Rule2022-18771
Pay Versus Performance
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 8, 2022
Effective
October 11, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting amendments to implement Section 14(i) ("Section 14(i)") of the Securities Exchange Act of 1934 ("Exchange Act"), as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). Section 14(i) directs the Commission to adopt rules requiring registrants to provide disclosure of pay versus performance. The disclosure is required in proxy or information statements in which executive compensation disclosure is required. The disclosure requirements do not apply to emerging growth companies, registered investment companies, or foreign private issuers.
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[Federal Register Volume 87, Number 173 (Thursday, September 8, 2022)]
[Rules and Regulations]
[Pages 55134-55197]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-18771]
[[Page 55133]]
Vol. 87
Thursday,
No. 173
September 8, 2022
Part III
Securities and Exchange Commission
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17 CFR Parts 229, 232, and 240
Pay Versus Performance; Final Rule
Federal Register / Vol. 87 , No. 173 / Thursday, September 8, 2022 /
Rules and Regulations
[[Page 55134]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 232, and 240
[Release Nos. 34-95607; File No. S7-07-15]
RIN 3235-AL00
Pay Versus Performance
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to implement Section 14(i) (``Section 14(i)'') of
the Securities Exchange Act of 1934 (``Exchange Act''), as added by
Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''). Section 14(i) directs the
Commission to adopt rules requiring registrants to provide disclosure
of pay versus performance. The disclosure is required in proxy or
information statements in which executive compensation disclosure is
required. The disclosure requirements do not apply to emerging growth
companies, registered investment companies, or foreign private issuers.
DATES:
Effective date: This final rule is effective on October 11, 2022.
Compliance date: Companies (other than emerging growth companies,
registered investment companies, or foreign private issuers) must begin
to comply with these disclosure requirements in proxy and information
statements that are required to include Item 402 of Regulation S-K (as
defined below) disclosure for fiscal years ending on or after December
16, 2022.
FOR FURTHER INFORMATION CONTACT: John Byrne, Special Counsel, Office of
Small Business Policy, at (202) 551-3460, Division of Corporation
Finance.
SUPPLEMENTARY INFORMATION: The Commission is adopting an amendment to
add new paragraph (v) to 17 CFR 229.402 (``Item 402 of Regulation S-
K''); and amending 17 CFR 232.405 (``Item 405 of Regulation S-T''), 17
CFR 240.14a-101 (``Schedule 14A''), and 17 CFR 240.14c-101 (``Schedule
14C''), each under the Exchange Act.
Table of Contents
I. Introduction
A. Background
B. Overview of Final Amendments
II. Discussion of Final Amendments
A. New Item 402(v) of Regulation S-K
1. Application and Operation of Item 402(v) of Regulation S-K
i. Proposed Amendments
ii. Comments
iii. Final Amendments
2. Format and Location of Disclosure
i. Proposed Amendments
ii. Comments
iii. Final Amendments
B. Executives Covered
1. Proposed Amendments
2. Comments
3. Final Amendments
C. Determination of Executive Compensation Actually Paid
1. Deduction of Change in Actuarial Present Value and Addition
of Actuarially Determined Service Cost and Prior Service Cost
i. Proposed Amendments
ii. Comments
iii. Final Amendments
2. Inclusion of Above-Market or Preferential Earnings on
Deferred Compensation That Is Not Tax Qualified
i. Proposed Amendments
ii. Comments
iii. Final Amendments
3. Equity Awards
i. Proposed Amendments
ii. Comments
iii. Final Amendments
D. Measures of Performance
1. Requirement To Disclose TSR and Peer Group TSR
i. Proposed Amendments
ii. Comments
iii. Final Amendments
2. Requirement To Disclose Net Income
i. Amendments Considered in the Reopening Release
ii. Comments
iii. Final Amendments
3. Tabular List of the Registrant's ``Most Important''
Performance Measures
i. Amendments Considered in the Reopening Release
ii. Comments
iii. Final Amendments
4. Requirement To Disclose a Company-Selected Measure
i. Amendments Considered in the Reopening Release
ii. Comments
iii. Final Amendments
E. Time Period Covered
1. Proposed Amendments
2. Comments
3. Final Amendments
F. Permitted Additional Pay-Versus-Performance Disclosure
1. Proposed Amendments
2. Comments
3. Final Amendments
G. Required Disclosure for Smaller Reporting Companies
1. Proposed Amendments
2. Comments
3. Final Amendments
III. Other Matters
IV. Compliance Dates
V. Economic Analysis
A. Background
B. Baseline
1. Affected Parties
2. Existing Disclosures and Analyses
3. Executive Compensation Practices
C. Discussion of Economic Effects
1. Introduction
2. Benefits
3. Costs
4. Implementation Alternatives
i. Registrants and Filings Subject to the Disclosure Requirement
ii. General Disclosure Requirements
iii. Compensation Measures
iv. Performance Measures
VI. Paperwork Reduction Act
A. Background
B. Summary of Comment Letters and Revisions to PRA Estimates
C. Summary of Collection of Information Requirements
D. Incremental and Aggregate Burden and Cost Estimates for the
Final Amendments
VII. Final Regulatory Flexibility Analysis
A. Need For, and Objectives of, the Final Rules
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Agency Action To Minimize Effect on Small Entities
Statutory Authority and Text of Amendments
I. Introduction
A. Background
Section 953(a) of the Dodd-Frank Act \1\ (``Section 953(a)'') added
Section 14(i) \2\ to the Exchange Act.\3\ Section 14(i) mandates that
the Commission shall, by rule, require each issuer to disclose in any
proxy or consent solicitation material for an annual meeting of the
shareholders of the issuer a clear description of any compensation
required to be disclosed by the issuer under Item 402 of Regulation S-K
(or any successor thereto), including, for any issuer other than an
emerging growth company, information that shows the relationship
between executive compensation actually paid and the financial
performance of the issuer, taking into account any change in the value
of the shares of stock and dividends of the issuer and any
distributions. Section 14(i) also states that an issuer may include a
graphic representation of the information required to be disclosed.
