Key Takeaways

• On January 27, 2022, the Securities and Exchange Commission (“SEC”) reopened the comment period for its 2015 proposal (the “2015 Proposal”) to implement Section 953(a) of the Dodd-Frank Act, requiring registrants to disclose, in both tabular and narrative format, how their executive compensation is paid in relation to their financial performance.
• The SEC has proposed amending the 2015 Proposal with additional disclosure requirements (the “Amended Proposal”) in an effort to improve transparency on executive compensation and enhance the usefulness of the disclosures.
• The public comment period will remain open for 30 days following publication of the release in the Federal Register.

Overview

The SEC has reopened the comment period for the 2015 Proposal regarding the Dodd-Frank Act pay-versus-performance rule. In conjunction with the reopening, the SEC has proposed several additional disclosure requirements in an effort to provide heightened transparency for investors. The new disclosure requirements, however, require registrants to generate more detailed reports, which raises concerns as to increased reporting costs and decreased efficiency.

Background

On April 29, 2015, the SEC, by a 3-2 vote, proposed the pay-versus-performance disclosure rule required by Section 953(a) of the Dodd-Frank Act. Section 953(a) added Section 14(i) to the Securities Exchange Act of 1934, which directs the SEC to adopt a rule requiring disclosure of the relationship between executive compensation actually paid and the issuer’s financial performance.

The 2015 Proposal, found here, sought to require tabular disclosure in annual meeting proxy and information statements of (a) the “compensation actually paid” – the total compensation as reported in the Summary Compensation Table, with certain adjustments made for equity award and defined benefit and pension plan amounts – to the CEO and the average compensation actually paid to the other named executive officers as a group; (b) the issuer’s total shareholder return (“TSR”); and (c) a peer group TSR. The tabular disclosure would be required for the prior five fiscal years. Smaller reporting companies (“SRCs”) would need to provide disclosure for only the prior three fiscal years, but not a peer group TSR. The registrant would also be required to provide a description, which could be in graph or narrative format, of the relationship between compensation actually paid, TSR and peer group TSR. (See BakerHostetler Alert about 2015 Proposal here.)

The Amended 2015 Proposal

With no action taken to adopt the 2015 Proposal as a rule, the SEC recently decided to amend the 2015 Proposal, citing immense regulatory and market developments since 2015 and a desire to provide investors with additional necessary data, and reopened the comment period.

On January 27, 2022, the SEC reopened the comment period for the 2015 Proposal pertaining to the pay-versus-performance disclosure rule required by Section 953(a) of the Dodd-Frank Act, and it is considering adding several additional disclosure items. The Amended Proposal seeks to require the same tabular disclosures as the 2015 Proposal, and the SEC is considering including three additional measures of financial performance: (a) pretax net income, (b) net income and (c) a company-selected measure. The registrant would also be required to provide a description, which could be in graph or narrative format, of the relationship between compensation actually paid to the CEO and executive officers and the now-five measures of financial performance (the two original measures from the 2015 Proposal, the issuer’s TSR and a peer group TSR, along with the three additional measures).

The SEC has specifically chosen pretax net income and net income as additional measures because they provide an accounting-based measure of financial performance, as well as being readily available. Moreover, the SEC has proposed that each registrant include, as the fifth and final financial performance measurement, a measurement of their choice, one not already included in the table, that reflects a measure specific to the particular registrant. The SEC believes the company-selected measure will provide additional useful disclosure by permitting registrants to select their most important performance measure, which would avoid the concern of whether a “one size fits all” benchmark is appropriate for all companies.

In addition, the SEC is considering requiring disclosure, in a tabular list, of a registrant’s five most-important performance measures used to determine compensation actually paid.[1] The SEC believes that this tabular disclosure may provide investors with additional context for evaluating compensation, including determining whether the compensation actually paid appropriately incentivizes management, as well as providing context in interpreting the remainder of the pay-versus-performance disclosure.

Smaller Reporting Companies

As with the limited disclosure requirements for SRCs under the 2015 Proposal, the SEC remains mindful of increasing small reporting company disclosure burdens. The Amended Proposal does not change the 2015 Proposal, which does not require SRCs to disclose a peer group TSR. Of the additional requirements being considered, the SEC would not require SRCs to provide a company-selected measure or to list their five most-important performance measures.

The public comment period will remain open for 30 days following publication of the release in the Federal Register. With respect to the request for public comment on the Amended Proposal, the SEC specifically requests comments on questions delineated in the release.

The full release containing the amendments, the SEC’s analysis and the specified questions for comment can be found here.

[1] If the registrant considers fewer than five performance measures when it links compensation actually paid during the fiscal year to company performance, the registrant would be required to disclose only the number of measures it actually considers.

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