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Article | Executive Pay Memo North America

SEC issues November 2023 guidance on pay versus performance

By Heather Marshall and Steve Kline | November 28, 2023

The Securities and Exchange Commission has issued further clarifications on pay versus performance disclosure requirements.
Executive Compensation

In August 2022, the Securities and Exchange Commission (SEC) issued pay versus performance (PVP) requirements under Regulation S-K. Since taking effect, key aspects of the requirements have been interpreted in ways that have not always aligned with what the SEC intended. This has been evidenced in comment letters issued by the SEC and in updates to the Compliance & Disclosure Interpretations (C&DIs) issued in February, September, and most recently November 21, 2023.

The February and September updates were largely straightforward and covered a range of topics, including footnotes, peer group selection and the company-selected measure. However, one issue puzzled us: how and when to reflect equity award values in compensation actually paid for retirement-eligible named executive officers.

As background, most companies provide for some form of accelerated vesting of equity awards upon retirement. For example, assume a named executive officer with restricted stock units has qualified for retirement by virtue of his or her age and service. Even though issuers don’t actually vest those units when the officer becomes eligible for retirement, the accounting treatment would say that no service period is required and that the award must be expensed in full if the recipient is retirement eligible.

In the September C&DIs the SEC appeared to entertain this view and suggested that, for the purpose of determining compensation actually paid, an award that vests on an accelerated basis at retirement with no other substantive vesting conditions could be deemed vested at the date of grant for the purposes of PVP too. In effect, this approach meant that subsequent stock price changes for such awards would no longer impact compensation actually paid beyond the retirement eligibility date. This seems to contradict the intent of PVP disclosures. It also ran the risk of creating significant complexity for companies with pro rata accelerated vesting treatment of equity awards on retirement. We raised these concerns with the SEC, particularly given that the C&DIs remained unclear on this issue, and were pleased to see revised guidance reflected in the November C&DIs release.

The latest guidance says that “other substantive conditions” must be considered, in addition to retirement eligibility. These include a market condition, actual retirement, or the satisfaction of the requisite service period. While the language remains ambiguous, it does appear now to distinguish between retirement eligibility and actual retirement. Accordingly, for awards that provide for accelerated vesting on retirement, issuers can now value awards during the vesting period through to the date of an actual retirement rather than merely the retirement eligibility date.

Table 1.
Question 128D.18
Some stock and option awards allow for accelerated vesting if the holder of such awards becomes retirement eligible. If retirement eligibility was the only vesting condition, would this condition be considered satisfied for purposes of the Item 402(v) of Regulation S-K disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible?
September 2023 answer
Yes. However, for awards with additional substantive conditions, in addition to retirement eligibility, such as a market condition as described in Question 128D.16, those other conditions must also be considered in determining when an award has vested.
Revised November 2023 answer
Yes. However, if retirement eligibility is not the sole vesting condition, other substantive conditions must also be considered in determining when an award has vested. Such conditions would include, but not be limited to, a market condition as described in Question 128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.

Source: SEC C&DIs issued in September and November 2023

Why is this important?

Few, if any, companies measured compensation actually paid on the basis of retirement eligibility in their first disclosure; therefore, such a change would have compelled companies to go back and revalue awards and recalculate compensation actually paid already reported. On balance, we believe this revised interpretation is better aligned with the rule’s original intent and should be far less burdensome for companies to comply with.

Other issues that the SEC addressed involved total shareholder return (TSR) peer groups, dividends, and considerations for emerging growth companies and smaller reporting companies. Highlights include:

  • The SEC reaffirmed that it does not permit TSR to be compared with a broad-based equity index, even if the company’s TSR plan measures performance against a broad-based equity index.
  • The SEC reaffirmed that if a custom peer group is used (rather than a published index), TSR must be weighted on a market capitalization basis.
  • If a company uses more than one published industry or line-of-business index on its total return chart on Form 10-K, the company may choose which index it uses for PVP. But if it chooses a different index the next year, it must explain the rationale and disclose the cumulative total return with both the new and old index.
  • Similarly, if a company uses a custom peer group but changes the composition of the group, then TSR must be compared with the old and new groups. The exception is if a) the dropped peer is no longer in the line of business or industry (or no longer exists presumably) or b) the changes to the group are the result of the application of pre-established objective criteria. In both these cases, however, the change must be disclosed. This provides some clarity and simplicity for those contending with peer group changes simply due to constituents no longer independently trading.
  • The SEC also reaffirmed points on how dividends and dividend equivalents should be reflected in compensation actually paid.
Looking ahead

The first PVP disclosures showed a high level of consistency in key areas such as peer group selection, supporting narrative and graphical disclosure style, and proxy placement, as covered in our July article. We expect most companies will embrace a consistent approach for year two, unless they have received a comment letter from the SEC or must address points clarified in the C&DIs.

It remains to be seen what Institutional Shareholder Services (ISS) will say about the role of PVP disclosures in their proxy analyses, with publication of their 2024 voting guidelines imminent. Glass Lewis’ recently published 2024 voting guidelines simply note that PVP “may be considered” when assessing pay-for-performance alignment and reaching say-on-pay recommendations.


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