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\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 15 U.S.C. 78n(i).
\3\ 15 U.S.C. 78a et seq. Subsequent to the addition of Section
14(i) to the Exchange Act, Section 102(a)(2) of the Jumpstart Our
Business Startups Act amended Section 14(i) to exclude registrants
that are ``emerging growth companies'' from the pay-versus-
performance disclosure requirements. Public Law 112-106, 126 Stat.
306 (2012).
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As a part of the Dodd-Frank Act legislative process, in a 2010
report, the Senate Committee on Banking, Housing and Urban Affairs
stated that the disclosure required under Section 14(i)
[[Page 55135]]
``may take many forms.'' \4\ In addition, the report indicated that the
relationship between executive pay and performance has become a
``significant concern of shareholders,'' and that the required
disclosure should ``add to corporate responsibility,'' as registrants
will be required to provide clearer executive pay disclosures.\5\
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\4\ Report of the Senate Committee on Banking, Housing and Urban
Affairs to accompany S. 3217, S. Rep. No. 111-176, at 135 (2010)
(``Senate Report''). The report stated with respect to Section
953(a): ``This disclosure about the relationship between executive
compensation and the financial performance of the issuer may include
a clear graphic comparison of the amount of executive compensation
and the financial performance of the issuer or return to investors
and may take many forms.''
\5\ Id.
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In 2015, the Commission proposed a new rule to implement Section
953(a) by creating a new requirement in Item 402 of Regulation S-K. The
proposed new item would require a registrant to provide a clear
description of (1) the relationship between executive compensation
actually paid to the registrant's named executive officers (``NEOs'')
(including the registrant's principal executive officer (or persons
acting in a similar capacity during the last completed fiscal year)
(``PEO'')) and the cumulative total shareholder return (``TSR'') of the
registrant, and (2) the relationship between the registrant's TSR and
the TSR of a peer group chosen by the registrant, over each of the
registrant's five most recently completed fiscal years.\6\ The comment
period for the Proposing Release was reopened in 2022 to permit
commenters to further analyze and comment upon the proposed rules in
light of developments since the publication of the Proposing Release
and our further consideration of the Section 953(a) mandate.\7\ In the
Reopening Release, we stated that we were considering, and requested
public comment on, certain additional disclosure requirements that may
better implement the Section 953(a) mandate by providing investors with
additional decision-relevant data.\8\
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\6\ See Pay Versus Performance, Release No. 34-74835 (Apr. 29,
2015) [80 FR 26329 (May 7, 2015)] (``Proposing Release'').
\7\ This reopening of the comment period was set out in
Reopening of Comment Period for Pay Versus Performance Release No.
34-94074 (Jan. 27, 2022) [87 FR 5939 (Feb. 2, 2022)] (``Reopening
Release'').
\8\ A comment letter from two members of Congress raised
concerns about the Reopening Release. See letter from Sen. Pat
Toomey and Sen. Richard Shelby, dated Feb. 1, 2022 (``Toomey/
Shelby''). Specifically, the letter criticized the Commission for
reopening the comment period on the Proposing Release and seeking
comment on a number of regulatory alternatives without updating the
cost-benefit analysis and analysis required by the Paperwork
Reduction Act and the Regulatory Flexibility Act. The letter
asserted that the approach taken in the Reopening Release
significantly impaired the public's ability to comment thoughtfully
on the proposals and was inconsistent with the Administrative
Procedure Act. In response to these concerns, we note that the
Reopening Release included a robust discussion of the additional
disclosures under consideration and solicited comment on specific
aspects of those disclosures. The Reopening Release also discussed
the potential benefits and costs of the additional disclosures,
including their impact on efficiency, competition and capital
formation. Finally, the Reopening Release discussed how the
additional disclosures might affect smaller registrants and
solicited comment on approaches that would minimize the impact on
smaller registrants, such as exempting smaller reporting companies
from certain aspects of the additional disclosures. Given the
discussion included in the Proposing Release and subsequent
Reopening Release, we believe the final rules satisfy the
requirements of the Administrative Procedure Act and other
applicable statutes. Moreover, we received numerous comments from
members of the public on the additional disclosures described in the
Reopening Release, including comments on the economic effects of the
additional disclosure, and we have considered those comments in
adopting the final rules and made certain changes in response.
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We believe the disclosure mandated by Section 953(a) is intended to
provide investors with more transparent, readily comparable, and
understandable disclosure of a registrant's executive compensation, so
that they may better assess a registrant's executive compensation
program when making voting decisions, for example when exercising their
rights to cast advisory votes on executive compensation under Exchange
Act Section 14A or electing directors.\9\ This belief is supported by
the fact that Section 953(a) was enacted contemporaneously with other
executive compensation-related provisions in the Dodd-Frank Act that
are ``designed to address shareholder rights and executive compensation
practices.'' \10\ These included Section 951 of the Dodd-Frank Act,
which enacted new Exchange Act Section 14A,\11\ and Section 953(b) of
the Dodd-Frank Act. These provisions required, respectively, that, not
less than every three years, a separate resolution be put to a non-
binding shareholder vote to approve compensation of executives; \12\
and that registrants provide disclosure of the ratio of the median
annual total compensation of employees to the annual total compensation
of the chief executive officer.\13\
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\9\ See generally Proposing Release at Section I.
\10\ Dodd-Frank Act, H.R. Rep. 111-157, at 827 (2010).
