On April 29, the Securities and Exchange Commission proposed new rules to require annual disclosure in proxy and information statements under the Securities Exchange Act of 1934 regarding the relationship between executive compensation actually paid by, and the financial performance of, registrants (excluding foreign private issuers, registered investment companies and emerging growth companies). The SEC is required to adopt pay-for-performance rules pursuant to The Dodd-Frank Wall Street Reform and Consumer Protection Act.
The new rules, if adopted, would ultimately require registrants to disclose information for the last five years (or three years in the case of smaller reporting companies), subject to a phase-in period.
If the proposed changes are adopted, registrants would need to present the compensation that has actually been paid (1) to the principal executive officer separately and (2) on average, to the other “named executive officers.” While disclosure under the proposed rules would utilize information set forth in the summary compensation table already required in proxy or information statements, a new table would be required and registrants would need to disclose adjustments made to amounts presented in the summary compensation table. For example, disclosure by registrants that are not smaller reporting companies would need to deduct any change in pension value reflected in the summary compensation table and add back the actuarially determined service cost for services rendered by executives during the applicable year. Furthermore, equity awards would be considered actually paid on each vesting date and at the fair market value on such date; and, to the extent valuation assumptions at the time of vesting are materially different from those disclosed in financials as of the grant date, additional disclosure would be required.
The proposed rules would rely on total shareholder return (TSR), as provided for in Item 201(e) of Regulation S-K, as the primary metric for capturing the relationship between executive compensation and financial performance, and would require a registrant to provide comparisons of its TSR against the TSR of the companies in the peer group that such registrant identifies in its stock performance graph or in its compensation discussion and analysis. This information would need to be presented in the new table.
Using the amounts presented in the new table, registrants would then be required to describe (graphically and/or as a narrative) the relationships between (1) compensation actually paid and its TSR and (2) its TSR and the TSR of its peer group.
These new disclosures would be required to be tagged in XBRL.
Click here for a copy of the SEC release.