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Article | Executive Pay Memo North America

Companies losing emerging growth status face an increase in pay disclosures

By Scott Oberstaedt , Heather Marshall and Max Fogle | May 14, 2024

Early planning is the best way for public companies that are losing their emerging growth status to address enhanced and new regulatory disclosures.
Executive Compensation
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There were more than 700 initial public offerings (IPOs) on U.S.-based stock exchanges in 2019 and 2020 combined. Many of those newly listed companies have benefitted from qualifying as emerging growth companies (EGCs) since their IPO.

EGCs can withhold certain disclosures from public filings; most notably, the executive compensation disclosures in an EGC’s annual proxy statement can be far less rigorous than for a standard public issuer. However, companies lose their EGC status after their fifth fiscal year as a public company, or earlier if they surpass certain thresholds for:

  • Annual revenue ($1.235 billion in 2024)
  • Non-convertible debt ($1 billion in 2024)
  • Public float ($700 million in 2024)[1]

Because many of the companies that went public in 2019 and 2020 have not surpassed these thresholds, they have been able to retain their EGC status. But the upcoming five-year expiration will dramatically increase their executive compensation disclosure requirements for upcoming proxy statements. Enhanced disclosures for companies that lose EGC status can be put into three categories.

Category 1: Expanded disclosures

When a company loses EGC status and becomes a regular filer, it will need to expand three sections of its next proxy statement (Table 1):

  • The Summary Compensation Table (SCT) will have the largest expansion of the existing executive compensation disclosures. Companies with EGC status require no more than three Named Executive Officers (NEOs) be listed (typically the CEO and the next two highest-paid executive officers), reporting no more than two years of compensation.
  • Once EGC status is lost, the number of required NEOs increases to five (typically the CEO, CFO and the next three highest-paid executive officers). Also, the number of years reported increases to three and total compensation needs to include changes in pension value, which is not required for EGCs. Some information that EGCs can disclose in text-only format needs to be expanded into a tabular format as a full filer. These include the All Other Compensation section of the SCT and the Potential Payments Upon Termination section.
  • Lastly, the thresholds of materiality for disclosing Related Person Transactions are lower, meaning that many former EGCs will need to provide more detail on relationships between members of the company’s board of directors and either the company itself or its executives. The company also will need to disclose any policies that it has adopted on managing related person transactions.

Table 1: Enhanced disclosures
EGC filer Regular filer
SCT: Number of Reportable Executive Officers Minimum of three NEOs, or all NEOs if there are fewer than three executive officers
  • Principal Executive Officer(s), such as a CEO
  • Next two highest-paid executive officers – Principal Financial Officer is not automatically required
Minimum of five NEOs, or all NEOs if there are fewer than five executive officers
  • Principal Executive Officer(s), such as a CEO
  • Principal Financial Officer(s), such as a CFO
  • Next three highest-paid executive officers
SCT: Number of Reportable Years Two years
  • Most recently completed fiscal year
  • The most recently completed prior fiscal year if the reported NEO was an NEO that year
Three years
  • Most recently completed fiscal year
  • The 1-2 most recently completed prior fiscal years, if the reported NEO was an NEO in those years
SCT: Elements of Compensation Reported Change in pension value can be excluded Change in pension value must be included if any value was accrued over the reportable period
SCT: All Other Compensation Details can be provided in text-only narrative format Generally, details must be provided as a separate table or in a detailed footnote
Potential Payments Upon Termination Details can be provided in text-only narrative format Must be provided as a separate table, and calculated assuming a termination on the final day of the fiscal year
Related Person Transactions Higher threshold of materiality for disclosure; any board-approved policies on the topic do not need to be disclosed Lower threshold of materiality for disclosure; any board-approved policies on the topic need to be disclosed

Category 2: New disclosures

Companies that lose EGC status and become regular filers need to add several sections to their proxy statements, and many of them will take considerable time, research and coordination with Finance and Legal to complete (Table 2). These include:

  • A Compensation Discussion and Analysis (CD&A) section that explains the company’s executive compensation philosophy and decision-making process as well as any details related to how NEOs earned their compensation packages in the most recent fiscal year.
  • As part of the CD&A, companies are required to submit a Compensation Committee Report that is signed by the committee members, stating they have reviewed and approved the CD&A disclosure for publication.
  • Up to three new compensation-related tables, if they applied to the company in the most recent fiscal year:
    • Grants of Plan-Based Awards (e.g., annual cash incentive, stock or option awards)
    • Change in pension valuation (e.g., defined benefit plans, nonqualified deferred compensation)
    • Option Exercises and Stock Vested
  • A CEO Pay Ratio section that compares the most recent fiscal year’s total compensation of the CEO to the median worker at the company. In preparation for this, the company must define the median worker and calculate their pay level for comparison purposes. This disclosure is required after the first complete year that a company does not have EGC status.
    For example, if a company uses a calendar fiscal year and loses EGC status on Dec. 31, 2024, the first required CEO Pay Ratio will be disclosed in 2026 and based on CEO and median worker pay levels in fiscal year 2025.
  • A Pay Versus Performance section that shows Compensation Actually Paid (CAP) to the CEO and the average CAP for the other NEOs. The company’s financial performance – defined by total shareholder return (TSR), net income and a company selected measure – also is reportable, along with a peer comparison for TSR. In the first year, three years of data are required to be reported under transitional relief, increasing the five years over the following two years.
  • A risk management disclosure of how the company’s compensation plans affect the company’s financial and/or strategic risk.

