Pay versus Performance Disclosures: A Snapshot
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Summary
The pay versus performance disclosures required by Item 402(v) of Regulation S-K require registrants to disclose information about the relationship between executive compensation paid and the financial performance of the registrant. These disclosures are required in proxy and information statements that require disclosure of executive compensation, but not in registration statements or in annual reports on Form 10-K. Emerging growth companies, registered investment companies and foreign private issuers are exempt from compliance with the pay versus performance disclosure requirements. Smaller reporting companies (SRCs) may scale their disclosures.
Disclosure Presentation: Key Highlights
(SEC Staff Guidance: SEC Staff Compliance and Disclosure Interpretations (C&DIs))
Registrants must disclose executive compensation “actually paid” to named executive officers (NEOs),1 as well as the following financial performance measures:
- Cumulative total shareholder return (TSR) for the registrant
- Peer group cumulative TSR
- Net income for the registrant
- Measure used by the registrant to measure financial performance (Company-Selected Measure)
The disclosures are required in tabular format, as follows:
| Pay Versus Performance | ||||||||
|---|---|---|---|---|---|---|---|---|
| Year (a) | Summary Compensation Table for Total Principal Executive Officer (PEO) | Compensation Actually Paid to PEO (b) | Average Summary Compensation Table Total for Non-PEO NEOs | Average Compensation Actually Paid to Non-PEO NEOs | Value of Initial Fixed $100 Investment Based On: | Net Income (f) | Company Selected Measure* (g) | |
| Registrant TSR (c) (e) | Peer Group TSR* (d) (e) | |||||||
*SRCs may omit this disclosure.
(a) If a registrant changes its fiscal year, disclosures should be provided for the “stub period” in the year of change (that is, the period between the last fiscal year end and the new fiscal year end). Refer to C&DI 228D.01 for an example.
(b) Executive compensation “actually paid” during a year is the “Total” column in the Summary Compensation Table (SCT) required by Item 402(c) of Regulation S-K, adjusted for certain amounts related to equity-based compensation and defined benefit and actuarial pension plans discussed further in section Compensation “Actually Paid”. If the registrant had multiple PEOs in a fiscal year, the compensation actually paid to the PEOs may be aggregated for disclosure if the presentation is not misleading to investors.
(c) Item 201(e) of Regulation S-K defines TSR as dividends plus or minus the change in share price over the measurement period.
(d) The peer group may be either the peer group used for disclosures required by S-K Item 201(e), or a peer group used in Compensation Discussion and Analysis (CD&A) even if such peer group is not used for “benchmarking” purposes. If the peer group is not a published industry or line-of-business index, the peer group must be disclosed and the cumulative TSR should be weighted based on the stock market capitalization of each selected peer at the beginning of each period for which the return is disclosed. If a registrant changes its peer group from the immediately preceding fiscal year, it must disclose the reason for the change, and compare its TSR to the TSR of the new peer group and the TSR of the peer group used in immediately preceding year. 3
(e) If a registrant went public during the earliest year presented in the table (and registered a class of securities pursuant to Section 12 of the Exchange Act), the “measurement point” for purposes of calculating TSR and peer group TSR should begin on the registration date. If a registrant emerges from bankruptcy and issues a new class of stock pursuant to the bankruptcy plan, it may provide its cumulative TSR and peer group TSR using a measurement period starting from the date the new class of stock begins trading.
(f) Net income (loss) must agree to net income or loss reported in the audited financial statements. Registrants may not use adjusted net income or loss amounts.
(g) The Company-Selected Measure:
- May be any financial performance measure that differs from the financial performance measures otherwise required to be disclosed in the table, which includes measures derived from the registrant’s net income or TSR (for example, it is acceptable to use earnings per share, gross profit, or relative TSR as the Company-Selected Measure).
- May not be the registrant’s stock price if the registrant does not use the stock price to link compensation actually paid to company performance.
- May not be omitted even if the registrant uses a “pool plan” to determine its annual bonus awards, 4 and cannot be measured over a multi-year period.
- Is not required to be disclosed if a registrant does not use any financial performance measures to link executive compensation actually paid to performance, or if it only uses a financial measure required by S-K Item 402(v).
In addition to the Company-Selected Measure, registrants must include a tabular list of three to seven financial performance measures that they believe are “most important” to link executive compensation actually paid to the performance of the company for the most recently completed fiscal year. The Company-Selected Measure must be selected from this list and the “most important” determination should be made considering only the most recently completed fiscal year. A registrant is not required to disclose its method for determining the “most important” measures but should consider whether it would be helpful to an understanding of the measure. If the registrant uses fewer than three measures, the tabular list must include all measures used. If the registrant considers a non-financial measure to be one of the “most important” measures, the rule permits, but does not require, it to be included in the tabular list.
The registrant may present the tabular list as any of the following:
- A single list for all NEOs
- Separate lists, one for the PEO and one for all other NEOs
- Separate lists for the PEO and each NEO
The list does not require the registrant to rank the importance of each measure. SRCs may omit these disclosures.
