United States: SEC Proposes Pay Versus Performance Disclosure Rule

Proposed Rule Would Add New Compensation Table and Related Information to Annual Meeting Proxy Statements

On April 29, 2015, the Securities and Exchange Commission (SEC), by a three-to-two vote, proposed the pay versus performance disclosure rule required by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Section 953(a) added Section 14(i) to the Securities Exchange Act of 1934 (the "Exchange Act"), which directs the SEC to adopt a rule requiring disclosure of the relationship between executive compensation actually paid and the issuer's financial performance.

The SEC proposal would require tabular disclosure in annual meeting proxy and information statements of (a) the "compensation actually paid" to the CEO and the average "compensation actually paid" to the other named executive officers as a group; (b) the issuer's total shareholder return (TSR); and (c) a peer group TSR. The registrant would also be required to provide a description, which could be in a graph or narrative format, of the relationship between compensation actually paid, TSR, and peer group TSR, as reflected in the table. After a phase-in period, this tabular disclosure would be required for the prior five fiscal years (or the prior three fiscal years for smaller reporting companies). The rule would be set forth in a new paragraph (v) to Item 402 of Regulation S-K.

For purposes of the table, "compensation actually paid" would mean total compensation as reported in the Summary Compensation Table with certain adjustments made for equity award and defined benefit and pension plan amounts. With respect to equity award amounts, issuers would replace grant date fair value as reported in the Summary Compensation Table with a vesting date fair value for any awards that vested during the applicable year and explain the calculation in footnotes.

Other noteworthy features of the proposal are as follows:

• TSR would be calculated in the same manner as currently required pursuant to Item 201(e) of Regulation S-K with respect to the performance graph required in annual reports or proxy statements.
• The peer group utilized could be either the same index or issuers used for purposes of the performance graph or the compensation peer group disclosed in the Compensation Discussion and Analysis. If the peer group is not a published industry or line-of-business index, the peer group components would have to be disclosed.
• The new disclosure would have to be electronically formatted using XBRL and filed as an exhibit to the definitive proxy or information statement filed with the SEC. This would be the first time the SEC has required any compensation-related or other proxy statement information to be filed in an interactive data format.
• Unlike other parts of Item 402 of Regulation S-K, the proposing release explains that the disclosure required by the new paragraph (v) would only be required in proxy and information statements and not in Annual Reports on Form 10-K or registration statements under the Securities Act of 1933 (the "Securities Act"). In addition, the disclosure would not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act unless specifically incorporated.
• Smaller reporting companies would be required to comply with the rule, but the tabular disclosure would cover only a three-year period. In addition, smaller reporting companies would not be required to include a peer group TSR.
• The proposed rule would not apply to emerging growth companies and foreign private issuers.

A copy of the SEC proposing release can be found here. The comment period for the proposal extends until July 6, 2015. Depending on when a final rule is adopted, it could be effective as early as the 2016 proxy season.

Of the four remaining Dodd-Frank Act executive compensation rulemakings to be finalized by the SEC, only the clawback policy rulemaking requirement by Section 954 of the Dodd-Frank Act has not been proposed at this point. In addition to the pay versus performance rule proposal, both the pay ratio disclosure rule required by Section 953(b) (proposed in the fall of 2013) and the hedging disclosure rule required by Section 955 (proposed in February 2015) have been proposed but not yet adopted.

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