At long last, on August 25, 2022, the Securities and Exchange Commission adopted the pay versus performance disclosure requirements directed by the Dodd-Frank Act over twelve years ago. The surprise rulemaking action is described in the SEC's press release and fact sheet. In January 2022, the SEC reopened the comment period for the rules that had originally been proposed in 2015 to implement Section 953(a) of the Dodd-Frank Act, which would require a comparison of a company's performance to the compensation actually paid to the company's principal executive officer and other executive officers. The new rules require companies to disclose in proxy statements how their executive compensation relates to certain executive compensation and performance measures over the last five fiscal years (after a brief phase-in period as further explained below).

Specifically, the new rules require that companies provide a table in their proxy statement disclosing specified executive compensation and financial performance measures for the company's five most recently completed fiscal years. This table must include, for the PEO and, as an average, for the other named executive officers, the Summary Compensation Table measure of total compensation and a measure reflecting "executive compensation actually paid," as specified by the rule. The following financial performance measures must be included in the table:

  • Total shareholder return (TSR) for the company;
  • TSR for each of the companies in the company's peer group;
  • The company's net income; and
  • A financial performance measure chosen by the company and specific to the company that, in the company's assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company's named executive officers to company performance for the most recently completed fiscal year.

The new rules require a description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to the PEO and, on average, to the other named executive officers over the company's five most recently completed fiscal years. The company must include a description of the relationship between the company's TSR and its peer group TSR.

The rules require companies to list three to seven financial performance measures that they determine are its most important measures. Companies are permitted, but not required, to include non-financial measures in the list if they considered such measures to be among their three to seven "most important" measures.

The new disclosure requirements will become effective 30 days following publication of the adopting release in the Federal Register. Companies (other than emerging growth companies, registered investment companies, or foreign private issuers, which are all exempt from the rule) will need to comply with these disclosure requirements in proxy statements for fiscal years ending on or after December 16, 2022. The pay versus performance disclosure will need to be tagged using Inline XBRL.

Companies (except for smaller reporting companies) will be required to provide the information for three years in the first proxy statement in which they provide the disclosure, adding another year of disclosure in each of the two subsequent annual proxy filings.

Smaller reporting companies will initially be required to provide the information for two years, adding an additional year of disclosure in the subsequent annual proxy or information statement that requires this disclosure. In addition, a smaller reporting company will only be required to provide the Inline XBRL data beginning in the third filing in which it provides pay versus performance disclosure, instead of the first.

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