SEC Adopts Sweeping Pay for Performance Disclosure Requirements for Public Companies

On August 25, 2022, the Securities and Exchange Commission (SEC) adopted rules (the Final Rules”), which require covered publicly traded companies to provide both tabular and narrative and/or graphical disclosure of the relationship between executive compensation actually paid” (as defined in the Final Rules) by the company to certain executive officers and the company’s performance over a specified time period (Pay Versus Performance Disclosure). The Final Rules also require companies to provide a list of their most important financial performance measures for linking executive compensation actually paid to company performance. The Final Rules are available in Release No. 34-95607, and the SEC’s pay versus performance fact sheet is available here.

Which Companies Are Covered.  All publicly traded companies except for emerging growth companies, foreign private issuers, and registered investment companies are required to provide the Pay Versus Performance Disclosure. Smaller reporting companies (SRCs) are subject to the Final Rules but are permitted to provide scaled disclosure. Notably, SRCs are not required to: 1) report data for the fourth and fifth most recent fiscal years; 2) report their peer group TSR; 3) select an additional financial performance measure for the pay-versus-performance table;  or 4) provide the list of three to seven financial performance measures.

Effective Date. The Final Rules will become effective 30 days after its publication in the Federal Register, and companies will be required to comply with the requirements in proxy and information statements that include executive compensation disclosures for fiscal years ending on or after December 16, 2022. Inline XBRL must be used to tag the Pay Versus Performance Disclosure; however, SRCs will be permitted to phase in Inline XBRL tagging.

The new disclosure obligations under the Final Rules will require advance planning for the 2023 proxy season in terms of both gathering information not previously required in proxy statements and to determine the best way to present the required disclosures.

Companies should begin to consider how they intend to comply with the Final Rules and prepare to provide complete and effective Pay Versus Performance Disclosure for the coming 2023 proxy season.

Summary of the Final Rules

New Tabular Disclosure under Item 402(v) of Regulation S-K. Section 953(a) of the Dodd-Frank Act instructed the SEC to adopt rules requiring companies to provide a clear description of ... information that shows the relationship between executive compensation actually paid and the financial performance of the issuer.” To address this, Item 402(v) of Regulation S-K now requires companies to include a new table (see below) in any proxy statement or information statement setting forth executive compensation disclosure, reporting:

For each fiscal year covered by the Pay Versus Performance Table, the company must include:

  • The total compensation paid to its Principal Executive Officer (PEO), as reported in the Summary Compensation Table (SCT) (column (b)), and the executive compensation actually paid” to the PEO (column (c)).   If more than one person served as the PEO during the covered fiscal year, then each PEO would be reported separately in additional columns with information provided for the applicable year such individual was a PEO.
  • The average of the total compensation, as reported in the SCT, for all named executive officers (NEOs) other than the PEO (column (d), and the average executive compensation actually paid” to the NEOs (column (e)). The table must include a footnote disclosing the names of individual NEOs and the years for which they are included.
  • The company’s cumulative annual total shareholder return (TSR) calculated and presented as the dollar value of an investment (column (f)) (i.e., in the same manner as in the Stock Price Performance Graph required under Item 201(e) of Regulation S-K).1  TSR should be calculated and presented as a dollar value of a $100 fixed investment for the measurement period.
  • The cumulative annual TSR of the companies in a peer group chosen by the company (column (g)), which must be the same index or peer group used for the purposes of Item 201(e) or, if applicable, the peer group used for purposes of the Compensation Discussion and Analysis disclosures. Footnote disclosure of any year-over-year changes in peer group companies as well as the reasons for any such change will be required along with a comparison of the issuer’s cumulative annual TSR with that of both the new and prior fiscal year peer group.
  • The company’s net income for the fiscal year calculated in accordance with U.S. GAAP (column (h)).

Calculating executive compensation actually paid.” Executive compensation actually paid” includes both amounts paid or earned, as well as incremental accounting valuations for unvested equity awards that may never be earned or that could have different intrinsic values when earned. For these purposes, executive compensation actually paid” is defined as the total compensation reported in the Summary Compensation Table, with adjustments made to the amounts reported for pension values and equity awards. See footnote regarding the calculation of equity and option award values.2 See footnote regarding the calculation of pension benefit values.3 Companies are required to disclose in a footnote the amount of each adjustment, and any valuation assumptions it used to determine equity award adjustments that materially differ from those disclosed as of the grant date of such equity award.

Required Periods Covered. The information provided in the Pay Versus Performance Table should generally cover the company’s five most recently completed fiscal years or, for SRCs, the three most recently completed fiscal years. To provide some transitional relief, the SEC will permit a company, for the first year in which the Pay Versus Performance Table is required, to limit the disclosure to only the three most recently completed fiscal years (or, for SRCs, the two most recently completed fiscal years). Thereafter, an additional year will be added in each subsequent annual filing in which the Pay Versus Performance Disclosure is required until the company discloses the requisite information for the five most recently completed fiscal years (or, for SRCs, the three most recently completed fiscal years).

Relationship Disclosures. In addition to the tabular disclosure described above, companies should include a narrative or graphic description, or a combination of both, of the relationship between each financial performance measure included in the table and the executive compensation actually paid over the fiscal years required to be disclosed. See more on executive compensation actually paid” below.

Companies must also describe the relationship between its total shareholder return (TSR) and its peer group TSR. The SEC encourages companies to present these relationships in a format that most clearly provides information to investors, based on the nature of each measure.

Company Selected Financial Performance Measures

Companies must also select a financial performance measure (the Company-Selected Measure”) that the company has determined represents the most important financial performance measure,” other than TSR or net income, that the company uses to link compensation actually paid to the NEOs to company performance for the most recently completed fiscal year. If such measure is a non-GAAP measure, disclosure must be provided as to how the number is calculated from the company’s audited financial statements, but a full reconciliation is not required.

Companies, other than SRCs, are also required to include a Tabular List” of the three to seven most important financial performance measures that the company used determine executive compensation for the most recent fiscal year.  If a company considers less than three financial performance measures in determining executive compensation, then the company may list only those financial performance measures considered, which may be zero.  Companies may also include non-financial performance measures in the Tabular List, as long as it discloses the three most important financial performance measures, or all of the most important financial performance measures considered if it has less than three.

Companies should include an explanatory narrative if it would help investors understand the Tabular List.  The Tabular List may be presented as a single list or as multiple lists if different financial performance measures are considered for the PEO and the NEOs as a group, or for each NEO.


One of the biggest challenges will be drafting disclosures that use the information in the new table to provide a clear description of the relationship between compensation actually paid” and the prescribed performance measures.

Given the substantial undertaking required to prepare the historical disclosures and the likelihood that significant interpretive questions will arise when applied to companies’ particular facts, companies should begin preparing for the new rules now by collecting the information that will be necessary for the disclosures.

Kelley Drye lawyers are available to assist with any questions you may have regarding these issues.
1 TSR should be included as measured by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the company’s share price at the end and the beginning of the measurement period, by the share price at the beginning of the measurement period (as set forth in Item 201(e) of Regulation S-K).

2 With respect to the stock award and option award values, the amounts included in the Summary Compensation Table, representing the grant date fair value, will be deducted, and the following adjustments should be made, in each case, with fair value calculated in accordance with U.S. GAAP:

  • For awards granted in the covered fiscal year:
    • add the year-end fair value if the award is outstanding and unvested as of the end of the covered fiscal year; and
    • add the fair value as of the vesting date for awards that vested during the year.
  • For any awards granted in prior years:
    • add or subtract any change in fair value as of the end of the covered fiscal year compared to the end of the prior fiscal year if the award is outstanding and unvested as of the end of the covered fiscal year;
    • add or subtract any change in fair value as of the vesting date (compared to the end of the prior fiscal year) if the award vested during the year; and
    • subtract the amount equal to the fair value at the end of the prior fiscal year if the award was forfeited during the covered fiscal year.
  • Add the dollar value of any dividends or other earnings paid on stock awards or options in the covered fiscal year prior to the vesting date that are not otherwise reflected in the fair value of such award or included in any other component of total compensation for the covered fiscal year.

3 With respect to pension values, companies will be required to disclose the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans. This will be deducted from the reported total compensation, and instead executive compensation actually paid” will include both:
  • the actuarially determined service cost for services rendered by the executive during the applicable year (“service cost”); and
  • the entire cost of benefits granted in a plan amendment (or initial plan adoption) during the applicable year that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or adoption (“prior service cost”).

Each of the above must be calculated in accordance with U.S. GAAP. If the prior service cost is a negative amount as a result of an amendment that reduces benefits relating to prior periods of service, then such amount would reduce the compensation actually paid.