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Article | Executive Pay Memo North America

SEC issues additional guidance on pay versus performance disclosures

By Steve Seelig and Heather Marshall | February 15, 2023

SEC clarifies aspects of Pay Versus Performance rule interpretation 
Executive Compensation

Following the close of business last Friday, the Securities and Exchange Commission (SEC) issued guidance in Compliance & Disclosure Interpretations (CD&Is) for those tasked with preparing Pay versus Performance (PVP) disclosures for soon-to-be-filed proxy statements. Many of these are specific to particular types of companies, such as those newly public, those changing their fiscal year or those emerging from bankruptcy. The guidance also explained how bonus pool plans are disclosed and how total shareholder return (TSR calculations) should focus on the peer group used for each single disclosure year.

The guidance also confirmed what many had correctly inferred regarding what measures can and cannot appear in the company-selected measure column, while clarifying what data must appear in the Net-Income column.

The guidance contained a few surprises, some more pleasant than others. Most notably to us, the SEC clarified the following:

  1. The peer group for the TSR disclosure could be: that used on the 10-K performance graph (other than broad market indices); that mentioned in the Compensation Discussion and Analysis (CD&A) for compensation benchmarking practices; or any other peer group disclosed in the CD&A to help determine executive pay, even if such peer group is not used for “benchmarking.” This seemingly confirms what many had wondered: that companies are allowed to use the TSR peer group used for their relative TSR plan.
  2. The SEC also confirmed that, for the initial filing, each year of the disclosure — 2020, 2021 and 2022 — must disclose the appropriate peer group used for that year. A company cannot use the peer group for 2022 for the 2020 or 2021 disclosure if the peers have changed.
  3. Extensive footnote disclosures of the equity and pension adjustments between the Summary Compensation Table (SCT) and Compensation Actually Paid (CAP) columns are required for the initial year of disclosure, aligning with the different component calculations set out in the rule. Thereafter the breakdown need only be disclosed for the most recent year added to the table. These footnote disclosures cannot be aggregated (e.g., the sum total of all equity adjustments for CAP calculations) as some companies had hoped would be allowed.
  4. A company can choose a Company-Selected Measure that is derived from, a component of or similar to these required measures, such as earnings per share, gross profit, income or loss from continuing operations, or relative total shareholder return. These measures also could be included as financial performance measures in the Tabular List. The surprise here was that relative total shareholder return could be used, given many had inferred this would not be eligible due to overlap with the required TSR columns already included in the PVP table. That being said, the CD&Is also clarified that the data in the Company-Selected Measure column cannot be multiyear in nature. This may deter some from using relative TSR given it is often calculated on a multiyear basis for incentive plan purposes; on a one-year basis it may show limited correlation with CAP.
  5. In contrast, stock price itself cannot be used as the Company-Selected Measure unless the company has a specific stock-price-related performance goal applicable to an incentive plan award or used to determine the size of a bonus pool.

We will keep you posted if the SEC issues additional guidance in this area, as interpretative questions remain on other aspects of the rule.


Senior Director, Executive Compensation

Senior Director, Executive Compensation and Board Advisory (New York)
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