\11\ 15 U.S.C. 78n-1.
\12\ Pursuant to the mandate in Section 14A of the Exchange Act,
we adopted rules requiring a shareholder advisory vote to approve
the compensation of a registrant's NEOs, as disclosed pursuant to
Item 402 of Regulation S-K, at an annual or other meeting of
shareholders at which directors will be elected and for which such
executive compensation disclosure is required under Commission
rules. See Shareholder Approval of Executive Compensation and Golden
Parachute Compensation, Release No. 33-9178 (Jan. 25, 2011) [76 FR
6010] (Feb. 2, 2011).
\13\ In 2015, we adopted rules to implement Section 953(b) of
the Dodd-Frank Act. See Pay Ratio Disclosure, Release No. 33-9877
(Aug. 5, 2015) [80 FR 50103] (Aug. 18, 2015).
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We believe the disclosure mandated by Section 14(i) will allow
investors to assess a registrant's executive compensation actually paid
relative to its financial performance more readily and at a lower cost
than under the existing executive compensation disclosure regime. Under
Item 402 of Regulation S-K, which specifies the information that must
be included when the applicable form or schedule requires executive
compensation disclosure, specific information regarding financial
performance is already required, including in the Performance Graph in
17 CFR 229.201(e) (``Item 201(e) of Regulation S-K''), the
Supplementary Financial Information in 17 CFR 229.302 (Item 302), and
Management's Discussion and Analysis of Financial Condition and Results
of Operations in 17 CFR 220.303 (Item 303). In addition, Item 402 of
Regulation S-K also requires detailed disclosure of executive
compensation and principles-based disclosure requirements regarding the
relationship between pay and performance.\14\
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\14\ The Compensation Discussion and Analysis (``CD&A'')
required by 17 CFR 229.402(b) (``Item 402(b) of Regulation S-K'')
requires registrants to provide an explanation of ``all material
elements of the registrant's compensation of the named executive
officers.'' 17 CFR 229.402(b)(1). With respect to performance, Item
402(b)(2) of Regulation S-K includes non-exclusive examples of
information that may be material, including (i) specific items of
corporate performance taken into account in setting compensation
policies and making compensation decisions; (ii) how specific forms
of compensation are structured and implemented to reflect these
items of the registrant's performance; and (iii) how specific forms
of compensation are structured and implemented to reflect the NEO's
individual performance and/or individual contribution to these items
of the registrant's performance. 17 CFR 229.402(b)(2)(v) through
(vii).
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There is no single place, however, where issuers must provide
investors with direct comparisons of an executive's pay with their
company's performance, and specifically financial performance,
particularly if investors are interested in that comparison over a
timespan longer than the most recent reporting period. Existing
disclosures generally provide the necessary components to make these
comparisons, including data required for calculations that aid in these
comparisons, but doing so may be time-consuming and costly. We believe
this information is important to investors in evaluating executive
compensation, and that disclosures about executive compensation may be
[[Page 55136]]
most meaningful to investors when placed in the context of the
company's financial performance.\15\ Indeed, we are aware that certain
third parties (e.g., proxy advisors or compensation consultants)
perform such analyses and charge clients for access to the resulting
data.\16\ Requiring registrants to compute and report this information
will make this information equally accessible to all investors in a
consistent manner.
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\15\ See infra Section V.C.2.
\16\ See infra Section V.B.2.
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By specifically referencing disclosure of ``information that shows
the relationship between executive compensation actually paid and . . .
financial performance of the issuer,'' Section 14(i) calls for
information that will supplement management's discussion of material
elements of executive compensation in the CD&A. In addition, we believe
this disclosure will provide investors with important and decision-
useful information for comparison purposes in one place when they
evaluate a registrant's executive compensation practices and policies,
including for purposes of the shareholder advisory vote on executive
compensation, votes on other compensation matters, director elections,
or when making investment decisions.\17\
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\17\ For example, academic researchers find that the salience
and readability of disclosures about executive compensation affect
say-on-pay votes. See, e.g., Danial Hemmings, Lynn Hodgkinson, &
Gwion Williams, It's OK to Pay Well, if You Write Well: The Effects
of Remuneration Disclosure Readability, 47 J. Bus. Fin. & Accounting
547 (2020); and Reggy Hooghiemstra, Yu Flora Kuang, & Bo Qin, Does
Obfuscating Excessive CEO Pay Work? The Influence of Remuneration
Report Readability on Say-on-Pay Votes, 47 Accounting & Bus. Res.
695 (2017).
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Section 14(i) did not expressly prescribe the manner in which
issuers would disclose the required information and we have exercised
our discretion to provide for a consistent format that we believe
furthers the statutory objectives of making pay-versus-performance data
clear and easy for investors to evaluate. Standardizing the format and
presentation of data, in particular quantitative metrics, to promote
such ease of use requires incremental costs for issuers. We have
elected not to pursue a wholly principles-based approach because, among
other reasons, such a route would limit comparability across issuers
and within issuers' filings over time, as well as increasing the
possibility that some issuers would choose to report only the most
favorable information. In addition, as we describe more extensively
below, the final rules require that issuers calculate the value of
certain equity and pension awards in more detail than would have been
required in the proposed rule. These changes, in our view, will result
in disclosures that more accurately represent the time when the awards
change in value, which is important for investors to be able to assess
whether such changes correspond to company performance over the
appropriate time period.
We received many comment letters in response to the Proposing
Release and the Reopening Release. After taking into consideration
these public comments, we are adopting the proposed rules, together
with certain of the supplemental disclosure requirements considered in
the Reopening Release, with some modifications to reflect public
comment. As discussed in more detail below, the final rules require
registrants to present disclosure that reflects the specific situation
of the registrant with respect to pay-versus-performance, and while
also providing pay-versus-performance disclosure that can be readily
compared across registrants.
B. Overview of Final Amendments
The amendments add new 17 CFR 229.402(v) (``Item 402(v) of
Regulation S-K''), which requires registrants to describe the
relationship between the executive compensation actually paid by the
registrant and the financial performance of the registrant over the
time horizon of the disclosure. Item 402(v) of Regulation S-K requires
disclosure of the cumulative TSR of the registrant (substantially as
defined in Item 201(e) of Regulation S-K),\18\ the TSR of the
registrant's peer group, the registrant's net income, and a measure
chosen by the registrant and specific to the registrant (``Company-
Selected Measure'') as the measures of financial performance.
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\18\ Item 201(e) of Regulation S-K sets forth the specific
disclosure requirements for the issuer's stock performance graph,
which is required to be included in the annual report to security
holders provided for by 17 CFR 240.14a-3 and 240.14c-3. The Item
provides that cumulative TSR is calculated by dividing the sum of
the cumulative amount of dividends for the measurement period,
assuming dividend reinvestment, and 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.
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The final rules require the following tabular disclosures, with the
asterisked items indicating portions of the final rules from which
smaller reporting companies (``SRCs'') \19\ are exempt: \20\
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\19\ A ``smaller reporting company'' means, in the case of
issuers required to file reports under Sections 13(a) or 15(d) of
the Exchange Act, an issuer that is not an investment company, an
asset-backed issuer, or a majority-owned subsidiary of a parent that
is not a smaller reporting company and that: (1) had a public float
of less than $250 million (as of the last business day of the
issuer's most recently completed second fiscal quarter); or (2) had
annual revenues of less than $100 million (as of the most recently
completed fiscal year for which audited financial statements are
available) and either: (i) no public float (as of the last business
day of the issuer's most recently completed second fiscal quarter);
or (ii) a public float of less than $700 million (as of the last
business day of the issuer's most recently completed second fiscal
quarter). 17 CFR 240.12b-2; and 17 CFR 229.10. Business development
companies (``BDCs''), which are a type of closed-end investment
company that is not registered under the Investment Company Act, do
not fall within the SRC definition, and thus do not qualify for the
scaled disclosures that we are adopting for SRCs. See infra Section
II.G (discussing our considerations with respect to SRC disclosure
requirements).
\20\ The title of column (i) of the table, ``Company-Selected
Measure,'' would be replaced with the name of the registrant's most
important measure, and that column would include the numerically
quantifiable performance of the issuer under such measure for each
covered fiscal year. For example, if the Company-Selected Measure
for the most recent fiscal year was total revenue, the company would
title the column ``Total Revenue'' and disclose its quantified total
revenue performance in each covered fiscal year.
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Value of initial fixed
Average $100 investment based
Summary summary Average on:
compensation Compensation compensation compensation -------------------------- [Company-
Year table total actually paid table total actually paid Peer group Net income selected
for PEO to PEO for non-PEO to non-PEO Total total measure] *
NEOs NEOs shareholder shareholder
return return *
(a) (b) (c) (d) (e) (f) (g) (h) (i)
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Y1.................................. .............. .............. .............. .............. ........... ........... ........... ...........
Y2.................................. .............. .............. .............. .............. ........... ........... ........... ...........
Y3.................................. .............. .............. .............. .............. ........... ........... ........... ...........
Y4 *................................ .............. .............. .............. .............. ........... ........... ........... ...........
Y5 *................................ .............. .............. .............. .............. ........... ........... ........... ...........
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[[Page 55137]]
In addition, registrants are required to use the information in the
above table to provide clear descriptions of the relationships between
compensation actually paid and three measures of financial performance,
as follows: describe the relationship between (a) the executive
compensation actually paid to the registrant's PEO and (b) the average
of the executive compensation actually paid to the registrant's
remaining NEOs to (i) the cumulative TSR of the registrant, (ii) the
net income of the registrant, and (iii) the registrant's Company-
Selected Measure, in each case over the registrant's five most recently
completed fiscal years. Registrants are also required to provide a
clear description of the relationship between the registrant's TSR and
the TSR of a peer group chosen by the registrant, also over the
registrant's five most recently completed fiscal years. Registrants
have flexibility as to the format in which to present the descriptions
of these relationships, whether graphical, narrative, or a combination
of the two. Registrants will also have the flexibility to decide
whether to group any of these relationship disclosures together when
presenting their clear description disclosure, but any combined
description of multiple relationships must be ``clear.'' SRCs will only
be required to present such clear descriptions with respect to the
measures they are required to include in the table and for their three,
rather than five, most recently completed fiscal years.
A registrant that is not an SRC also will be required to provide an
unranked list of the most important financial performance measures used
by the registrant to link executive compensation actually paid to the
registrant's NEOs during the last fiscal year to company performance.
Although, as discussed below, registrants may include non-financial
performance measures in this list, they must select the Company-
Selected Measure from the financial performance measures included in
this list, and it must be the financial performance measure that in the
registrant's assessment represents the most important performance
measure (that is not otherwise required to be disclosed in the table)
used by the registrant to link compensation actually paid to the
registrant's NEOs, for the most recently completed fiscal year, to
company performance.\21\
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\21\ Registrants that do not use any financial performance
measures to link executive compensation actually paid to company
performance, or that only use measures already required to be
disclosed in the table, would not be required to disclose a Company-
Selected Measure or its relationship to executive compensation
actually paid.
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As discussed below, the final rules permit registrants to
voluntarily provide supplemental measures of compensation or financial
performance (in the table or in other disclosure), and other
supplemental disclosures, so long as any such measure or disclosure is
clearly identified as supplemental, not misleading, and not presented
with greater prominence than the required disclosure.\22\
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\22\ See infra Section II.F.3.
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The final rules apply to all reporting companies except foreign
private issuers, registered investment companies, and emerging growth
companies (``EGCs'').\23\ As proposed, BDCs will be treated in the same
manner as issuers other than registered investment companies and,
therefore, be subject to the disclosure requirement of new Item 402(v)
of Regulation S-K.
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\23\ ``Emerging growth company'' means an issuer that had total
annual gross revenues of less than $1.07 billion during its most
recently completed fiscal year. An issuer that is an emerging growth
company as of the first day of that fiscal year shall continue to be
deemed an emerging growth company until the earliest of: (i) the
last day of the fiscal year of the issuer during which it had total
annual gross revenues of $1.07 billion or more; (ii) the last day of
the fiscal year of the issuer following the fifth anniversary of the
date of the first sale of common equity securities of the issuer
pursuant to an effective registration statement under the Securities
Act of 1933 [15 U.S.C. 77a et seq.]; (iii) the date on which such
issuer has, during the previous three year period, issued more than
$1 billion in non-convertible debt; or (iv) the date on which such
issuer is deemed to be a large accelerated filer. 17 CFR 240.12b-2.
Section 102(a)(2) of the Jumpstart Our Business Startups Act amended
Section 14(i) to exclude registrants that are EGCs from the pay-
versus-performance disclosure requirements. Public Law 112-106, 126
Stat. 306 (2012). In accordance with this provision, the Commission
did not propose to require EGCs to provide pay-versus-performance
disclosure.
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II. Discussion of Final Amendments
A. New Item 402(v) of Regulation S-K
1. Application and Operation of Item 402(v) of Regulation S-K
i. Proposed Amendments
We proposed including the pay-versus-performance disclosure in a
new Item 402(v) of Regulation S-K, as Section 14(i) explicitly refers
to Item 402 of Regulation S-K as the reference point for the executive
compensation to be addressed by the new disclosure relating
compensation to performance. We proposed requiring registrants to
include the Item 402(v) of Regulation S-K disclosure in any proxy or
information statement for which disclosure under Item 402 of Regulation
S-K is required.\24\ By including the requirement in Item 402 of
Regulation S-K and requiring this disclosure in proxy statements on
Schedule 14A and in information statements on Schedule 14C,
shareholders would have available the pay-versus-performance
disclosure, along with all other executive compensation disclosures
called for by Item 402 of Regulation S-K, in circumstances in which
shareholder action is to be taken with regard to executive compensation
or an election of directors.
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\24\ The disclosure called for under Item 402 of Regulation S-K
is required under Item 8 of Schedule 14A, and Item 1 of Schedule
14C. Schedule 14C correlates with the items of Schedule 14A to
generally require the disclosure of information called for by
Schedule 14A to the extent that the item would be applicable to any
matter to be acted on at a meeting if proxies were to be solicited.
Schedule 14C implements Exchange Act Section 14(c) [15 U.S.C.
78n(c)] (``Section 14(c)''), which created disclosure obligations
for registrants that choose not to, or otherwise do not, solicit
proxies, consents, or other authorizations from some or all of their
security holders entitled to vote.
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Because the language of Section 14(i) calling for the disclosure to
be provided in solicitation material for an annual meeting of the
shareholders suggests that the disclosure was intended to be provided
in conjunction with a shareholder vote, we proposed limiting the
requirement to provide these disclosures to a registrant's proxy or
information statement, instead of in all filings where disclosure under
Item 402 of Regulation S-K is required (which would also include a
registrant's Form 10-K \25\ and Securities Act \26\ registration
statements). In addition, as proposed, the information would not be
deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the
registrant specifically incorporates it by reference.
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\25\ 17 CFR 249.310.
\26\ 15 U.S.C. 77a et seq.
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ii. Comments
Some commenters generally supported the proposed approach,\27\ with
one noting that including the disclosure in proxy and information
statements would provide ``relevant information at a time when (a) it
is most useful to shareowners and (b) shareowners are equipped to act
on the information if they are so inclined.'' \28\
[[Page 55138]]
One commenter suggested that the Commission limit the requirement to
include the pay-versus-performance information to proxy statements
only, noting that any other document could just make reference to the
proxy statement; \29\ while another commenter suggested the pay-versus-
performance information ``should be included in all materials/filings
that discuss compensation.'' \30\
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\27\ See letters from Federal Home Loan Banks, dated July 2,
2015 (``FHL Banks''); Financial Services Roundtable, dated July 6,
2015 (``FSR''); and Ohio Public Employees Retirement System, dated
July 6, 2015 (``OPERS''). Comment letters received in response to
the Proposing Release and Reopening Release are available at <a href="https://www.sec.gov/comments/s7-07-15/s70715.htm">https://www.sec.gov/comments/s7-07-15/s70715.htm</a>.
\28\ Letter from OPERS.
\29\ See letter from Hermes Investment Management, dated July 7,
2015 (``Hermes'').
\30\ Letter from Regis Quirin, dated June 24, 2015 (``Quirin'').
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iii. Final Amendments
As proposed, we are adopting the requirement to include the new
Item 402(v) of Regulation S-K disclosure in any proxy or information
statement for which disclosure under Item 402 of Regulation S-K is
required. As noted by commenters \31\ and in the Proposing Release,
placing the pay-versus-performance information in proxy statements and
information statements will provide shareholders with the pay-versus-
performance disclosure (along with all other executive compensation
disclosures called for by Item 402 of Regulation S-K) in circumstances
in which shareholder action is to be taken with regard to an election
of directors or executive compensation. We are not requiring the pay-
versus-performance disclosure in other filings where disclosure under
Item 402 of Regulation S-K is required, as we believe that, taken in
context, the language of Section 14(i) calling for registrants to
provide the disclosure ``in any proxy or consent solicitation material
for an annual meeting of the shareholders'' suggests that the
information was intended to be presented in conjunction with a
shareholder vote.