  • Table 2. New disclosures
    Regular filer
    CD&A Required to provide a clear, concise and understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to the NEOs
    Compensation Committee Report Committee members are required to report that they have reviewed the CD&A and recommend that it be included in the proxy statement and 10-K
    Grants of Plan-Based Awards Summary table showing the most recent fiscal year’s potential cash bonus (annual or multi-year) that could be earned (minimum / target / maximum), PSUs that could be earned (minimum / target / maximum), RSUs granted, and stock options granted with strike price and expiration date for each NEO
    Change in Pension Value Contributions, withdrawals, present value of future benefit and/or changes to pension balance values for each NEO in the most recent fiscal year
    Stock Options Exercised and Shares Vested Number of shares/options and values realized for each NEO in the most recent fiscal year
    CEO Pay Ratio Calculation of a ratio between CEO total compensation (as reported in the SCT) and the compensation of the median company employee, with allowable exceptions and exclusions
    Pay Versus Performance Calculation of CEO and average other NEO CAP, and calculation of financial performance (TSR and other goals).
    Compensation Risk Management Description of the company’s efforts to balance executive rewards and company risk as well as a summary of any compensation risk analyses conducted by the board in the most recent fiscal year

    Category 3: New shareholder votes

    Lastly, losing EGC status means the company’s exemption from certain shareholder votes also expires (Table 3), regardless of whether the company is a Smaller Reporting Company or a regular filer. These votes include:

    • A non-binding Say on Pay vote on the appropriateness of NEO compensation. Shareholders can vote “yes,” “no,” or “abstain".
    • A Say on Pay Frequency shareholder vote on how often the company should conduct future Say on Pay votes. Shareholders can vote for anywhere from one to three years or abstain. As with Say on Pay, the vote is non-binding.
    • If the company is filing a merger proxy statement as part of a planned takeover, a non-binding Say on Parachute vote on the appropriateness of NEO compensation at the time of the merger.

    Table 3. New shareholder votes
    Full filer
    Say on Pay Non-binding vote on the company’s NEO compensation
    Say on Pay Frequency Non-binding vote on how frequently the company should hold a Say on Pay vote
    Say on Parachute Non-binding vote on the company’s NEO compensation upon change in control (required only in a merger proxy statement)


    Successfully approach expanded disclosures

    For companies that transition from EGC status, the combination of enhanced and new disclosures can be overwhelming. The new details require significant coordination, research, calculation and decision making by both management and the Compensation Committee.

    New inputs for the SCT may involve departments that may not have been included in prior proxy statement reporting, such as retirement and risk management. These internal sources should be identified before the proxy writing process starts, and they should know what details they are expected to provide and on what timeline.

    With a three-year lookback, quieter summer periods provide an opportunity to collect the previous two years of information either for the known NEOs holding the roles of Principal Executive Officer (typically the CEO) and Principal Financial Officer (typically the CFO), or a broader group of executive officers.

    This is particularly true for the Pay Versus Performance disclosure, which may require companies to go as far back as IPO, to the extent that equity awards granted in prior periods remained outstanding or vested in any of the reportable three years. Equity valuations consistent with those used for Accounting Standards Codification (ASC) 718 are required on multiple measurement dates and may not have been previously prepared.

    In addition, the board can review and approve decisions on the CD&A, Say on Pay Frequency, CEO Pay Ratio and Pay Versus Performance disclosures early in the process to get a head start on calculations and writing. Plus, the results of the first Say on Pay vote will give the Compensation Committee feedback on its executive pay decisions to date, potentially affecting its approach to future actions.

    Ultimately, the key to success for any company approaching expanded disclosures starts with planning – and planning early – and ensuring you have the right team in place to meet these regulatory requirements.

    Footnotes

    A company that has been public for five years may lose EGC status but qualify for Smaller Reporting Company (SRC) status, which also allows for limited compensation disclosures in its proxy statements (though a Pay versus Performance table and Say on Pay vote are still required). However, the financial thresholds for SRC status are lower than for EGCs. Most notably, SRCs must have either less than $250m in public float, or a combination of under $100m revenue and under $700m public float. Return to article

Authors

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