On April 29, 2015, the Securities and Exchange Commission (the “SEC” or “Commission”) voted 3-2 to propose a rule requiring certain reporting companies to include a new pay-versus-performance disclosure in any proxy or information statement for which disclosure under Item 402 of Regulation S-K is required.1 The full text of the proposed rule, along with the SEC’s specific requests for comment, may be found here. This new disclosure is intended to highlight the relationship between the executive compensation a registrant pays to certain of its executive officers and the financial performance of the registrant, and would apply to public companies (other than foreign private issuers, emerging growth companies or registered investment companies).

Implements Dodd-Frank Act Section 953(a)

The proposed rule implements a requirement under Section 953(a) of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which provides as follows:

“The Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders of the issuer a clear description of any compensation required to be disclosed by the issuer under section 229.402 of title 17, Code of Federal Regulations (or any successor thereto), including information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions.” [Emphasis added]

New Regulation S-K Item 402(v)

The proposed rule would add a new Item 402(v) to Regulation S-K under the Securities Act of 1933, as amended, which would require a registrant to disclose the following information: (i) total compensation reported in the Summary Compensation Table (“SCT”) for its principal executive officer (“PEO”), (ii) the total compensation actually paid to its PEO, (iii) an average of the total compensation reported in the SCT for the registrant’s named executive officers other than the PEO (the “Other NEOs”), (iv) an average of the total compensation actually paid to the Other NEOs, (v) the registrant’s total shareholder return on an annual basis, and (vi) the total shareholder return on an annual basis of companies in the registrant’s peer group.

The proposed rule would require disclosure of the above-described information in the following tabular format:

Click here to view table.

While the proposed rule does not mandate a location for the new Item 402(v) disclosure, the SEC generally expects that it would be disclosed with the other Item 402 executive compensation disclosure. In addition to the table set forth above, Item 402(v) would require footnote disclosure of each amount deducted from, and added to, the total compensation amount disclosed in the SCT for both the PEO and the Other NEOs, for purposes of computing the amounts of compensation actually paid to such persons as required by columns (c) and (e) above, respectively. Requiring disclosure of SCT total compensation side by side with “compensation actually paid” (as described below) is intended to facilitate shareholder comparison of such amounts. The disclosure required by new proposed Item 402(v), including the tabular disclosure and any required footnote disclosure, would be required to be presented in interactive data format using eXtensible Business Reporting Language (or “XBRL”).2

Proposed Item 402(v) would also require a registrant to describe (1) the relationship between the executive compensation actually paid and the registrant’s total shareholder return, and (2) the relationship between the registrant’s total shareholder return and the total shareholder return of its peer group, in each case, using the information included in the table. This description would follow the table and could be provided either as a narrative or graphically, or as a combination of the two, and would also be required to be provided in interactive data using XBRL.

Components of Proposed Rule

Executives Covered: The proposed rule would apply to a registrant’s named executive officers previously determined in accordance with Item 402(a)(3) of Regulation S-K, for registrants other than smaller reporting companies, and Item 402(m) of Regulation S-K, for smaller reporting companies. In addition, the additional disclosure would require that compensation information be presented separately for the registrant’s PEO and as an average for the registrant’s Other NEOs.

Compensation Actually Paid: “Compensation Actually Paid” as reported in columns (c) and (e) above, would be defined to mean the total compensation reported in the SCT (regardless of whether the compensation is awarded based on the registrant’s financial performance), adjusted to (i) exclude certain pension costs, and (ii) with respect to equity awards that vested in the applicable year being reported, include the fair value at vesting rather than the grant date fair value which is currently included in the SCT. This new amount being included for equity awards would also require registrants to reflect any increases in fair value resulting from adjustments or amendments to the exercise price of options or stock appreciation rights held by its named executive officers.

Performance Measured: The proposed rule would require registrants to use total shareholder return as defined in Item 201(e) of Regulation S-K as the measure of the registrant’s financial performance for purposes of the pay-versus-performance disclosure required by new Item 402(v) of Regulation S-K. And, registrants other than smaller reporting companies would also be required to disclose peer group total shareholder return (using either the peer group the registrant uses for Item 201(e) purposes, or the peer group used in the registrant’s Compensation Discussion and Analysis for purposes of disclosing the registrant’s compensation benchmarking practices).

Time Period Covered: For registrants other than smaller reporting companies, the proposed rule would require such registrants to provide the new pay-versus-performance disclosure for the five most recently completed fiscal years (or the last three completed fiscal years in the first year the disclosure is required, and the last four completed fiscal years in the second year the disclosure is required). Smaller reporting companies would be required to provide such information for the three most recently completed fiscal years (or the last two completed fiscal years in the first year the disclosure is required). The pay-versus--performance disclosure, however, would only be required for years that a registrant was a reporting company pursuant to Sections 13(a) or 15(d) of the Exchange Act, providing additional relief to newly reporting registrants.

What’s Next

The proposed rule was published in the Federal Register on May 7, 2015, see link here, which begins the clock on a 60-day comment period. Interested parties will have until July 6, 2015, to submit any comments on the proposed rule to the SEC. A final rule would be issued after the SEC considers any such comments.