In early Fall 2022, the U.S. Securities and Exchange Commission (SEC) issued a final rule significantly expanding executive pay disclosures by publicly traded U.S. companies (foreign private issuers, registered investment companies, and Emerging Growth Companies are exempted). The disclosures, which provide detailed information about the performance metrics companies use to determine executive compensation payouts, are effective for the 2023 proxy season*.
The final rule provides new disclosures, describing which performance measures a company deemed most important in determining the compensation it actually paid its executives for the most recently completed fiscal year. Companies are to disclose the three to seven most important measures in an unranked list.
In addition to the executive-pay summary compensation table currently required in proxy statements, large companies must provide, in a new table, a five-year history of pay versus performance-related metrics, with a shorter, three-year reporting requirement for smaller companies.
The table must disclose financial performance measures for specified years, including:
- Total shareholder return (TSR)
- TSR of companies in its peer group
- Net income
- A company-selected financial performance measure that the company determines is the most important metric it uses to link compensation actually paid to its named executive officers with company performance
- While not requiring disclosure, companies may supplement their mandatory pay-for-performance disclosure with a discussion of ESG metrics
Companies must describe the relationships between each financial performance measure and the executive compensation paid to the “principle executive officer” and, as an average, for its other named executive officers.
Specific items and tabular calculations are likely to be different than what organizations are presently disclosing. This could be quite burdensome for smaller reporting companies, as these entities are least likely to already be including required information in their current disclosures.
Don’t Go at it Alone. Here is How Centri Can Help.
Centri’s SEC Reporting, HR Advisory, and ESG practices have developed a robust support offering to help you prepare your disclosure: the company-selected measure, the three to seven financial performance measures, and a narrative to explain the calculations and how the measures impact and influence executive compensation. For more information or questions, please contact us.
*Companies must begin to comply with the new disclosure requirements in proxy and information statements for fiscal years ending on or after Dec. 16, 2022. For the first annual filings after the new requirements take effect, large companies may provide three years of data, instead of five, and small companies may provide two years of data, instead of three.
Editor’s note: This article was originally published on October 11, 2022. It was updated on March 2, 2023.
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