Registrants must clearly describe the relationship between the financial performance measures and the compensation actually paid to the registrant’s NEOs. The disclosures may be presented narratively, graphically, or a combination of the two, and must describe the relationship between the following:
- Executive compensation actually paid and registrant’s TSR, net income, and company-selected measure
- Registrant’s TSR and peer group TSR
Compensation “Actually Paid”
Compensation “actually paid” is determined by adjusting the “Total” column in the SCT for the following:
- Defined benefit and actuarial pension plans (not required for SRCs):
- Add:
- Actuarial “service cost” for services rendered during the fiscal year
- “Prior service cost,” as determined in accordance with U.S. GAAP, of benefits granted during the fiscal year, whether by amendment or initiation of a plan, for services rendered in prior fiscal years
- Deduct:
- The increase in the actuarial present value from prior fiscal year5
- The increase in the actuarial present value from prior fiscal year5
- Add:
- Equity awards: The fair value (FV) of equity-based awards is determined using the methodologies and assumptions required by U.S. GAAP. Examples of methodologies that are inconsistent with U.S. GAAP include using an expected term that:
- Subtracts the elapsed life of the award from the expected term at the grant data
- Is based on the “simplified” method for awards that are not “plain vanilla” (such as for out-of-the-money awards at the valuation date)
The following adjustments are required for equity-based awards:
- Add:
- For awards granted during the fiscal year, FV of the following:
- Outstanding and unvested awards as of the end of the fiscal year
- Vested awards, as of the vesting date
- For awards granted in prior fiscal years, the change in FV of the following:
- Outstanding and unvested awards from the end of the prior fiscal year
- Vested awards from the end of the prior fiscal year to the vesting date
- The dollar value of any dividends (or dividend equivalents) or other earnings paid on unvested awards during the fiscal year that are not otherwise reflected in the FV of the award or in any other component of total compensation
- Dividends to be paid at a future date are excluded from the compensation actually paid as the FV of the award reflects that expectation.
- Dividends that have been paid are included in compensation actually paid (separate from the FV of the equity award) when the FV of the award no longer reflects the expectation of paying that dividend.
- For awards granted during the fiscal year, FV of the following:
- Deduct:
- The FV, as of the end of the prior fiscal year, of awards granted in prior fiscal years that do not meet vesting conditions (awards forfeited) during the current fiscal year
- Awards that vest based on performance or market conditions are not deducted until the award is forfeited, even if the condition is not met during the fiscal year.
- The equity award amounts presented in the SCT (“Stock awards” and “Option awards”)
- The FV, as of the end of the prior fiscal year, of awards granted in prior fiscal years that do not meet vesting conditions (awards forfeited) during the current fiscal year
| The equity award adjustments must consider the following: | |
|---|---|
| Awards granted prior to an equity restructuring or Initial Public Offering (IPO) |
|
| Newly appointed NEO |
|
| Market or performance-based conditions |
|
| Accelerated vesting upon retirement eligibility |
|
Transition Period
The transition period allows registrants to disclose the following:
- Three years of information (two for SRCs) in the first proxy or information statement that requires compliance with S-K Item 402(v)
- Another year of information in each of the next two annual proxy or information statement filings (next year’s annual proxy filing for SRCs)
Newly public companies may provide the disclosures for the most recently completed fiscal year in their first proxy or information statement and add another year of information in future filings until all required years are presented.
The following table summarizes how many fiscal years of information are required to be presented, depending on the transition year and the status of the registrant:
| Transition Year | Registrant (a) | SRC | Newly Public (b) |
|---|---|---|---|
| 1 | 3 | 2 | 1 |
| 2 | 4 | 3 | 2 |
| 3 | 5 | 3 | 3 |
| 4 | 5 | 3 | 4 (c) |
| 5 | 5 | 3 | 5 (c) |
(a) Excludes SRCs, newly public companies and those exempt from compliance with the rule.
(b) Excludes emerging growth companies.
(c) SRCs are not required to provide more than three years of information.
Loss of SRC Status
Registrants may forward incorporate Part III information into their Form 10-K from their definitive proxy statement filed within 120 days of year-end. If the registrant’s Form 10-K for the fiscal year in which it loses SRC status forward incorporates Part III information from its definitive proxy statement, the SEC staff will not object to the registrant’s use of SRC scaled pay versus performance disclosures in that definitive proxy statement. Subsequent proxy or information statements must comply with non-scaled disclosures, except:
- There is no requirement to revise prior year disclosure to conform to non-SRC status
- Each year presented should include:
- Peer group TSR, as it is calculated cumulatively
- The numerically quantifiable performance under the Company-Selected Measure
- The SEC staff will not object if a registrant does not present a year prior to those included in the registrant’s first filing requiring pay versus performance disclosures
Loss of EGC Status
A registrant that loses its EGC status must comply with pay versus performance disclosures in its first proxy or information statement filed following the loss of status. Registrants may follow the transition period relief and provide three years of information, rather than five (two, rather than three, if the registrant is a SRC).