ARTICLE
22 November 2024

Inside The Numbers: Year Two Of Pay Versus Performance Disclosures

MB
Mayer Brown

Contributor

Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world’s leading companies and financial institutions on their most complex deals and disputes. We have deep experience in high-stakes litigation and complex transactions across industry sectors, including our signature strength, the global financial services industry.
During the Practising Law Institute's 56th Annual Institute on Securities Regulation, Securities and Exchange Commission's Division of Corporation Finance...
United States Corporate/Commercial Law

During the Practising Law Institute's 56th Annual Institute on Securities Regulation, Securities and Exchange Commission's Division of Corporation Finance (the "Division") Deputy Director for Disclosure Operations Cicely Lamothe shared valuable insights on implementation of the SEC's pay versus performance (PvP) rules. The SEC adopted these rules in 2022, which require disclosure of five years of PvP data in proxy and information statements in which executive compensation information is required to be included. Read our Legal Update on the PvP rules.

The Division took a pragmatic approach in the first year, issuing forward-looking comments on filings with a focus on essential disclosures and identifying compliance issues. The Division again conducted reviews of PvP disclosures made during the 2024 proxy season, in some cases seeking additional information from registrants with respect to their disclosures. Key takeaways from the two years of reviews include:

  1. Relationship Disclosures. Many companies in the first year of the rule's effectiveness failed to adequately disclose the connection between executive compensation and company performance. While disclosures improved in the second year, the staff stressed that meaningful insights are crucial, rather than just reiterating numbers.
  2. Net Income Reporting. Filers are required to disclose GAAP net income in their PvP tables. While there has been improvement since the first year, some companies continued to incorrectly report figures that excluded non-controlling interests.
  3. Non-GAAP Measures. Although there is no requirement to provide a numeric reconciliation to a GAAP measure, companies using non-GAAP measures must clearly define how these figures are calculated from audited financial statements. The staff cautioned that clarity with respect to the adjustments is essential, and to avoid inconsistencies in how a measure is calculated from year to year.
  4. "Compensation Actually Paid" Calculation. Adherence to the terminology and steps outlined in the rules is essential when calculating and presenting compensation actually paid.

With the third year of PvP rules' implementation now underway, these observations aim to guide companies in enhancing their disclosures. A recent study by Pay Governance, reporting on PvP disclosure in 2024, noted that 96% of the companies surveyed retained the same Company-Selected Measure as in 2023 with changes occurring only in cases of significant shifts in incentive programs. Further, 86% of surveyed companies used the same peer group or index for total shareholder return (TSR) comparisons. Companies using custom peer groups accounted for most changes, typically due to changes in peer group composition.

With regard to tabular list — a unranked list of the three to seven most important financial performance measures used by a company to link executive compensation actually paid company performance (Important Financial Metrics)– 87% of the surveyed companies reported the same number of Important Financial Metrics as in 2023, while 6% increased and 7% decreased the number of metrics. Of the companies that kept the same number of Important Financial Metrics, 93% used the exact same metrics year-over-year, while the remainder changed their metrics.

A study by Meridian Compensation Partners discussed the format of PvP disclosure. Of Meridian's study group, 81% of surveyed companies compared TSR against an industry-specific index, while 19% opted for a custom peer group. Graphic disclosures were preferred over narrative disclosures with 92% of companies favoring graphic representations to illustrate the relationship between "Compensation Actually Paid" and performance.

Most companies listed three to five metrics in the tabular list, with 30% reporting three metrics, 22% reporting four metrics, and 23% reporting five metrics. Only 13% of companies supplemented SEC-required disclosures with voluntary reporting. Among these, 50% of surveyed companies defined pay as Realized or Realizable Pay, 31% defined pay using Summary Compensation Table Pay, excluding certain components, 27% used Target Pay, and 15% used Total Compensation from the Summary Compensation Table.

Overall, companies are embedding these requirements into long-term compensation strategies, reinforcing transparency and alignment between pay and performance.

Visit us at mayerbrown.com

Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England & Wales), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) and non-legal service providers, which provide consultancy services (collectively, the "Mayer Brown Practices"). The Mayer Brown Practices are established in various jurisdictions and may be a legal person or a partnership. PK Wong & Nair LLC ("PKWN") is the constituent Singapore law practice of our licensed joint law venture in Singapore, Mayer Brown PK Wong & Nair Pte. Ltd. Details of the individual Mayer Brown Practices and PKWN can be found in the Legal Notices section of our website. "Mayer Brown" and the Mayer Brown logo are the trademarks of Mayer Brown.

© Copyright 2024. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More