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SEC Publishes New C&DI On Pay Versus Performance Rules

For the second time since the adoption of the pay versus performance rules (Pay vs. Performance) in August, 2022 (see HERE), the SEC has published guidance via new compliance and disclosure interpretations (“C&DI”).  The SEC previously published 15 C&DI on the subject in February 2023 – see HERE.

The Pay vs. Performance rules require companies to provide a tabular disclosure of specified executive compensation and financial performance measures for their five most recently completed fiscal years in any proxy or information statement filed under Section 14 of the Exchange Act. With respect to the measures of performance, a company is required to report its total shareholder return (TSR), the TSR of companies in the company’s peer group, its net income, and a financial performance measure chosen by the company itself. Using the information presented in the table, companies are required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the company’s TSR and the TSR of its selected peer group. A company is also required to provide a list of three to seven financial performance measures that it determines are its most important performance measures, for linking executive compensation actually paid to company performance.

The Pay vs. Performance rules were adopted seven years after being first proposed following a period of being completely dropped from the SEC regulatory Agenda.  The new disclosure requirements went into effect for inclusion in proxy and information statements for the fiscal year ended on or after December 16, 2022.

New Guidance

On September 27, 2023, the SEC published nine new (Questions 128D.14 – 128D.22) and updated on existing (Question 118.08) C&DI on the topic of Pay vs. Performance.

Question 128D.14 – Confirms that awards granted in years prior to a restructuring, such as a spin-off, should be included in the calculation of compensation actually paid.  All stock and option awards that are outstanding and unvested at the beginning of the covered fiscal year or are granted to the principal executive officer and the remaining named executive officers during the covered fiscal year, must be included in the calculation.

Question 128D.15 – Awards granted prior to an initial public offering should be valued based on the change in fair value of those awards as of the end of the prior fiscal year.  The fair value of these awards should not be determined based on other dates, such as the date of the registrant’s initial public offering.

Question 128D.16 – Under U.S. GAAP, “market conditions” include certain elements related to the price of shares that effect the exercise price, exercisability or other pertinent factors related to a stock or option award.  However, “market conditions” are not considered a “vesting condition” under U.S. GAAP, even if the executive is not entitled to the compensation under the market conditions are satisfied.  The SEC confirms that the effect of a market condition should be reflected in the fair value of share-based awards.  In addition, for purposes of the table required by Item 402(v)(1), market conditions should also be considered in determining whether the vesting conditions of share-based awards have been met. Until the market condition is satisfied, companies must include any change in the fair value of any awards subject to market conditions, in the calculation of executive compensation actually paid.  Companies must also deduct the amount of the fair value at the end of the prior fiscal year for awards that fail to meet the market condition during the covered fiscal year if it results in forfeiture of the award.

Question 128D.17 – Following the advice in Question 128D.16, the SEC confirms that if the market condition prevents vesting but does not result in the forfeiture of the award, its fair value should not be subtracted from the tabular disclosure.

Question 128D.18 – Where an award’s vesting is only conditioned upon the recipient becoming retirement eligible, the amount of the award should be added to the disclosure of compensation actually paid in the year that such holder becomes retirement eligible.

Question 128D.19 – Some stock and option awards with a performance condition require certification by others, such as the compensation committee, that the level of performance was attained.  Where such certification of achievement of performance is a substantive vesting factor for an executive to receive the award, vesting would not be complete until such certification is attained.  This is true even if performance is in one fiscal year and the certification in the next.  However, the certification condition must actually be a substantive condition to vesting and not just perfunctory to delay including the award as compensation actually paid in a given fiscal year.

Question 128D.20Item 402(v)(2)(iii)(C)(3) of Regulation S-K requires the fair value of all stock awards, and all option awards, with or without tandem stock appreciation rights (“SARs”) to be computed in a manner consistent with the methodology used to account for share-based payments under GAAP.  The SEC confirms that the valuation technique may be different that the one used to determine the grant date fair value.  However, the rules require disclosure about the assumptions made in the valuation that differ materially from those disclosed as of the grant date of such equity awards including the reason for the change.

Question 128D.21 – Following Question 128D.20, the SEC confirms that it would never be acceptable to value awards based on a method not prescribed by GAAP.

Question 128D.22Regulation S-K provides that “registrants are not required to disclose target levels with respect to specific quantitative or qualitative performance-related factors considered by the compensation committee or the board of directors, or any other factors or criteria involving confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm for the registrant.”  However, the Pay vs. Performance rules require the calculation of the fair value of awards taking into account the probable outcome of achieving any performance conditions.   The rule also requires disclosure of any assumptions made in the calculation.  The SEC confirms that information that would involve trade secrets can be omitted.  However, the company should disclose as much information as possible.

Question 118.08 – This question involves the topic of disclosures of non-GAAP financial measures.  If non-GAAP financial measures are presented in the Compensation Discussion & Analysis or any other part of the proxy statement for any other purpose, such as to explain how pay is structured or implemented to reflect the company’s or a named executive officer’s performance or to justify certain levels or amounts of pay, then those non-GAAP financial measures are subject to the requirements of Regulation G and Item 10(e) of Regulation S-K.  However, in these pay-related circumstances only, the SEC will not object if a company includes the required GAAP reconciliation and other information in an annex to the proxy statement, provided the company includes a prominent cross-reference to such annex. Similarly, if the non-GAAP financial measures are the same as those included in the Form 10-K that is incorporating by reference the proxy statement’s Item 402 disclosure as part of its Part III information, the SEC will not object if the company complies with Regulation G and Item 10(e) by providing a prominent cross-reference to the pages in the Form 10-K containing the required GAAP reconciliation and other information.  For more information on the use of non-GAAP financial measures including compliance with Regulation G and Item 10(e) see HERE and the blogs linked therein.

The Author

Laura Anthony, Esq.

Founding Partner

Anthony L.G., PLLC

A Corporate Law Firm


Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC 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, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with 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; 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 American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA 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 small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

Contact Anthony L.G., PLLC. Inquiries of a technical nature are always encouraged.

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Anthony L.G., PLLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

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