United States: SEC Proposes Dodd-Frank Pay-Versus-Performance Disclosure Rules

On April 29, 2015, the Securities and Exchange Commission (SEC) voted 3-2 to propose new rules requiring companies to disclose the relationship between executive compensation "actually paid" and the company's "financial performance." The proposed rules implement Section 14(i) of the Securities Exchange Act of 1934, as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These disclosures would be required to be included in proxy or information statements in which executive compensation disclosure is currently required pursuant to Item 402 of Regulation S-K.
The pay-versus-performance rules are one of four governance and executive compensation-related provisions applicable to public companies under the Dodd-Frank Act that remain to be adopted by the SEC. Three of the four (pay-versus-performance, hedging policy and pay ratio) have now been proposed, leaving only the clawbacks rulemaking to be proposed. While not as controversial as the pay ratio rulemaking, pay-versus-performance nonetheless will bring with it challenges for companies subject to the new disclosure requirements, not to mention contribute to the ever-expanding length of proxy statements.
The two key questions in the pay-versus-performance disclosure mandate are what is compensation "actually paid" and what is "performance." The SEC took the approach in the proposal that compensation "actually paid" is the total compensation that companies report in the summary compensation table with adjustments for pension benefits and equity awards, while "performance" must be measured by total shareholder return (TSR). In addition to disclosing information about the company's compensation and TSR, certain companies subject to the new requirements also will be required to provide disclosure of their peer companies' TSR.
Companies Subject to the New Disclosure Requirements
The proposed rules would apply to all reporting companies except for foreign private issuers (which are not generally subject to the proxy rules), registered investment companies and emerging growth companies (which were exempted from the statutory requirement by Section 102(a)(2) of the JOBS Act). Smaller reporting companies would be subject to the new requirements, but would receive certain accommodations under the proposal.
Covered Executives
The proposed rules would require disclosure about the company's named executive officers (NEOs) for each covered fiscal year. Information for the principal executive officer (PEO) would be presented separately, while an average would be provided for the remaining NEOs. If multiple PEOs serve during a covered fiscal year, the reported data would be an aggregation of those individuals' compensation. Any other former executives who are included in the summary compensation table as NEOs would be included in the average reported for the remaining NEOs. In discussing the proposal, the SEC noted its belief that requiring average compensation for the non-PEO NEOs would make the information more comparable year-to-year in light of the likely variability in the composition and number of non-PEO NEOs over the years for which disclosure is required.
Summary of New Disclosures

The proposed rules would add new paragraph (v) to Item 402 of Regulation S-K, which would require the following tabular disclosure for each of the company's last five completed fiscal years (or three years in the case of smaller reporting companies) in any proxy or information statement in which disclosure under Item 402 is required:


As reflected above, the required table must disclose the following for each covered fiscal year:

  • the PEO's total compensation, as reported in the summary compensation table in the proxy statement (presented on an aggregate basis if there was more than one PEO during the year);
  • the compensation "actually paid" to the PEO (the summary compensation table total compensation as adjusted for pension benefits and equity awards) (presented on an aggregate basis if there was more than one PEO during the year);
  • the average total compensation for the non-PEO NEOs (including any former executive officers required to be included in the summary compensation table);
  • the average compensation "actually paid" to non-PEO NEOs (including any former executive officers required to be included in the summary compensation table);
  • the company's cumulative TSR, using the definition of TSR included in Item 201(e) of Regulation S-K, which sets forth an existing requirement for a stock performance graph; and
  • the TSR of the companies identified in the peer group identified by the company in its stock performance graph or in its compensation discussion and analysis (CD&A).

