Memorandum RE: Pay v. Performance Disclosure Rules

Item 402(v) of Regulation S-K

On August 25, 2022, the Securities and Exchange Commission (SEC) adopted Item 402(v) of Regulation S-K, requiring companies to provide certain “pay versus performance” disclosures regarding the relationship between executive compensation actually paid and the company’s financial performance in any proxy statement or information statement for which Item 402 executive compensation disclosure is required. 

To Which Companies Does the Pay v. Performance Rule Apply?

With the exception of emerging growth companies (EGCs), foreign private issuers, or registered investment companies, all issuers must provide the information required by Item 402(v). Smaller reporting companies (SRCs) that have ceased to be EGCs will be permitted to provide scaled disclosures.

What Must Issuers Subject to the Pay v. Performance Rule Provide?

Issuers must provide a Pay v. Performance Table in the applicable formats set forth below. For registrants other than SRCs, the table must disclose specified executive compensation and financial performance measures for the registrant’s five most recently completed fiscal years; SRCs, instead, will provide information for the three most recently completed fiscal years.

Issuers Other than SRCs

(1) Calculated using the same method as required under Item 201(e) of Regulation S-K for the registrant’s stock performance graph: divide (i) the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (ii) the difference between the registrant’s share price at the end and the beginning of the measurement period, by the share price at the beginning of the measurement period.

(2) Registrants may use either the same peer group used for purposes of Item 201(e) of Regulation S-K, or a peer group used in the registrant’s Compensation Discussion and Analysis for purposes of disclosing a registrant’s compensation benchmarking practices, weighted as described in Item 402(v).

(3) Registrants may use either the same peer group used for purposes of Item 201(e) of Regulation S-K, or a peer group used in the registrant’s Compensation Discussion and Analysis for purposes of disclosing a registrant’s compensation benchmarking practices, weighted as described in Item 402(v).

SRCs

(1) Calculated using the same method as required under Item 201(e) of Regulation S-K for the registrant’s stock performance graph: divide (i) the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (ii) the difference between the registrant’s share price at the end and the beginning of the measurement period, by the share price at the beginning of the measurement period.

Further Requirements: Per the SEC’s Small Entity Compliance Guide, in addition to the Pay v. Performance Tables, issuers must provide the following:

Footnotes to the table. Under the amendments, registrants are required to disclose specified information in footnotes to the table, including the name of each PEO and each non-PEO NEO included in the average compensation amount and amounts deducted or added to calculate executive compensation actually paid.

Relationship disclosure. Item 402(v) also requires a registrant to provide a clear description of the relationships between (1) each of the financial performance measures included in the table and (2) the executive compensation actually paid to its PEO and, on average, to its other NEOs over the registrant’s five most recently completed fiscal years (or three most recently completed fiscal years for SRCs). Registrants other than SRCs are required to also include a description of the relationship between the registrant’s TSR and its peer group TSR. Registrants may present the descriptions of these relationships by means of graphical or narrative disclosures or a combination of both.

Tabular List. Registrants other than SRCs are also required to provide a list (“Tabular List”) of three to seven financial performance measures that the registrant determines are its most important measures (using the same approach as taken for the Company-Selected Measure). Registrants are permitted, but not required, to include non-financial measures in the Tabular List if they considered such measures to be among their three to seven “most important” measures.

Inline XBRL. All registrants are required to use Inline XBRL to tag their pay versus performance disclosure in the relevant proxy or information statement, subject to a transition period for SRCs described below. Registrants will be required to separately tag each value in the Pay v. Performance Table, block-text tag the footnote and relationship disclosures and, for non-SRCs, the Tabular List, and tag specific data within the footnote disclosures.

Where Must the Pay v. Performance Table be Located?

Item 402(v) affords reporting companies flexibility in determining where in the proxy or information statement to provide the Pay v. Performance Table, as the SEC believed that mandating disclosure in the Compensation Discussion & Analysis could cause confusion as it might suggest that the company considered the pay v. performance relationship in its compensation decisions, which may or may not be the case.  The information required by Item 402(v) will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, including Part III of Form 10-K, except to the extent that the company specifically incorporates it by reference.

What are the Compliance Dates for the Pay v. Performance Rule?

Registrants subject to Item 402(v) must begin to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 of Regulation S-K disclosure for any annual meeting of shareholders for fiscal years ending on or after December 16, 2022. The rule outlines phase-in periods as set forth in the chart below:

For companies newly subject the Exchange Act’s reporting requirements, information for fiscal years prior to the last completed fiscal year will not be required.

For further information, please reference final rule here.