What Will the New Rules Require?

Item 402(v) of Regulation S-K will require companies to include a new “Pay Versus Performance” table (see below) in proxy or information statements that discloses how executive compensation as reported in the currently required Summary Compensation Table and as actually paid by a company relates to the company’s financial performance for the five most recently completed fiscal years. The amount “actually paid” will be calculated based on a number of specified adjustments set forth in the rule and disclosed in footnotes to the table:

The financial performance measures to be included in the table are: (1) total shareholder return (TSR) for the company; (2) TSR for the company’s peer group (which will be the same peer group as used for the company’s stock performance graph or as disclosed in compensation discussion and analysis, with accompanying footnotes if not a published industry or line-of-business index); (3) the company’s net income; and (4) a financial performance measure chosen by the company and specific to the company (Company-Selected Measure) that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company’s principal executive officer (PEO)(for all who served in such role during the most recent fiscal year) and, as an average, the company’s other named executive officers (NEOs) to the company’s financial performance. The rule includes instructions as to how to calculate the TSR for the company and the peer group.

Using the information presented in the table, companies will be required to describe the relationships between the executive compensation actually paid to their PEOs and, on average, to their other NEOs, and each of the company’s performance measures, as well as the relationship between the company’s TSR and the TSR of its selected peer group.

Companies will further be required to provide a list of three to seven financial performance measures that they determine are the most important performance measures for linking executive compensation actually paid to the company’s performance (using the same approach as taken for the Company-Selected Measure).

Companies are permitted, but not required, to include non-financial measures in the list if they consider such measures to be among their three to seven “most important.”

Companies will also be required to use Inline XBRL to tag their pay versus performance disclosure. The information required by the new rules will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

What is the Deadline for Compliance?

Companies must begin to comply with these new disclosure requirements in proxy and information statements that are required to include Regulation S-K Item 402 executive compensation disclosures for fiscal years ending on or after December 16, 2022.

Companies other than smaller reporting companies (SRCs) will be required to provide the information for three years in the first proxy or information statement in which they provide the disclosure, adding another year of disclosure in each of the two subsequent annual proxy filings that require the disclosure.

SRCs will initially be required to provide the information for two years, adding an additional year of disclosure in the subsequent annual proxy or information statement that requires the disclosure. In addition, SRCs will only need to provide the required Inline XBRL data beginning in the third filing in which they provide pay versus performance disclosures, instead of the first.

Which Companies Must Comply with the New Rules?

The new rules will apply to all reporting companies, except (1) foreign private issuers, (2) registered investment companies, and (3) emerging growth companies.