Companies also would be required (using the information provided in the table) to provide 1) a clear description of the relationship between executive compensation actually paid to the company's PEO and other NEOs and the cumulative TSR of the company for the period covered in the table and 2) a comparison of the company's TSR and the TSR of the company's peer group.
In addition to being allowed to present three rather than five years of information, smaller reporting companies also would not be required to provide disclosure about peer group TSR because they are not required to disclose an Item 201(e) performance graph or CD&A. 
Companies would be required to tag the disclosure in eXtensible Business Reporting Language, or XBRL, which represents the first time information in proxy or information statements would be required to be tagged. This requirement would be phased in for smaller reporting companies, so that they would not be required to comply with the tagging requirement until the third annual filing in which the pay-versus-performance disclosure is provided.
Calculating Executive Compensation "Actually Paid"
The SEC stated that it recognizes companies currently follow different concepts for "realized" and "realizable" pay and that companies have not broadly accepted one conceptual approach over another. To provide comparability across issuers, the SEC's proposed rule sets forth a calculation for amounts "actually paid." Executive compensation "actually paid" would be calculated using the total compensation amount that companies report in the summary compensation table already required in the proxy statement as a starting point, with adjustments relating to pension benefits and equity awards. Companies would be required to disclose the adjustments to the compensation as reported in the summary compensation table.
Under the proposal:

  • Pension amounts would be adjusted by deducting the change in pension value reflected in the summary compensation table and adding back the actuarially determined service cost for services rendered by the executive during the applicable year. Smaller reporting companies would not be required to make adjustments in pension amounts because they are subject to scaled compensation disclosure requirements that do not include disclosure of pension plans.
  • Equity awards would be considered actually paid on the date of vesting and at fair value on that date, rather than fair value on the grant date as required in the summary compensation table. A company would be required to disclose the vesting date valuation assumptions if they are materially different from those disclosed in its financial statements as of the grant date.

Measure of Financial Performance

While Section 14(i) of the Exchange Act does not specify how a company's financial performance is to be measured, it requires financial performance to take into account any change in the value of the shares of stock and dividends of the company and any distributions of the company. To meet this statutory requirement, the SEC has proposed to use TSR, as defined in Item 201(e) of Regulation S-K, which is calculated by dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the registrant's share price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period. Issuers, other than smaller reporting companies, must present comparative TSR information for the same peer group used for purposes of Item 201(e) of Regulation S-K, or, a peer group used in the CD&A for purposes of disclosing the issuer's compensation benchmarking practices. For many companies, TSR is not the way financial performance is generally measured. While the proposal would require use of TSR, companies may supplement the required disclosure under the proposed rule with other measures that they feel are better suited to the company, so long as such measures are clearly identified, not misleading, and not presented with greater prominence than the required disclosure.
Subject to Say-on-Pay Vote
Because the proposed new disclosures would be provided under Item 402, the disclosures would be subject to the say-on-pay advisory vote required under Rule 14a-21(a). In proposing the new disclosure requirements, the SEC noted its belief that both the pay-versus-performance and pay ratio provisions under the Dodd-Frank Act were intended to provide shareholders with information to help assess a company's executive compensation when exercising their rights to cast say-on-pay votes, and that the new pay-versus-performance disclosures will provide shareholders a new metric for assessing a company's executive compensation relative to its financial performance.
Phase-In of New Disclosure Requirements
The proposed rules would be phased in for all companies subject to the new disclosure requirements. Companies other than smaller reporting companies would be required to provide information on the prior three years the first time the new disclosure is provided, with an additional year of information provided in each of the two subsequent annual proxy or information statements. Smaller reporting companies would initially provide the information for two years, with the third year to be added in their next annual proxy or information statement. The timing of adoption of the final rules will determine when the disclosure is first required, which could be as early as the 2016 proxy season.
Comment Period
Comments on the rule proposal should be received by the SEC on or before July 6, 2015. The proposing release includes 54 specific requests for comment, as well as a general request for comment. In addition to requesting comment on the various specific details of the rule proposal, the SEC more generally requests comment on whether the proposed rule strikes the appropriate balance between prescribing rules to meet the statutory requirements of Section 14(i) while also allowing issuers sufficient flexibility to provide the most useful information to shareholders, and whether the SEC should permit a principles-based approach to the disclosures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Hughes Hubbard & Reed LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Hughes Hubbard & Reed LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions