06.02.2015

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Updates

The Securities and Exchange Commission recently proposed rules that would require public companies to disclose the relationship between executive compensation actually paid and the company’s financial performance.  These proposed rules would implement Section 14(i) of the Securities Exchange Act of 1934 (Exchange Act), which was added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  The public has until July 6, 2015 to comment on the proposed rules.

The proposed rules would require public companies to present in a new table the following information for the last five years:

  • Executive Compensation Actually Paid.  Executive compensation actually paid calculated based on total compensation as disclosed in the Summary Compensation Table (SCT), excluding changes in actuarial present value of pension benefits that is unrelated to the executive’s service during the year and including the value of equity awards vesting during the year (rather than the value at grant reported in the SCT).
  • Annual Company TSR.  The company’s Total Shareholder Return (TSR) presented on an annual basis to measure the company’s financial performance.
  • Annual Peer Group TSR.  TSR for the company’s peer group presented on an annual basis, using either the peer group selected for the company’s stock performance graph (as required in the annual report to shareholders) or the peer group identified in the company’s compensation discussion and analysis (CD&A) disclosure.

The proposed rules would also require each company to describe the relationship between executive compensation actually paid as defined in the proposed rules and the company’s TSR and the TSR of its peer group. 

This update highlights key provisions of the proposed rules.

Proposed Rules Require Pay-for-Performance Disclosure

The proposed rules would create a new Item 402(v) to Regulation S-K that would require public companies to disclose the relationship between executive compensation actually paid and the company’s financial performance in all proxy statements and consent solicitations where executive compensation disclosure is required.

Executives Covered.  The proposed rules require disclosure of the compensation actually paid to the named executive officers (NEOs) who are named in the SCT.  Disclosure must be provided separately for the principal executive officer (PEO), typically a company’s CEO, and as an average for the remaining NEOs.  To the extent there has been more than one CEO in a given year, their compensation must be aggregated for this column.

Executive Compensation “Actually Paid.”  Under the proposed rules, “executive compensation actually paid” would be calculated as follows:

  • total compensation as reported in the SCT;
  • minus the change in the actuarial present value of all defined benefit and pension plans;
  • plus the actuarially determined service cost for services rendered by the executive during the applicable year, in accordance with FASB ASC Topic 715;
  • minus the grant date fair value of stock and option awards; and
  • plus the aggregate vesting-date fair value of stock and option awards that vested during the year (as determined under FASB ASC Topic 718), even if options have not been exercised.

Companies may supplement the required disclosures for compensation actually paid with additional measures of compensation, such as “realizable pay” or “realized pay,” as long as the additional disclosure is not misleading or presented more prominently than the required disclosure. 

Measure of Company Performance—TSR.  The proposed rules require that a company disclose TSR presented on an annual basis to measure its own financial performance, calculated in the same way as required for purposes of the performance graph required under Item 201(e) of Regulation S-K.  Companies may provide additional disclosure using other metrics to measure financial performance, as long as such information is not misleading and is no more prominent than the required TSR disclosure.  Companies would also be required to disclose the TSR of the company’s peers.

Prescribed Pay-Versus-Performance Table.  The proposed rules would require a new pay-versus-performance table with the following headings:

Pay Versus Performance

  • Footnotes.  The proposed rules would require that the table be accompanied by footnote disclosure to indicate amounts deducted from and added to the total compensation amount included in the SCT, as well as any assumptions used in calculating the fair value of stock or option awards on the vesting date if they differ from the assumptions used for calculating the grant date fair value.

Description of Relationship Between Compensation Actually Paid and TSR.  Under the proposed rules, using the information in the pay-versus-performance table, companies would be required to describe the relationship between executive compensation actually paid and the cumulative TSR of the company.  The disclosure would also include a comparison of the company’s TSR and the TSR of the company’s peer group.  This disclosure may be in a narrative format or presented graphically or both.

Disclosure of Information for Last Five Fiscal Years—Transition Rules.  Under the proposed rules, the pay-versus-performance table must include the required information for each of the five most recently completed fiscal years.  The disclosure would occur in phases: companies initially would only report three years of data and would increase disclosure by one year, for each year, until five years of data is presented.

Location for New Disclosure.  The proposed rules do not mandate a specific location within the proxy statement (or information statement) for the new disclosure.  Instead, the SEC notes that it intentionally provides flexibility in the proposed rules, although it expects that companies will likely provide the new disclosure with the rest of the Item 402 executive compensation disclosure.

  • The new disclosure required under the proposed rules, like other Item 402 disclosure, would be subject to the say-on-pay advisory vote under the Exchange Act but would not be deemed to be incorporated by reference into other filings under the Securities Act or the Exchange Act unless the company specifically incorporates it by reference.

Reduced Disclosure for Smaller Reporting Companies.  The proposed rules provide two types of relief for smaller reporting companies.  Smaller reporting companies:

  • May disclose only three years of compensation, rather than five, and only two years for the first year of required disclosure under the proposed transition rules;
  • Are not required to disclose peer group TSR; and
  • Are not required to disclose pension-related information.

XBRL Tagging.  Under the proposed rules the disclosure in the new pay-for-performance table, any accompanying footnotes and the description of the relationship between compensation paid and company performance would also have to be presented in interactive data format using eXtensible Business Reporting Language (XBRL).  Any material supplementing the required disclosure is not required to be XBRL-formatted.

New Rules Don’t Apply to Some Issuers.  Emerging growth companies (which are excluded from the requirements pursuant to the Jumpstart Our Business Startups (JOBS) Act), foreign private issuers and registered investment companies would not be required to comply with the proposed rules.

Timing for Rule Adoption.  The SEC has not provided any information regarding the timing for adoption of the final rules, but it is possible that they will be in effect as soon as the 2016 proxy season.

Additional Information

You can find a copy of the full text of the proposed rules here.  Visit Perkins Coie’s news and insights online library for more information about these issues and discussions of recent speeches, cases, laws, regulations and rule proposals of interest to public companies.

© 2015 Perkins Coie LLP


 

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