On April 29, 2015, the Securities and Exchange Commission issued a proposed rule regarding the so- called “pay for performance” disclosure (“Pay for Performance Disclosure”), which is one of the compensation-related disclosure requirements mandated by Section 953 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed Pay for Performance disclosure rule (the “Proposed Rule”) is part of the Dodd-Frank initiative to increase compensation disclosure for public company executives and requires registrants (other than emerging growth companies, foreign private issuers, and registered investment companies) to clearly disclose in their proxy or information statements, for each of the five most recently completed fiscal years, information regarding the relationship between executive compensation “actually paid” to the registrant’s named executive officers and the registrant’s total shareholder return (“TSR”), as well as the relationship between the registrant’s TSR and the TSR of the registrant’s peer group. Required disclosure includes a mandatory table and additional information in either narrative or graphic form (or both). Once finalized, a transition rule included in the Proposed Rule provides for the phase-in of required disclosure. Summarized below are the main aspects of the Proposed Rule, which is currently subject to a comment period that runs until sixty days following the publication of the Proposed Rule in the Federal Register (which is expected to be published on May 7, 2015).

Disclosure Requirements

The Proposed Rule requires the Pay for Performance Disclosure in any proxy or information statement (but not registration statements) for which disclosure of compensation is required if action is to be taken regarding executive compensation matters or the election of directors. Disclosure is not required in any specific location within the proxy or information statement, but the SEC does expect such information will typically be included with the other executive compensation disclosures. Depending on whether the Pay for Performance information is used as part of the registrant’s compensation decision-making process, a registrant may, or may not, choose to include the information in the Compensation Discussion & Analysis section.

Wherever it is disclosed, the Pay for Performance Disclosure includes both a specific table and other supplemental information. The required table must contain, for each year being disclosed, the amount of compensation “actually paid,” to the principal executive officer (or to all those individuals who served in this role during the fiscal year, in the aggregate), the average compensation “actually paid” to the other named executive officers as a group, the TSR for the registrant, and the TSR for the selected peer group. The table also includes columns for the “Total Compensation” amounts reported in the registrant’s Summary Compensation Table for the relevant named executive officers.   These total compensation numbers are reference points from which the “actually paid” compensation amounts are calculated, based on certain adjustments provided under the Proposed Rule. The prescribed format for the table is as follows:

Pay Versus Performance

Click here to view table.

In addition, the Proposed Rule requires that the new table include footnote disclosure reporting details of the “actually paid” calculation. Following the new table, the registrant must separately clearly describe (either via narrative, graphic, or a combination of the two) (i) the relationship between the executive compensation actually paid and the registrant’s TSR, and (ii) the relationship between the registrant TSR and the peer group TSR.

The Proposed Rule also provides that the disclosure provided in each column of the proposed table (including footnote disclosures) will need to be provided in interactive data format using XBRL.

Determination of Compensation Amount “Actually Paid” and TSR

The Proposed Rule requires the amount of compensation considered “actually paid” for purposes of this disclosure to be computed by making a series of adjustments to the Total Compensation amount reported for each named executive officer in the Summary Compensation Table. Generally, adjustments include:

  1. Subtracting any amount attributable to the increase in the actuarial present value of all defined benefit and actuarial pension plans reported in the Summary Compensation Table, but then adding back the actuarially determined service cost for services rendered by the executive during the applicable year;
  2. Subtracting the total grant date fair value of awards of stock and options for awards granted in the applicable year, but then adding back, for awards that vested in the applicable year, the fair value of those vesting awards as of the vesting date, computed in accordance with FASB Topic 718.

For purposes of the Proposed Rule, TSR is calculated in the same manner that it is calculated for purposes of the performance graph that must be included in the registrant’s annual report under Item 201(e) of Reg. S-K. The Pay for Performance Disclosure also generally requires disclosure of peer group TSR, using either the same peer group used by the registrant for purposes of the Item 201 performance graph or the peer group used by the registrant for purposes of its compensation benchmarking practices, as disclosed in its Compensation Discussion & Analysis. If the peer group is not a published industry or line-of-business index, the registrant would be required to disclose the identity of the included issuers, which can be accomplished through incorporating previously filed materials by reference. Smaller Reporting Companies are exempt from including information on peer group TSR.

Registrants may provide additional information, such as information on “realizable” or “realized” pay, or other financial performance measures, as long as the additional disclosure is clearly identified and not misleading or more prominent than the required disclosure.

Transition Period

Generally, the Pay for Performance Disclosure includes information for the five most recently completed fiscal years, with smaller reporting companies required to provide information only for the three most recently completed fiscal years. However, the proposed rule offers a transition period for registrants, phasing in the required disclosure over a period of years as follows:

  • Existing Registrants (other than Smaller Reporting Companies): In the first applicable filing after the rule becomes effective, Pay for Performance Disclosure is required for the last three fiscal years. Thereafter, one additional year of disclosure is added in each of the two subsequent annual proxy filings where disclosure is required.
  • Smaller Reporting Companies: In the first applicable filing after the rule becomes effective, Pay for Performance Disclosure is required for only the last two fiscal years.
  • Newly Reporting Companies: Information for fiscal years prior to the last completed fiscal year will not be required if the company was not a reporting company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended at any time during that year. Therefore, in the first year as a reporting company, disclosure will be required only for the most recently completed fiscal year.

Solicitation of Comments

Along with the issuance of the Proposed Rule, the SEC has included a substantial number of requests for comment on all aspects of the Proposed Rule, including, among other things, the mechanics of the disclosure, in what filings it should be included, the degree to which the rule captures the concept of “compensation actually paid,” and the appropriateness of the performance metrics chosen. Any comments must be submitted within 60 days following the publication of the Proposed Rule in the Federal Register (which is expected to be published on May 7, 2015).