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\31\ See letters from FHL Banks and OPERS.
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2. Format and Location of Disclosure
i. Proposed Amendments
Section 14(i) requires us to adopt rules requiring disclosure of
``information'' that shows the relationship between executive
compensation actually paid and registrant financial performance, but it
does not specify the format or location of that disclosure. We proposed
allowing registrants to decide where in the proxy or information
statement to provide the required disclosure. Although the new
disclosure item would show the historical relationship between
executive pay and registrant financial performance, and may provide a
useful point of comparison for the analysis provided in the CD&A, the
Proposing Release indicated that it would be appropriate to provide
flexibility for registrants in determining where in the proxy or
information statement to provide the disclosure.
We proposed requiring registrants to provide a standardized table
containing the values of:
<bullet> The total PEO compensation reported in the Summary
Compensation Table;
<bullet> The value of executive compensation actually paid to the
PEO;
<bullet> For NEOs (other than the PEO), the average total
compensation reported in the Summary Compensation Table;
<bullet> The value of the average executive compensation actually
paid to the NEOs (other than the PEO);
<bullet> The value of a fixed investment scaled by cumulative TSR,
for the registrant; and
<bullet> The value of a fixed investment scaled by cumulative TSR
for the selected peer group.
For the amounts disclosed as executive compensation actually paid,
we proposed requiring footnote disclosure of the amounts that were
deducted from, and added to, the Summary Compensation Table total
compensation amounts to calculate the executive compensation actually
paid,\32\ and footnote disclosure of vesting date valuation
assumptions.
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\32\ See infra Section II.C (discussing the adjustments proposed
to be made to the Summary Compensation Table total compensation to
calculate executive compensation actually paid).
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Because the statute specifically references disclosure of the
relationship between executive compensation actually paid and
registrant's financial performance, we proposed requiring registrants,
using the values presented in the table, to describe (1) the
relationship between the executive compensation actually paid and
registrant TSR, and (2) the relationship between registrant TSR and
peer group TSR. The disclosure about the relationship would follow the
table and could be described as a narrative, graphically, or a
combination of the two.
In the Reopening Release, we requested comment on requiring the
tabular disclosure to include disclosure of income or loss before
income tax expense,\33\ net income, and a Company-Selected Measure. We
also requested comment on requiring registrants to provide a clear
description of the relationship of each of these additional measures to
executive compensation actually paid, but, consistent with the
relationship descriptions proposed with respect to TSR and peer group
TSR, allowing the registrant to choose the format used to present the
relationship, such as a graphical or narrative description (or a
combination of the two).
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\33\ In the Reopening Release we used the term ``pre-tax net
income,'' but are using the phrase ``income or loss before income
tax expense'' in this release, to be consistent with the language in
17 CFR part 210 (``Regulation S-X'').
---------------------------------------------------------------------------
We also proposed that the disclosure be provided in interactive
data format using machine-readable eXtensible Business Reporting
Language (``XBRL''). Specifically, the proposal would require
registrants to tag separately the values disclosed in the required
table, and to separately block-text tag the required relationship
disclosure and the footnote disclosures.\34\ In the Reopening Release,
we requested comment on whether we should require registrants also to
tag specific data points (such as quantitative amounts) within the
footnote disclosures that would be block-text tagged, and to use Inline
XBRL rather than XBRL to tag their pay-versus-performance
disclosure.\35\
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\34\ Specifically, the proposed approach would require
registrants to provide the interactive data as an exhibit to the
definitive proxy or information statement filed with the Commission,
in addition to appearing with and in the same format as the rest of
the disclosure provided pursuant to proposed Item 402(v) of
Regulation S-K; and to prepare their interactive data using the list
of tags the Commission specifies and submit them with any supporting
files the EDGAR Filer Manual prescribes.
\35\ Subsequent to the proposal, the Commission adopted rules
replacing XBRL tagging requirements for registrant financial
statements with Inline XBRL tagging requirements. Inline XBRL embeds
the machine-readable tags in the human-readable document itself,
rather than in a separate exhibit. See Inline XBRL Filing of Tagged
Data, Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16,
2018)]. In 2020, the Commission adopted rules requiring BDCs to tag
their financial statements and certain prospectus disclosures in
Inline XBRL. See Securities Offering Reform for Closed-End
Investment Companies, Release No. IC-33836 (Apr. 8, 2020) [85 FR
33290 (June 1, 2020)]. The following year, the Commission required
operating companies, BDCs, and non-interval registered closed-end
funds to tag their filing fee exhibits on certain forms in Inline
XBRL. See Filing Fee Disclosure and Payment Methods Modernization,
Release No. 33-10997 (Oct. 13, 2021) [86 FR 70166 (Dec. 9, 2021)].
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ii. Comments
Commenters were divided over whether we should require registrants
to include the pay-versus-performance disclosure in the CD&A,\36\ or
allow registrants to decide where in the proxy or information statement
to provide the required disclosure, as proposed.\37\
[[Page 55139]]
Commenters in favor of allowing registrants to decide where to provide
the disclosure argued that including the disclosure in the CD&A could
cause confusion, as registrants do not necessarily consider the
information included in the pay-versus-performance disclosure when
making decisions about executive compensation. Those in favor of
locating the disclosure in the CD&A stated that locating the disclosure
alongside other executive compensation disclosure would make the
disclosure easier to locate for investors and provide investors the
ability to more easily assess the pay-versus-performance disclosure.
