chair Gary Gensler stated that he supports the Proposed Rule because “it would strengthen the transparency and quality of executive compensation disclosure.”

Currently, the Compensation Discussion and Analysis (CD&A) required by Item 402 of Regulation S-K requires disclosure of “all material elements of the registrant’s compensation of the named executive officers” but does not require an explanation of specific information showing the relationship between the executive compensation paid and the financial performance of the company. The Proposed Rule would require a new “Pay versus Performance” table which would include the executive compensation of NEOs that is “actually paid” plus total shareholder return (TSR) for the company and its peer group for the last five years.

According to the press release announcing the reopening of the comment period, the SEC is “considering whether additional performance metrics would better reflect Congress’s intention in the Dodd-Frank Act and would provide shareholders with information they need to evaluate a company’s executive compensation policies.” The SEC believes that executive compensation practices related to company performance have evolved since 2015 to the point that investors should be given an additional opportunity to comment on the Proposed Rule. In addition, in response to prior comments that TSR alone does not provide a complete picture of company performance, the SEC has also stated that it is considering requiring disclosure of three additional measures of performance: pre-tax net income, net income and a measure chosen by the company that is specific to it (Company-Selected Measure).

The first two additional measures are already provided for under generally accepted accounting principles and are familiar to investors and companies. The third new measure, the Company-Selected Measure, would represent the company’s assessment of the most important performance measure (not already included in the disclosure table) used by the company to link compensation actually paid to company performance, over the time horizon of the disclosure, and using a benchmark most appropriate for the individual company.

The SEC is also asking for feedback on whether to require companies to provide a list of their five most important performance measures used to link compensation actually paid to company performance, in order of importance. If a company considers fewer than five performance measures when linking compensation actually paid to company performance, the company would be required to disclose only the measures actually utilized.

The requirements of the Proposed Rule would be somewhat reduced for smaller reporting companies and would not apply to foreign companies, registered investment companies or emerging growth companies. The SEC does not believe the requirements in the Proposed Rule, along with the additional disclosures they are considering, will be burdensome to companies since companies already possess the applicable information. The SEC acknowledged, however, that the additional elements proposed could be counterproductive if they complicate or obscure the disclosure that would be most helpful to investors.

As a result of the reopened comment period, comments to the Proposed Rule must now be received by March 4, 2022.