By Tom Brennan. On April 29, 2015, the Securities and Exchange Commission (the “Commission”) voted to propose rules requiring public companies to disclose in a clear manner the relationship between executive compensation and the financial performance of the registrant. The proposed disclosure would be required in proxy statements in which executive compensation disclosure pursuant to Item 402 of Regulation S-K is required. The proposal is meant to supplement current disclosure requirements with a factual description of how executive compensation that is actually paid in a particular year relates to financial performance.
Specifically, the Commission proposed new Item 402(v) of Regulation S-K requiring a registrant to provide a clear description of:
- the relationship between executive compensation “actually paid” to the named executive officers included in the Summary Compensation Table (the “NEOs”) and the cumulative total shareholder return (“TSR”); and
- the relationship between TSR and the TSR of a peer group chosen by the registrant.
In determining executive compensation actually paid, the registrant would use the Total Compensation number set forth in the Summary Compensation Table for the NEOs, modified:
- to exclude changes in actuarial pension plans not attributable to the applicable year of service; and
- to include the fair value of equity awards at vesting rather than fair value at grant as currently provided for in the Summary Compensation Table.
TSR for the registrant and its peer group would be calculated as used in the performance graph contained in the Annual Report on Form 10-K or Proxy Statement. The peer group could be the same peer group as used in the performance graph or the same group as used in the CD&A for purposes of compensation “benchmarking” practices. Smaller reporting companies are not required to include the peer group TSR. The time period for the information would be the prior five (5) years, or three (3) years for smaller reporting companies, with a phase in period.
All of this information would be provided in a new table that would include the Summary Compensation Table total for the principal executive officer (“PEO”), the Compensation Actually Paid to the PEO, the average Summary Compensation Table total for all non-PEO Named Executive Officers, the average Compensation Actually Paid to all non-PEO Named Executive Officers, TSR for the registrant and TSR for the peer group. Following this new table, the registrant would provide a narrative, a graph, or a combination of the two describing the relationship between executive compensation and TSR.
Pay-for-performance disclosure would be subject to the say-on-pay non-binding shareholder advisory vote and would need to be tagged in XBRL format. The proposed rule does not apply to foreign private issuers or emerging growth companies.