The SEC’s Pay Versus Performance Proposals

The proposals require SEC reporting companies to disclose the relationship between compensation “actually paid” to their named executive officers and the company’s financial performance, measured as total shareholder return (TSR). The proposed disclosure would consist of a table reflecting compensation and TSR amounts including a discussion of the relationship between performance and the amounts paid to executive officers. Pay versus Performance Proposals.

Disclosure Table – Executive Compensation Amounts

The disclosure table would include:

• the applicable year for which the information is presented,
• the total compensation paid to the company’s principal executive officers as presented in the summary compensation table,
• the compensation actually paid to the principal executive officers,
• the average total compensation to the company’s other named executive officers as set forth in the summary compensation table,
• the average total compensation actually paid to the other named executive officers,
• the company’s TSR, and
• for other than smaller reporting companies, the issuer must provide peer group TSR.

Peer group TSR would be calculated pursuant to Item 201(e) of Regulation S-K, and the peer group used would be the group used for preparing the stock performance graph or in the company’s compensation discussion and analysis for disclosing the company’s compensation benchmarking practices.

Under the SEC proposal, compensation “actually paid” to the company’s principal executive officers and other named executive officers, is calculated by adjusting the total compensation disclosed in the summary compensation table as follows:

• for other than smaller reporting companies, subtracting the change in the actuarial present value of defined benefit and pension plans and adding the actuarially determined service costs under such plans attributable to services rendered by the executive during the applicable year;
• subtracting the grant date fair value of equity awards as disclosed in the summary compensation table and adding, instead, the fair value of such awards on the vesting date; and
• adding the incremental fair value for modifications to options or stock appreciation rights, including a change to the exercise price.

Companies would be required to disclose the assumptions used to value equity awards if they materially differ from those disclosed in the financial statements for the assumptions used for the fair value on the grant date. Footnotes to the table disclosing the amounts deducted from and added to the total compensation set forth in the summary compensation table used to calculate the amount of compensation actually paid, would also be required.

Discussion of “Executive Performance”

The SEC’s proposed amendments would require SEC reporting companies, using the information in the summary compensation table, to describe the relationship between the executive compensation actually paid to the company’s principal executive officers and the average compensation actually paid to the other named executive officers, and the cumulative TSR for the prior three years for smaller reporting companies and last five years for all other SEC reporting companies. SEC reporting companies other than smaller reporting companies would also have to provide a comparison of the cumulative TSR of the company and the TSR of the selected peer group over the same time period.

Applicability and Transition Provisions

The SEC proposals exempt foreign private issuers, registered investment companies and emerging growth companies. As proposed, the pay verses performance disclosure would be required in any proxy or information statement in which executive compensation information pursuant to Item 402 of Regulation S-K was required to be included.

As proposed, the amendments would be phased in so that smaller reporting companies start with two years of disclosure in the first year. All others would start with three years, adding a year of disclosure in subsequent years until companies are reporting five years of data, or three years for smaller reporting companies. Companies would be required to provide the new disclosures only for the years that they were an SEC reporting company.

The adopting release for the proposed pay-versus-performance disclosure requirement is available here [PDF].

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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