Introduction

The Securities and Exchange Commission recently issued proposed rules that would implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires disclosure of the relationship between executive compensation actually paid by a company and the company’s financial performance. The proposed rules would add new Item 402(v) to Regulation S-K and would generally apply to all reporting companies. However, the new requirement would not apply to foreign private issuers, registered investment companies and emerging growth companies (companies with less than $1bn of gross revenue in their latest fiscal year).

Proposed new disclosures

If adopted, the proposed rules would require companies to include a new table in any proxy or information statement for which disclosure under Item 402 of Regulation S-K is required (where the solicitation relates to the election of directors or executive compensation matters) showing the following information:

  • the total compensation of the CEO, as reported in the summary compensation table;
  • the average total compensation of the other named executive officers, as reported in the summary compensation table (including the CFO, the next three most highly compensated executive officers serving at the end of the year, and up to two additional executive officers who would have been included but were not serving at the end of the year);
  • the “executive compensation actually paid” to the CEO and the average “executive compensation actually paid” to the other named executive officers;
  • the “cumulative total shareholder return” (as defined in Item 201(e) of Regulation S-K) for the company, which shows the total increase or decrease in the company’s stock price plus dividends paid on the company’s stock; and
  • the “cumulative total shareholder return” for either (1) the peer group identified in the company’s stock performance graph (a published industry or line-of-business index, peer issuers selected by the company, or companies with similar market capitalizations), or (2) the peer group, if any, used in the compensation discussion and analysis to benchmark compensation.

A narrative or graphical description of the relationship between “executive compensation actually paid” and the company’s total shareholder return, and between the company’s total shareholder return and its peer group total shareholder return, would also be required. The SEC’s proposing release states that “[d]isclosure of the relationship could include, for example, a graph providing executive compensation actually paid and change in TSR on parallel axes and plotting compensation and TSR over the required time period. Alternatively, disclosure of the relationship could include showing the percentage change over each year of the required time period in both executive compensation actually paid and TSR together with a brief discussion of that relationship.”

Companies would initially be required to provide disclosure for the last three fiscal years, with four fiscal years of disclosure to be provided in the following annual filing, and five fiscal years of disclosure to be provided thereafter. Newly reporting companies would only be required to provide the disclosure for one year in the first year as a reporting company and for two years in its second year as a reporting company.

The disclosure would be required only in a company’s proxy or information statement, and would not be required in Securities Act registration statements or in a company’s annual report on Form 10-K. It would also not be deemed to be incorporated by reference into any other SEC filings, except to the extent that a company specifically incorporated it by reference.

The proposed rules would require that the new disclosure be provided in XBRL interactive data format.

Executive compensation actually paid

The proposed rules define the term “executive compensation actually paid” as an adjustment to the total compensation reported in the summary compensation table. Specifically, the summary compensation table total compensation amount would be modified by:

  • deducting the aggregate change in the actuarial present value of the officer’s accumulated benefit under all defined benefit and actuarial pension plans, but including the actuarial present value of each officer’s benefit under all such plans attributable to services rendered during the covered fiscal year; and
  • considering equity awards as actually paid on the date of vesting and valued at fair value on that date, rather than at fair value on the date of grant.

Comment period and adoption

The proposed rules are currently open for public comment. The comment period will end on July 6, 2015. The proposed rules will not become effective unless and until the SEC adopts final rules, but it is possible that the final rules will be issued in time for the 2016 proxy season.

Conclusion

Companies that would be subject to the new disclosure requirement may wish to make preliminary determinations of the additional information that would be disclosed, as well as the relationship between their executive compensation actually paid and total shareholder return of the company and its peer group. Companies may also want to revisit the composition of their peer group, given the focus on the new potential disclosure requirement. Once the new requirement is adopted, companies may also wish to consider whether to provide additional information or discussion with the new disclosure in order to help shareholders better understand it.