New SEC clarifications on pay versus performance disclosures

ARTICLE | February 15, 2023

Authored by RSM US LLP

The SEC’s Division of Corporation Finance has issued a set of fifteen new Compliance and Disclosure Interpretations (C&DI) regarding the “pay versus performance” (PvP) disclosure rule (Item 402(v) of Regulation S-K), which was issued in August 2022, to answer various questions on broad range of topics in relation to the new disclosure requirements (where they are applicable).

Topics addressed include clarifying:

• That PvP disclosures are not required in a Form 10-K (Question 128D.01).
• When equity awards for periods prior to appointment as a named executive officer are required to be included. (Question 128D.02)
• When footnote disclosures are required for each of the fiscal years presented in the PvP table. (Question 128D.03)
• That pension and equity adjustments in the footnote cannot be aggregated. (Question 128D.04)
• That companies may use a peer group that is disclosed in the compensation disclosure and analysis (CD&A) even if it is not used for compensation benchmarking purposes. (Question 128D.05)
• That the measurement period of calculating cumulative total shareholder return (TSR) and peer group TSR should begin on the company’s registration date when the company went public during the earliest year included in the PvP table. (Question 128D.06)
• That if a company changes its peer group during the years covered by the PvP table, it should not present the peer group TSR for each of the years using the most recent peer group. (Question 128D.07)
• The company may not use a non-GAAP net income measure as a ‘net income measure’ in the PvP table. (Question 128D.08)
• That the CSM may be any financial performance measure that differs from the financial performance measures otherwise required to be disclosed in the PvP table, including a measure that is derived from, a component of, or similar to those required measures, such as earnings per share, gross profit, income or loss from continuing operations or relative TSR. (Question 128 D.09)
• That a company cannot use a stock price as its CSM. (Question 128D.10)
• That the CSM cannot be measured over a multi-year period that includes the applicable fiscal year as the final year, similar to the use of multi-year measurement periods for calculating TSR. (Question 128D.11)
• That if bonuses are paid from a bonus pool that is determined based on the satisfaction of a financial performance measure, the company is using the measure to link compensation “actually paid” to company performance and must therefore disclose it. (Question 128D.12)
• That, as long as the presentation will not be misleading to investors, a company may aggregate multiple principal executive officer’s (PEOs’) compensation for purposes of the narrative, graphical or combined comparison between compensation “actually paid” and TSR, net income and the CSM. (Question 128D.13)
• If a company changes its fiscal year during the time period covered by the PvP table, the company should provide the disclosure for the “stub period” and should not annualize or restate compensation. (Question 228D.01)
• The company may present cumulative TSR and peer group cumulative TSR using a measurement period that starts with when its stock starts trading after emerging from bankruptcy. (Question 228D.02)

If a company is presenting the new PvP disclosures, the question and answers in the C&DI’s that have been issued should be referred to in preparing the required disclosures.