---------------------------------------------------------------------------
\36\ See letters from California Public Employees Retirement
System Investment Office, dated July 6, 2015 (``CalPERS 2015''); CFA
Institute, dated July 6, 2015 (``CFA''); Farient Advisors LLC, dated
July 6, 2015 (``Farient''); and Teachers Insurance Annuity
Association of America, dated July 6, 2015 (``TIAA'').
\37\ See letters from Compensation Advisory Partners, dated July
2, 2015 (``CAP''); Celanese Corp., dated June 12, 2015
(``Celanese''); Frederic W. Cook & Co., dated June 24, 2015
(``Cook''); Steven Hall ad Partners, dated July 6, 2015 (``Hall'');
and Pearl, Myers and Partners, dated July 6, 2015 (``Pearl''). See
also letter from Axcelis Technologies, Inc., dated Jan. 31, 2022
(suggesting that pay and performance data for all companies should
be made available on a new Commission website, rather than in
individual registrant disclosures).
---------------------------------------------------------------------------
Commenters were also divided on the proposal to require the
disclosure in a tabular format. Some commenters generally supported the
proposed tabular disclosure,\38\ while others opposed the tabular
format, suggesting it was overly simplistic and would require
significant supplemental disclosures.\39\
---------------------------------------------------------------------------
\38\ See letters from AllianceBernstein L.P., dated Mar. 4, 2022
(``AB''); As You Sow, dated July 2, 2015 (``As You Sow 2015''); CAP;
Farient; Hermes; and OPERS.
\39\ See letters from Aspen Institute's Business and Society
Program, dated July 6, 2015 (``Aspen''); Celanese; Center on
Executive Compensation, dated July 6, 2015 (``CEC 2015''); Corporate
Governance Coalition for Investor Value, dated July 23, 2015
(``Coalition''); Honeywell International Inc., dated July 2, 2015
(``Honeywell''); International Bancshares Corp., dated June 29, 2015
(``IBC 2015''); McGuireWoods LLP and Brownstein Hyatt Farber
Schreck, LLP, dated Mar. 4, 2022 (``McGuireWoods''); and National
Association of Manufacturers, dated July 6, 2015 (``NAM 2015'').
---------------------------------------------------------------------------
We received significant comment on the specific performance
measures to be included in the table, as discussed in Section II.E
below. With respect to the other information proposed to be provided in
the tabular format, one commenter suggested dividing the table to
separate the TSR disclosure from the compensation actually paid
disclosure.\40\ In addition, some commenters opposed requiring
disclosure of the total compensation from the Summary Compensation
Table,\41\ with one stating that ``including the SCT data would result
in redundancy, would add a second figure which is not representative of
compensation actually paid, and could result in possible confusion to
shareholders.'' \42\ However, other commenters supported the inclusion
of the Summary Compensation Table total compensation figures,\43\ with
one suggesting that including the Summary Compensation Table figures
would help investors understand the pay-versus-performance disclosure
alongside the Summary Compensation Table disclosure when evaluating a
registrant's annual compensation decisions,\44\ and another noting that
the Summary Compensation Table figures ``will help to clarify potential
differences between reported compensation and compensation actually
paid.'' \45\
---------------------------------------------------------------------------
\40\ See letter from AON Hewitt, dated July 6, 2015 (``AON'').
\41\ See letters from CEC 2015; Exxon Mobil Corp., dated June
23, 2015 (``Exxon''); Hall; McGuireWoods; Pay Governance LLC, dated
June 30, 2015 (``PG 2015''); Pearl; Technical Compensation Advisors,
dated July 6, 2015 (``TCA 2015''); and Technical Compensation
Advisors, dated. Mar. 4, 2022 (``TCA 2022'').
\42\ Letter from PG 2015.
\43\ See letters from American Federation of Labor and Congress
of Industrial Organizations, dated June 30, 2015 (``AFL-CIO 2015'');
CalPERS 2015; and CAP.
\44\ See letter from AFL-CIO 2015.
\45\ Letter from CAP.
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A number of commenters suggested that we require or allow graphical
disclosures. Some commenters suggested requiring graphical
disclosure,\46\ while one specifically supported giving registrants the
flexibility to choose whether to include graphical disclosure.\47\ A
few of these commenters suggested requiring inclusion of the
performance graph required in Item 201(e) of Regulation S-K, or a
modified version of that graph.\48\ In addition, a few commenters
suggested the Commission mandate formatting requirements for graphical
disclosure, if graphical disclosure is permitted.\49\ One commenter
suggested that we replace the tabular disclosure requirement with a
graphical disclosure requirement depicting TSR and compensation
actually paid,\50\ while another commenter stated that a prescribed
graphical format would facilitate comparability.\51\
---------------------------------------------------------------------------
\46\ See letters from AFL-CIO 2015 (stating that a graph would
be especially useful if it disclosed (1) the change between
executive compensation actually paid and the Summary Compensation
Table figure and (2) the TSRs of both the registrant and a peer
group over all five disclosure years); CalPERS 2015 (suggesting line
graphs be required in addition to tabular and narrative
disclosures); Council of Institutional Investors, dated June 25,
2015 (``CII 2015'') (suggesting the Commission require registrants
to disclose, at a minimum, ``a graph providing executive
compensation actually paid and change in TSR on parallel axes and
plotting compensation and TSR over the required time period'');
Corning Inc., dated June 12, 2015 (``Corning'') (suggesting
requiring the graph included in Item 201(e) of Regulation S-K);
OPERS (suggesting requiring a line graph, showing TSR coupled with a
corresponding line showing the executive compensation as a group);
and Shareholder Value Advisors, dated July 6, 2015 (``SVA'')
(suggesting requiring the inclusion of a scatterplot).
\47\ See letter from Hall.
