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SEC Releases New Pay For Performance Proposal

Michael Andresino, David Barbash, Thomas Brennan May 5, 2015

On April 29, 2015, the Securities and Exchange Commission (the “Commission”) voted to propose rules requiring public companies to disclose in a clear manner the relationship between executive compensation and the financial performance of the registrant. The proposed disclosure would be required in proxy statements in which executive compensation disclosure pursuant to Item 402 of Regulation S-K is required.  The proposed rule implements Section 14(i) of the Securities Exchange Act of 1934 (the “Exchange Act”) as added by Section 953(a) of Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), and follows other Dodd-Frank executive compensation proposals, including the say-on-pay advisory vote and the pay-ratio disclosure.

Although current proxy disclosure requires a principles based approach to the relationship between executive compensation and financial performance, there is no current requirement for specific factual information showing the relationship.  The proposal is meant to supplement current disclosure requirements with a factual description of how executive compensation that is actually paid in a particular year relates to financial performance.  The Commission believes that this factual disclosure will assist shareholders in evaluating director oversight and in voting for or against directors at an election. 

Specifically, the Commission proposed new Item 402(v) of Regulation S-K requiring a registrant to provide a clear description of: 

  •  the relationship between executive compensation “actually paid” to the named executive officers included in the Summary Compensation Table (the “NEOs”) and the cumulative total shareholder return (“TSR”); and
  • the relationship between TSR and the TSR of a peer group chosen by the registrant.  

In determining executive compensation actually paid, the registrant would use the Total Compensation number set forth in the Summary Compensation Table for the NEOs, modified:

  • to exclude changes in actuarial pension plans not attributable to the applicable year of service; and
  • to include the fair value of equity awards at vesting rather than fair value at grant as currently provided for in the Summary Compensation Table. 

TSR for the registrant and its peer group would be calculated as currently provided in Item 201(e) of Regulation S-K and used in the performance graph contained in the Annual Report on Form 10-K or Proxy Statement, as well as for the registrant’s peer group.  The peer group could be the same peer group as used in the performance graph or the same group as used in the CD&A for purposes of compensation “benchmarking” practices.  As smaller reporting companies are not required to include a performance graph in their Annual Report on Form 10-K or Proxy Statement, they are not required to include the peer group TSR.  The time period for the information would be the prior five (5) years, or three (3) years for smaller reporting companies.  The rule provides for a phase in period with the first year requiring three (3) years of information (two (2) years for smaller reporting companies) with one additional year of information added each year until the full required information is provided.

All of this information would be provided in a new table included in the Proxy Statement.  The location of this table is not mandated but is generally expected to be with the other executive compensation disclosure, although it does not need to be in the CD&A.   The table would include the Summary Compensation Table total for the principal executive officer (“PEO”), the Compensation Actually Paid to the PEO, the average Summary Compensation Table total for all non-PEO Named Executive Officers, the average Compensation Actually Paid to non-PEO Named Executive Officers, TSR for the registrant and TSR for the peer group.  Following this new table, the registrant would provide a narrative, a graph, or a combination of the two describing the relationship between executive compensation and TSR. For example, the registrant could provide a graph showing changes in executive compensation and TSR plotted on parallel axes or alternatively, the percentage changes over each period in executive compensation and TSR and discuss in narrative form the relationship between the percentage changes.

The proposal acknowledges that some registrants have been using the concept of “realized pay” or “realizable pay” in their proxy statement and using this constructed number as a means of comparing executive compensation to financial performance.  Registrants could continue to provide this supplemental disclosure along with the required “actually paid” disclosure as long as it is not misleading and not presented more prominently then the “actually paid” disclosure.

As the pay-for performance would be set forth in Item 402 of Regulation S-K, it would be subject to the say-on-pay non-binding shareholder advisory vote.  Also, the disclosure would need to be tagged in  XBRL format.  The proposed rule does not apply to foreign private issuers or emerging growth companies.

If you have any questions about this topic, please contact any of the following partners in our Securities Group: Thomas S. Brennan, Michael L. Andresino, or David M. Barbash.

This Alert is provided for information purposes only, and does not constitute legal advice.  According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2015 Posternak Blankstein & Lund LLP.  All rights reserved.
 

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