With the SEC’s finalization of pay-for-performance (P4P) disclosure rules for executive compensation earlier this month, all public company proxy disclosures for fiscal years ending on or after December 16, 2022. The new rules, mandated by the Dodd-Frank Act, are intended to provide investors with more transparent and understandable disclosure of a company’s executive compensation.
The new rules require all reporting companies (minus foreign private firms), registered investment companies and emerging growth companies, to provide a table in their proxy statements that show P4P information for their last five completed fiscal years (smaller reporting companies will be subject to scaled disclosure requirements) in order to show more clearly how compensation actually paid relates to company financial performance.
The table must include the following:
- Total shareholder return (TSR)
- TSR of the companies’ peer group
- Net income
- A financial performance measure chosen by the company that it believes best represents the most important measure used to link executive compensation to company performance for the most recent fiscal year
Further using the table, the SEC expects the companies to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the company’s TSR and the peer group’s TSR performance in the proxy materials. In addition to the company-selected performance measure, companies must also describe at least three and up to seven performance measures that they believe to be the most important measures for linking executive compensation actually paid to company performance, as well as non-financial measures if a company deems them to be among their “most important.”
Small reporting companies (SRCs) have fewer reporting requirements as part of the new rule. SRCs may elect to provide only three years of pay versus performance disclosure instead of five. They are also not required to present peer group TSR, a company-selected measure in the table, or the additional three to seven “most important” performance measures.
Given the complexities of the new reporting requirements, companies will have to begin to prepare for 2023 proxy disclosures well ahead of their former schedule. Many companies also face challenges on Say-on-Pay/compensation committee director elections with these new requirements, especially given the volatility and industry-specific macro challenges that many companies faced regarding TSR performance.
Especially during fall and winter ahead of the 2023 proxy season, companies must engage with their top shareholders to communicate how to evaluate their financial performance with regard to P4P and refresh their 2023 disclosure approach. ICR can help. Get in touch.
