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SEC Proposed Pay Versus Performance

On April 29, 2015, the SEC published the anticipated pay versus performance proposed rules.  The rules are in the comment period and will not be effective until the SEC publishes final rules.  Although timing is unclear, some commentators believe the new rules will be implemented as soon as the 2016 proxy season. 

The proposed rules require companies to clearly and concisely disclose the relationship between executive compensation actually paid and the financial performance of the company, taking into account any change in the value of the shares of stock and dividends of the registrant and any distributions.  The new proposed disclosure requirements will not apply to emerging growth companies or foreign private issuers.  In addition, smaller public companies will have a scaled back disclosure requirement. 

The proposed new rules implement Section 14(i) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) and as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) by amending Item 402 of Regulation S-K. The disclosure must be made in proxy or information statements in which Item 402 disclosure is included.  The disclosure is not required in regular Exchange Act reports such as Forms 10-K or 10-Q. 

Section 953(a) of Dodd-Frank was enacted at the same time as the Section 951 “say on pay” requirements which were implemented by the SEC in 2011 and phased in for smaller reporting companies in 2013.  The new “pay vs. performance” disclosure requirements are meant to complement and provide additional information that will be helpful in exercising shareholder “say on pay” advisory votes.  As an Item 402 disclosure, the new pay vs. performance disclosure will also be the subject of the “say on pay” advisory vote.  My blog on say on pay for smaller reporting companies can be read HERE.

Although the current rules require many metrics and details on executive compensation, none previously have required a specific disclosure on the relationship between pay and performance.  The Compensation Discussion and Analysis (CD&A) required by Item 402(b) requires an explanation of “all material elements of the registrant’s compensation of the named executive officers” and requires general discussions of performance including disclosure of any bonus structures and performance-based compensation.  The new disclosure requirements will supplement this information by providing a factual description of how the executive compensation actually paid related to the financial performance of the company. 

In accordance with the proposed rules, a company must include a new table disclosing compensation “actually paid” to the principal executive offer or CEO and to the other named executive officers and the corresponding “total compensation” amounts for the prior five fiscal years or three fiscal years for smaller reporting companies.  The five- or three-year look-back, as applicable, is subject to a phase-in period for the new rules.  The table must include:

  • The total executive compensation of the CEO and the average of the total compensation of other named executive officers as reported in the summary compensation table (note the summary compensation table is already a required Item 402 disclosure in proxy and information statements);
  • The executive compensation “actually paid” to the CEO and the average of the executive compensation actually paid to the other named executive officers.  The new proposed rules delineate the required elements and calculation for this disclosure;
  • The cumulative total shareholder return (TSR), calculated in the same manner as the performance graph already required by current SEC rules.

Disclosure of compensation “actually paid”

The proposed new rules delineate the elements of and calculation for the required compensation “actually paid” disclosure.  For smaller reporting companies, the compensation “actually paid” is the executive compensation reported in the Summary Compensation Table disclosure already required to be disclosed in the proxy and information statements in accordance with existing Item 402.  All companies other than smaller reporting companies must then modify the disclosed amount to exclude changes in actuarial present value of benefits under defined benefit and actuarial pension plans that are not attributable to the applicable year of service, and to include the fair value of equity awards at vesting rather than when granted. 

Relationship with Total Shareholder Return (TSR)

The new rules require companies to measure financial performance using TSR as defined in Item 201(e) of Regulation S-K and to make a comparison with the TSR of the company and the compensation actually paid for both the CEO and an average of all the other named executive officers.  Using the values disclosed in the table, the company must disclose the relationship between the executive compensation actually paid and the company’s TSR. The company can make the disclosure either using a narrative discussion, a graph or a combination of both.  Interestingly, the company has flexibility as to the location of the discussion and it is not required to be included in the CD&A section.  Companies that are not smaller reporting companies must also provide disclosure on the relationship between the company’s TSR and the TSR of a peer group as chosen by the reporting company.

Additional and supplemental disclosure

The reporting company may provide additional and supplemental disclosure to the extent that such additional disclosure is useful to an understanding of the pay vs. performance discussion.  As with any information, the additional information cannot be misleading or detract from the basic disclosure elements required by the new proposed rules. 

XBRL Tagging

The new disclosure must be tagged in the XBRL files.  This is the first time the SEC has required XBRL tagging outside of the financial statements. 


The rule allows for a phase-in period.  In the first filing following the effectiveness of the proposed rule, companies will only be required to provide two years of disclosure and will need to add an additional year of disclosure for each subsequent year’s filing until the required number of years of disclosure has been achieved (3 years for smaller reporting companies and 5 years for all others). 

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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