After a 12-year gap, the U.S. Securities and Exchange Commission (SEC) has finally adopted final rules implementing the pay-versus-performance rule required by Congress in the 2010 Dodd-Frank Act.
Under the rule, publicly traded companies will now be required to justify to shareholders compensation paid to executives by comparing it with the company’s financial performance. To that end, publicly traded companies will have to disclose additional details about how senior executives are compensated, including performance bonuses.
The final rule was adopted Aug. 25 in a split 3-2 vote, with Republican Commissioners Hester Peirce and Mark Uyeda voting against the proposal.
In April 2015, the Commission proposed amendments to Item 402 of Regulation S-K to implement the pay versus performance disclosure requirement, and in January 2022, reopened the comment period to provide additional opportunity to comment further and to address certain additional requirements the Commission was considering.
“Today’s rule makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies,” SEC Chair Gary Gensler said in a statement. “I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies.”
In contrast, Commissioner Peirce, in explaining why she’s opposed to the rule, argued that it “will elicit costly, complicated, disclosure of questionable utility.” In noting that Section 953(a) of Dodd-Frank anticipates a principles-based approach to eliciting disclosure about the relationship between actual executive compensation and company performance, Peirce says that “[r]ather than following the statute to craft a workable, practical rule, the Commission instead adopts an unnecessarily complicated rule.”
New Requirements
Specifically, new Item 402(v) of Regulation S-K will require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years.
Registrants will be required to include in the table—for the principal executive officer (PEO) and, as an average, for the other named executive officers (NEOs)—the Summary Compensation Table measure of total compensation and a measure reflecting “executive compensation actually paid,” calculated as prescribed by the rule, a fact sheet explains.
Regarding measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income and a financial performance measure chosen by the registrant.
Using the information presented in the table, registrants will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group.
A registrant will also be required to provide a list of three to seven financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance. Registrants are also permitted, but not required, to include non-financial measures in the list if they considered such measures to be among their three to seven “most important” measures, the SEC further explains.
The rules will apply to all reporting companies, except foreign private issuers, registered investment companies, and Emerging Growth Companies. Smaller reporting companies will be permitted to provide scaled disclosures.
Compliance Dates
The final rules will become effective 30 days following publication in the Federal Register.
To give companies adequate time to implement the new disclosures, the SEC notes that registrants must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after Dec. 16, 2022.
