It is essential for companies to maintain compliance with the latest government regulations regarding corporate governance to protect their investments and reputation. The Securities and Exchange Commission—or the SEC—has adopted a series of amendments to Section 14(i) on August 25, 2022, designed to uphold a balance between the interests of company stakeholders, shareholders, executives, their customers, and the government. These amendments now require registrants to clearly disclose the relationship between the executive compensation that is actually being paid out and the financial performance of the registrant over the course of the applicable time period for disclosure.
The amendment to the disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act was effective as of October 11, 2022. Companies will begin to confront some of the obligations required by this amendment as they prepare disclosures for their upcoming 2023 proxy statement. Registrants subject to Item 402(v) must begin to comply with these disclosure requirements for annual shareholder meetings held on or after December 16, 2022.
For the first year, initial disclosures will require information from only the previous three years. After that first year, the amendment will require the last five fiscal years as well, which could prove particularly burdensome if proper preparations are not taken.
Who do These Regulations Apply to
All reporting companies that file proxy statements that disclose executive compensation are subject to the new SEC amendments. The amendments also apply to smaller reporting companies—also referred to as SRCs—but they are permitted to provide scaled-back disclosures for the last three fiscal years instead of the full five-year requirement. Exceptions include foreign private issuers, registered investment companies, and engineering growth companies. Disclosures must be made for the principal executive officer (PEO) and any other named executive officers (NEOs).
According to the new Item 402(v), registrants are required to provide a table that organizes executive compensation and financial performance measures over the five most recently completed fiscal years—or three for SRCs. The table must include the total compensation and reflect the executive compensation that is actually paid for the PEO and applicable NEOs. These compensation calculations for non-SRCs must include adjustments for pension plans and other equity awards.
Pay Versus Performance Table-Specific Requirements
The table should include the registrant’s total shareholder return (TSR) calculated based on a fixed investment of one hundred dollars at the time of financial measurement. Non-SRCs must also include the cumulative TSR for the registrant’s peer group, which should also be based on a fixed investment.
Additionally, the table should include the registrant’s net income, and non-SRCs must also report any other financial performance measures that are specific to the registrant—so-called Company-Selected Measures. These financial measures of performance are ones the company self-determines to be the most important but are otherwise not required to be included in the table.
Additional Narrative, Footnote, and Relationship Disclosures
In addition to the table, companies are expected to describe—in a combination of graphics, narrative form, and footnotes to the table—the precise relationship between the compensation that is actually paid to the PEO and the average compensation paid to NEOs.
This financial analysis should include footnotes that specifically name each PEO and NEO included in the average compensation amount to determine the compensation actually paid. Registrants must also provide a clear description of the relationships between each of the financial performance measures that are included in the table.
Registrants—other than SRCs—are also required to provide an unranked Tabular List of three to seven financial performance measures that the registrant deems to be the most important, similar in fashion to the Company-Selected Measure approach. Companies, however, may also include measures that are not financial in nature on this list as long as at least three financial metrics are included.
Ultimately, the new disclosure requirements are extensive and companies should seek expert advisors to ensure they maintain compliance with the new SEC regulations.