January 29, 2023

Volume XIII, Number 29

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SEC Adopts Final Pay versus Performance Rules

On August 25, 2022, the US Securities and Exchange Commission (SEC) adopted final rules to implement the pay versus performance disclosure requirement mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Dodd-Frank Act added Section 14(i) to the Securities Exchange Act of 1934, which directs the SEC to adopt rules that require registrants to clearly disclose the relationship between executive compensation actually paid and the registrant’s financial performance. More than 12 years after US Congress passed the Dodd-Frank Act, the SEC has adopted Item 402(v) of Regulation S-K to put these disclosure requirements into effect in time for the 2023 proxy season.

In Depth

Applicability

The new pay versus performance rules apply to all reporting companies, excluding emerging growth companies, foreign private issuers and registered investment companies. Smaller reporting companies (SRCs) will have reduced reporting requirements. Item 402(v)’s pay versus performance disclosure will be required in any proxy statement or information statement for which Item 402’s executive compensation disclosure is required for fiscal years ending on or after December 16, 2022. Registrants with calendar year-ends will therefore need to address Item 402(v) in their 2023 proxy statements.

Requirements

Item 402(v) will require registrants to disclose, in tabular format, specified executive compensation and financial performance measures for the registrant’s five most recently completed fiscal years. The pay versus performance table must include:

  • A Summary Compensation Table measure of total compensation for the registrant’s principal executive officer (PEO) and, as an average, for the registrant’s other named executive officers (NEOs).

  • The executive compensation actually paid to the registrant’s PEO and, as an average, to the registrant’s other NEOs, calculated as prescribed by the rule.

  • The following specified financial performance measures:

    • Total shareholder return for the registrant

    • Total shareholder return for the registrant’s peer group

    • The registrant’s net income

    • A “Company-Selected Measure” chosen by and specific to the registrant that, in the registrant’s view, represents the most important financial performance measure they use to connect the compensation actually paid to their NEOs to company performance for the most recently completed fiscal year.

A registrant will also be required to provide a clear description of the relationships between the executive compensation actually paid to its PEO and, as an average, its other NEOs and the registrant’s cumulative total shareholder return, net income and the company-selected measure over the registrant’s five most recently completed fiscal years. Registrants will also be required to include descriptions of the relationships between their total shareholder return and their peer group’s total shareholder return. Registrants will have discretion in formatting these descriptions, which may be in narrative or graphical form or a combination of the two.

Additionally, a registrant will be required to list three to seven financial performance measures that they conclude are their most important measures. Registrants may, but will not be required to, include non-financial measures in this list if they determine that such measures are among their three to seven most important measures.

The rules do not require the new pay versus performance disclosures to be in any particular section of a registrant’s proxy or information statement but Inline XBRL tagging will be required.

Pay versus Performance Table

© 2023 McDermott Will & EmeryNational Law Review, Volume XII, Number 258
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About this Author

Thomas P. Conaghan, Mcdermott Will Emery law Firm,  (M&A), joint ventures, strategic investments, spin-offs,
Partner

Thomas P. Conaghan is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Washington, D.C., office.  Tom represents both publicly held and closely held businesses, underwriters and other sources of capital, corporate boards and board committees and corporate executives.  He advises both U.S. and foreign-based public companies on issues relating to public and private offerings of securities, disclosure, periodic reporting, corporate governance, executive compensation, the rules of the New York Stock Exchange and the Nasdaq Stock Market and compliance with the...

202-756-8161
Andrew C. Liazos Executive Compensation Attorney McDermott Will Boston
Partner

Andrew C. Liazos is a partner in the law firm of McDermott Will & Emery LLP based in the Firm’s Boston office. Andrew heads the Firm's Executive Compensation Group and the Boston Employee Benefits Practice.

Andrew regularly represents Fortune 500 companies, public companies, large closely held businesses and compensation committees on all aspects of executive compensation, ERISA fiduciary matters, employee benefits in business transactions and bankruptcy, and employee stock ownership plans. He also counsels executives in employment agreement and joint...

617 535 4038
Eric Orsic, corporate, securities, attorney, McDermott Will, law firm
Partner

Eric Orsic is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. Eric focuses his practice in the areas of mergers and acquisitions, and securities transactions and compliance.   Eric works with both public and privately-held companies to structure and negotiate business acquisitions/dispositions.  His public company transactional experience includes public equity and debt offerings, tender offers and going-private transactions.  Eric also serves as outside securities counsel to several public companies and advises on SEC compliance...

312-984-7617
Heidi Steele, Mcdermott, Corporate Securities lawyer
Partner

Heidi J. Steele Focuses her practice on corporate securities, mergers and acquisitions of public and private companies and corporate counseling. She has extensive experience in public and private equity and debt financings, compliance with disclosure and regulatory requirements, tender offers and mergers, acquisitions and dispositions. She advises public and private corporations on a variety of matters, including securities compliance.

Heidi acts as counsel for a wide range of corporate combinations. Recent transactions work includes public offerings of common...

312-984-3624
Brian J. Tratner Corporate Lawyer McDermott NYC
Associate

Brian J. Tratner focuses his practice on corporate advisory matters, particularly M&A and capital markets.

During law school, Brian was a judicial extern for the Honorable Jack B. Weinstein for the US District Court for the Eastern District of New York.

212-547-5334
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