Following its reopening of the comment period in January for the Pay Versus Performance rulemaking proposal initially released in May 2015, the SEC adopted (on a 3-to-2 vote) final Pay Versus Performance rule today.
According to the Fact Sheet, the rule requires companies to provide tabular disclosure of enumerated executive compensation and financial performance measures for their five most recently completed fiscal years. Specifically, the table must include the Summary Compensation Table measure of total compensation and a measure reflecting “executive compensation actually paid” (calculated as prescribed by the rule) for the CEO and as an average for the other NEOs.
Required financial performance measures include the company’s and company peer group’s TSRs; the company’s net income; and a company-selected performance measure that represents what the company believes to be the most important financial performance measure it used to link CEO pay to company performance for the most recently completed fiscal year.
Companies will also be required to:
- Describe the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its PEO and, on average, to its other NEOs, over the registrant’s five most recently completed fiscal years
- Describe the relationship between the registrant’s TSR and its peer group TSR
- List three to seven financial performance measures that the company determines are its most important measures (using the same approach as taken for the company-selected performance measure). Companies may (but are not required to) include non-financial measures in the list if they considered such measures to be among their three to seven “most important” measures.
In their dissenting statements, SEC Commissioners Pierce and Uyeda strongly critiqued the substance and process associated with the rulemaking. As previously reported, the Society submitted a comment letter on the initial proposal in July 2015, and another comment letter in March 2022 in response to the reopening of the comment period, which, among other things, recommended a 3-year rather than 5-year disclosure period and elimination of the proposed requirement to disclose the most important performance measures.
The rules, which apply to all reporting companies, except foreign private issuers, registered investment companies, and Emerging Growth Companies, will become effective 30 days following publication of the release in the Federal Register. SRCs will be permitted to provide scaled disclosures. The disclosures are required to be included in proxy and information statements for fiscal years ending on or after December 16, 2022.
See also the SEC’s release and these supporting statements from SEC Chair Gensler and Commissioners Crenshaw and Lizárraga.
Access additional resources on our Pay for Performance page.