There Are No Shortcuts with SEC’s New Pay Versus Performance Rule

The Securities and Exchange Commission’s (SEC) new Pay Versus Performance rule is broad and deep, including a highly technical regulation that demands close attention. Shortcuts are not an option.

Fortunately, the SEC has issued a helpful FAQ that answers a lot of the questions companies might have.

Some history: Corporations have been including “pay for performance” information in their SEC filings for years. It’s a growing area of focus, yet an imprecise business concept. In practice, corporations, investors, proxy advisors, and others all have their own ideas about what constitutes pay and what is meant by performance.

For example, pay is contingent on how and when a company determines equity-based compensation values. And performance targets can include a corporation’s stock price, certain financial milestones, or many other metrics. Environmental, Social and Governance (ESG) has been gaining traction recently as a key measurement of corporate performance.

The SEC’s Pay Versus Performance (PvP) rule is intended to offer a more prescriptive and standardized process that allows investors and others to easily compare how different companies measure up.

Amending the SEC’s previous disclosure framework for executive compensation, the new rule requires public companies to share information about the relationship between executive compensation decisions and financial performance. Key details:

• It requires companies to provide a table disclosing specified executive compensation and financial performance measures for the five most recently completed fiscal years, subject to a transition period
   
• Companies have flexibility as to the format in which to present the descriptions of comparative relationships, whether graphical, narrative, or a combination of the two
   
• Companies may decide whether to group any of the relationship disclosures together when presenting their description disclosure, but any combined description of multiple relationships must be “clear”
   
• The SEC is not mandating a specific location within the proxy where this disclosure must be placed. Companies can decide where to nest the disclosure information.

Disclosure requirements apply to most reporting companies providing proxy and information statements for fiscal years ending on or after December 16, 2022. Emerging growth companies, foreign private issuers, and registered investment companies are not subject to the rule.

Further, there is a phase-in period, and inline XBRL will be required. XBRL is a reporting language that enables the exchange of business information.

DFIN’s PvP team stands ready to help your company comply with the PvP rule. As the leading provider of software- and technology-enabled financial regulatory and compliance solutions, DFIN files more than 170,000 filings with the SEC annually and provides full XBRL data tagging services in alignment with the SEC Executive Compensation Disclosure (ECD) Taxonomy.

In addition, our corporate governance team is discussing with many of our corporate clients where in the proxy to locate the new data (e.g., in the CD&A, or following the traditional compensation tables), whether to include graphs, and similar decisions. Also, based on our relationships and continuing engagement with major institutional investors, we are sharing our understanding of how they, and the proxy advisors, plan to utilize these new disclosures in “year one” (2023) and how this may change by “year two” and after.

For more information, please watch DFIN’s Pay Versus Performance webcast, which describes the rule in greater detail as well as the DFIN services and SaaS we can bring to bear to ensure companies are in compliance. You may also contact DFIN here.