United States: New SEC Proposed Pay-Versus-Performance Rules

On April 29, 2015, the United States Securities and Exchange Commission (the "SEC") proposed new rules intended to address the required measure of "executive compensation actually paid" under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").

PROPOSED PAY-VERSUS-PERFORMANCE RULES

The proposed rules would add a new Item 402(v) to SEC Regulation S-K. Under proposed Item 402(v), additional executive compensation disclosures would be required in proxy solicitation materials or other applicable information statements that are required to contain executive compensation disclosure. The proposed new disclosures would not apply to emerging growth companies, foreign private issuers, or registered investment companies (other than business development companies). Similar to other disclosures required under Item 402, these disclosure obligations would be scaled and somewhat less onerous for smaller reporting companies.

Milbank observations:

  • This new disclosure could be placed in the Compensation Discussion and Analysis (the "CD&A") for context. However, inclusion in the CD&A could implicitly suggest that these new pay-versus-performance disclosures were considered in making executive compensation decisions.
  • As the new disclosures are contained in SEC Regulation S-K Item 402, they would be subject to ordinary say-on-pay advisory votes along with the other executive compensation information disclosed under Item 402.

TABULAR DISCLOSURE OF COMPENSATION ACTUALLY PAID

The proposal requires the new disclosures to be contained in a prescribed table. Subject to a proposed phase-in period, the new table would be required to include the following information for each of the company's five most recently completed fiscal years:

  • executive compensation "actually paid" to the company's principal executive officer (the "PEO") and the average of executive compensation "actually paid" to the company's other named executive officers, as listed in the Summary Compensation Table for the applicable year (the "Other NEOs);
  • total compensation of the PEO and the average total compensation of the Other NEOs, as is already required to be disclosed in the Summary Compensation Table;
  • the company's cumulative total shareholder return ("TSR"), determined as already prescribed under existing SEC rules; and
  • the TSR of the company's designated peer group of companies (the "Peer Group").

If more than one person serves as the PEO in any year, the compensation for those people would be aggregated into a single PEO entry for the applicable year.

Milbank observation:

Disclosure of average compensation for the Other NEOs potentially makes this information more comparable from year to year, regardless of the fact that the number and identity of the Other NEOs may vary from year to year during the comparison period.

DETERMINATION OF EXECUTIVE COMPENSATION ACTUALLY PAID

The amount of executive compensation "actually paid" to an individual during an applicable year begins as total compensation set forth in the Summary Compensation Table, but is then adjusted by (i) removing changes in pension value that are not attributable to the applicable year of service and (ii) utilizing the vesting date value of equity awards that vested during the applicable year, rather than awards granted during the year. Equity award fair values would be determined using FASB ASC Topic 718. Itemized numerical footnote disclosure would be required to accompany the new table for each entry in order to explain the applicable differences between executive compensation "actually paid" and total compensation as determined for purposes of the Summary Compensation Table. In addition, in the case of stock options and stock appreciation rights ("SARs"), vesting date valuation assumptions must be disclosed if they are materially different from those disclosed in the financial statements as of the grant date. To the extent that equity awards were repriced or otherwise modified during the applicable year, the incremental fair value changes are also required to be disclosed (including on a pro-rata basis for awards with multiple vesting dates).

Milbank observations:

  • The net effect of the pension adjustment is to remove the portion of change in pension value that results solely from changes in interest rates, age, and other actuarial inputs and assumptions, instead capturing only the value attributable to the incremental service during the applicable year.
  • As in the case of total compensation for purposes of the Summary Compensation Table, executive compensation "actually paid" would include preferential earnings on non-qualified deferred compensation.
  • One implication of using the fair value of awards vesting during the relevant year, rather than the fair value of awards granted or exercised during the relevant year, is that different vesting schedules (i.e., cliff versus time vesting) could have a big year to year impact on these disclosures.
  • One-day vesting date differences at the end of a year (i.e., on December 31 versus January 1) could similarly have a significant impact on the executive compensation "actually paid" during a given year, in particular if the fair value of the equity award vesting represents a substantial portion of the executive's total compensation for that year.
  • Under the SEC's proposal, it appears that equity awards are included in the computation of executive compensation "actually paid" only to the extent that all vesting conditions applicable to the award (or portion thereof) are fully satisfied. If an equity award is subject to both time and performance conditions, it seems that both would need to be satisfied before the applicable portion of the award is included in the calculation of executive compensation "actually paid."
  • The required disclosure of stock option and SAR valuation assumption differences would require revisiting the assumptions used at each applicable grant date to ensure conformity.

DISCLOSURE OF PAY-VERSUS-PERFORMANCE RELATIONSHIPS

With respect to the information disclosed in the new table, the proposed rules would also require disclosure regarding the relationship between (i) executive compensation "actually paid" and the company's TSR, and (ii) the company's TSR and the Peer Group's TSR. The proposed rules do not prescribe any particular method for presenting this relationship disclosure, instead indicating that the relationship disclosure could be in the form of a narrative, a graph, a chart, or some combination thereof. Similarly, the proposed rules specify that this new information would not be required to be disclosed in any particular location within the proxy or information statement.

ADDITIONAL TECHNICAL REQUIREMENTS

As with executive compensation disclosures in general, the SEC's plain English principles would apply to these new disclosures. In addition, as proposed, these new disclosures must be provided in tagged data format using eXtensible Business Reporting Language (XBRL).

PROCESS AND IMPACT

The proposed rules are subject to a 60-day public comment period. If the proposed rules are adopted in their current form following the public comment period, they would apply to the first proxy or other applicable filing after the rules become effective. However, a phase-in is currently proposed that would initially require disclosure for only the company's three most recently completed fiscal years (with one additional year of historical disclosure being added during each subsequent year until five years are disclosed).

Milbank observations:

  • If the SEC adopts final rules by the end of 2015, they would likely apply with respect to the 2016 proxy filing season.
  • The phase-in reduction is permissive and not mandatory, meaning that companies can still disclose data for five years if they prefer.
  • As with compensation disclosure generally, these new historical disclosures are only required with respect to years when the company was a reporting company.

COORDINATION WITH PAY RATIO RULES

These proposed pay-versus-performance rules are distinct from the chief executive officer ("CEO") pay ratio disclosure rules that the SEC previously proposed on October 1, 2013 under Section 953(b) of the Dodd-Frank Act. Those proposed rules would require disclosure regarding the ratio of the CEO's annual total compensation to the median annual total compensation of company employees. However, the SEC has not yet adopted final CEO pay ratio rules.

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.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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.

Disclaimer

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.

General

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