Last week, the SEC finally released proposed rules under Dodd-Frank Act Section 953, which will require companies to disclose information in their annual proxy statement that shows the relationship between the executive compensation actually paid and the financial performance of the company. This will add more detail to last week’s post on the key provisions of the proposed rules.

New Item 402(v) provides the following table for the disclosure of the required information:

PAY VERSUS PERFORMANCE

Click here to view the table.

As indicated by the column titles, column (b) is the CEO’s total compensation for the year as reported in the SCT.

Column (c) is the compensation actually paid to the CEO (If more than one person served as CEO during a year, include in column (c) the aggregate compensation actually paid for the persons who served as CEO).

Column (d) is the average total compensation reported for the remaining NEOs.

Column (e) is the average compensation actually paid to the remaining NEOs.

Column (f) is the Company’s cumulative total shareholder return for each year.

Column (g) is the cumulative total shareholder return for the Company’s peer group (calculated in the same manner for the same measurement period). A company may use either (i) the same peer group used for purposes of Performance Graph required by Item 201(e) or, (ii) a peer group used in the CD&A for purposes of disclosing the company’s compensation benchmarking practices. If the peer group is not a published industry or line-of-business index, the Company must disclose the identity of the companies comprising the group. The returns of each component company of the group must be weighted according to the respective companies’ stock market capitalization at the beginning of each period for which a return is indicated.

COMPENSATION ACTUALLY PAID

Among the most important terms and definitions is “compensation actually paid,” which the rules would define as:

  • Total compensation for the covered fiscal year for each NEO as provided in the SCT,
  • Minus, the aggregate change in the actuarial present value of the NEO’s accumulated benefit under all defined benefit pension plans reported in the SCT,
  • Plus, the service cost under all such pension plans, calculated as the actuarial present value of each NEO’s benefit under all plans for service rendered during the year, in accordance with FASB ASC Topic 715, and
  • Substitute the fair value on the vesting date of all stock, option, and SAR awards for which all vesting conditions were satisfied during the covered fiscal year, grant date FMV figures reported in the SCT as to those awards.

Regarding “compensation actually paid,” the proposed rules would require companies to add certain footnotes to the Table that disclose (i) the exact amounts deducted and added in calculating compensation actually paid the CEO and the average amounts deducted and added for the other NEOs, and (ii) any difference in the assumptions used to calculate the fair value on the vesting date of all stock, option, and SAR awards from the assumptions used to calculate grant date FMV figures.

Other important terms include the “measurement period,” which is the period beginning at the “measurement point” established by the market close on the last trading day before the Company’s earliest fiscal year in the table, through and including the end of the Company’s last completed fiscal year.

NARRATIVE DISCLOSURE

The proposed rules also would require narrative disclosure supplementing the information provided in the table to provide

  • A clear description of the relationship between: (i) the compensation actually paid to the CEO (column (c)) and the average of the compensation actually paid to the other NEOs (column (e)), and (ii) the Company’s cumulative TSR (column (f)) for each of the last five completed fiscal years, and
  • A comparison of the Company’s cumulative TSR (column (f)) and cumulative TSR of the Company’s peer group (column (g)) over the same period.

XBRL

As we mentioned in the first blog post, companies must electronically format this new disclosure using the eXtensible Business Reporting Language (XBRL). Companies must tag each amount required to be disclosed in the table separately. The required footnote and narrative disclosure must be block-text tagged.

TRANSITIONAL RULES AND EXEMPTIONS

In the first filing in which a Company provides this disclosure, it may provide disclosure for only three years, instead of five, and provide disclosure for an additional year in each of the two subsequent annual filings. New/IPO companies only need report information for the last completed fiscal year.

Smaller reporting companies may provide the required information for three years instead of five and may provide the disclosure for only two fiscal years in the first filing in which it provides this disclosure. Smaller companies also are not required to provide the disclosure with respect to the TSR of its peer group.

Emerging growth companies, registered investment companies, and foreign private issuers are exempt from this reporting requirement.