Yesterday the SEC issued its long-awaited “pay-versus-performance” rule proposal. The rules would add a new paragraph (v) to Item 402 of Regulation S-K. In short, the proposed rules would require a new table comparing “executive compensation actually paid” to the “total shareholder return” (TSR) of the company and its peers, as well as a discussion of the relationship between these amounts.

Here is a quick summary of the main requirements of the proposal:

Tabular Disclosure

The proposed rules would require tabular disclosure in a prescribed format of “executive compensation actually paid,” total compensation as disclosed in the Summary Compensation Table, total shareholder return (TSR), and peer group TSR.

  • “Executive compensation actually paid” is the total compensation disclosed in the Summary Compensation Table, modified (1) to exclude changes in actuarial present value of certain pension benefits (that can be attributable to other years of service), and (2) to use the value of equity awards at vesting rather than when granted
  • TSR is as defined in Item 201(e) of Regulation S-K (the performance graph)

The proposed rules would require a separate presentation of this disclosure as to the principal executive officer (PEO) and as an average for the remaining named executive officers (NEOs).

Click here to see format of the pay-versus-performance table.

Clear Description of Relationships

Using the values presented in the table, the proposed rules would require providing a “clear description” of (1) the relationship between the executive compensation actually paid and TSR, and (2) the relationship between TSR and peer group TSR, over each of the five most recently completed fiscal years.

Notably, the proposed rules would permit disclosure of information in addition to what the proposed rules specifically require, so long as the information is not misleading and does not obscure the required information. This would appear to permit, for example, companies that utilize EBITDA or other performance measures besides TSR when making executive compensation decisions to provide additional disclosure regarding the relationship between such measures and the amounts actually paid to executive officers.

Other Notable Disclosure Considerations

The proposed rules would:

  • Require XBRL-tagging this data
  • Not require this new disclosure to appear in any specified location (e.g., do not include in CD&A if not considered in making compensation decisions), although the SEC would expect this disclosure near the other executive compensation disclosures

Exclusions and Phase-Ins

The proposed rules would provide exclusions and phase-ins that provide relief for certain companies:

  • The proposed rules would not apply to emerging growth companies, foreign private issuers or registered investment companies
  • Smaller reporting companies would only need to present the new disclosure for three years and would not need to disclose peer group TSR
  • Newly public companies would only need to disclose pay-versus-performance for the years the company has been public reporting (e.g., following an IPO, a company would present one-year, and in the second year after an IPO it would present two years, of pay-versus-performance disclosure)