The U.S. Securities and Exchange Commission (SEC) has issued a final rule that expands executive pay disclosure requirements for publicly traded U.S. companies, accompanied by a fact sheet summarizing the rule. The rule goes into effect for the 2023 proxy season or fiscal years ending on or after December 16, 2022. It implements requirements established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
The SEC first proposed a pay-versus-performance disclosure rule in 2015 and reopened public comments on the proposed rule in January 2022. The rule requires companies to provide detailed information about their performance metrics to determine executive pay. More specifically, the rule mandates that companies divulge the three to seven most important performance measures in an unranked list that they used to determine executive compensation in the most recently completed fiscal year. In addition, companies must explain how they calculate each specific performance measure and how they impact executive pay.
In addition to the performance measures and the already-required executive-pay summary compensation table, large companies must provide a five-year history of pay versus performance-related metrics. In the first annual disclosure filing after the rule takes effect, large companies must include only three years of data. The disclosure must include the following information:
- Total shareholder return (TSR);
- TSR of companies in its peer group;
- Net income; and
- A company-selected financial performance measure that the company determines is the most important metric it uses to link compensation paid to its named executive officers with company performance.
Smaller companies must provide a three-year history of the same information, although they may provide only a two-year history for the first annual filing after the rule takes effect.
Reporting companies also must describe the relationship between financial performance measures and the average compensation paid to the highest executive officer and other executive officers. Whether these new reporting requirements will be excessively burdensome depends on whether companies are tracking pay versus performance already. Even if companies already keep track of that information, they may have to provide it in a different format or calculate it differently than what they are doing now.
Although some commenters requested that the SEC require companies to disclose ESG or environment, social, and government metrics, the SEC declined to do so. Still, companies may supplement their mandatory disclosures by discussing ESG metrics or other nonfinancial performance metrics.
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