\48\ See letters from Allison Transmission Holdings, Inc., dated
July 6, 2015 (``Allison''); and Corning. But see letters from CAP;
Center for Capital Markets Competitiveness, dated June 30, 2015
(``CCMC 2015''); Davis Polk and Wardwell LLP, dated July 2, 2015
(``Davis Polk 2015''); and McGuireWoods (each opposing the inclusion
of the performance graph).
\49\ See letters from Hermes and PG 2015. But see letter from
Hall (recommending allowing registrants to choose their own
graphical disclosure).
\50\ See letter from Meridian Compensation Partners, dated July
6, 2015 (``Meridian'').
\51\ See letter from OPERS.
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One commenter generally supported the requirement to provide a
clear description of the relationship between the measures disclosed in
the table and executive compensation, stating that a ``simple-to-
understand approach would be particularly valuable to investors.'' \52\
Another commenter, who supported requiring disclosure only of one (or
more) Company-Selected Measure(s), indicated that registrants should be
required to provide a clear description of the relationship between the
Company-Selected Measure(s) in the table and executive
compensation.\53\
---------------------------------------------------------------------------
\52\ See letter from Principles for Responsible Investment,
dated Mar. 4, 2022 (``PRI'').
\53\ See letter from National Association of Manufacturers,
dated Mar. 4, 2022 (``NAM 2022'').
---------------------------------------------------------------------------
Commenters were divided on the proposed XBRL tagging requirement.
Of the commenters who opposed the requirement,\54\ some made
alternative suggestions such as only requiring block-tagging,\55\ only
requiring tagging of the information in the table,\56\ delaying the
implementation of the tagging requirement,\57\ or permitting but not
requiring tagging.\58\ One commenter stated the Commission should
proceed ``cautiously'' to ensure that the cost of tagging does not
outweigh the benefits,\59\ while another suggested the Commission
should provide data on how many investors use XBRL disclosures before
implementing the requirement.\60\ However, a number of commenters
supported the XBRL
[[Page 55140]]
requirement,\61\ with one suggesting that tagging should be required
for the actual metrics registrants use to determine executive
compensation.\62\
---------------------------------------------------------------------------
\54\ See letters from CCMC 2015; CEC 2015; Celanese; Davis Polk
2015; Jon Faulkner, dated May 4, 2015 (``Faulkner''); FedEx Corp.,
dated July 6, 2015 (``FedEx 2015''); Hyster-Yale Materials Handling
Inc., dated June 10, 2015 (``Hyster-Yale''); IBC 2015; McGuireWoods;
NACCO Industries, Inc., dated June 9, 2015 (``NACCO''); Pearl;
Society for Corporate Governance, dated Mar. 10, 2022 (``SCG''); and
Society of Corporate Secretaries and Governance Professionals, dated
July 7, 2015 (``SCSGP'').
\55\ See letter from Pearl.
\56\ See letters from Hyster-Yale and NACCO.
\57\ See letters from Mercer, dated July 6, 2015 (``Mercer'')
and NACCO.
\58\ See letter from CII 2015.
\59\ See letter from National Investor Relations Institute,
dated July 10, 2015 (``NIRI 2015'').
\60\ See letter from CCMC 2015.
\61\ See letters from AFL-CIO 2015; CalPERS 2015; Public
Citizen, dated July 6, 2015 (``Public Citizen 2015''); and State
Board of Administration of Florida, dated July 6, 2015 (``SBA-FL'').
See also CII 2015 (agreeing with the Commission's rationale for
requiring tagging, and not opposing the Commission requiring XBRL
tagging, but suggesting that ``permitting, rather than requiring,
registrants to tag data when registrant-specific extensions are
necessary may be more appropriate'').
\62\ See letter from AFL-CIO 2015.
---------------------------------------------------------------------------
In response to the Reopening Release request for comment regarding
Inline XBRL, a number of commenters suggested requiring all registrants
to use Inline XBRL to tag their pay-versus-performance disclosure,
including the tagging of specific data points within the footnote
disclosures that would be block-text tagged.\63\ One commenter directly
opposed requiring the use of the Inline XBRL (as considered in the
Reopening Release),\64\ while another commenter, who generally opposed
an XBRL tagging requirement, stated that, if XBRL tagging is required,
Inline XBRL tagging should be permitted.\65\ One commenter suggested
the Commission give time for registrants to implement any XBRL
requirements, due to the ``stylized'' nature of proxy statements, and
that there may be a learning curve because registrant staff preparing
the proxy statement may be different from the staff preparing documents
that are subject to current tagging requirements.\66\
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\63\ See letters from Council of Institutional Investors, dated
Feb. 24, 2022 (``CII 2022''); Steven Huddart, dated Mar. 4, 2022
(``Huddart''); International Corporate Governance Network, dated
Mar. 4, 2022 (``ICGN''); and XBRL US, dated Mar. 4, 2022 (``XBRL
US'').
\64\ See letter from Davis Polk and Wardwell LLP, dated Mar. 4,
2022 (``Davis Polk 2022'') (noting that, while the use of Inline
XBRL ``could increase the ability of investors to compare across
filers, . . . the initial compliance costs, the quality and the
extent of use of XBRL data by investors would not justify the cost
of creating XBRL data in company filings,'' and therefore
specifically recommending not requiring the use of Inline XBRL).
\65\ See letter from McGuireWoods.
\66\ See letter from XBRL US.
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iii. Final Amendments
The final rules provide registrants flexibility in determining
where in the proxy or information statement to provide the disclosure
required, as proposed. We believe, as noted in the Proposing Release
and by some commenters, that mandating registrants to include the
disclosure in the CD&A may cause confusion by suggesting that the
registrant considered the pay-versus-performance relationship in its
compensation decisions, which may or may not be the case.
We are adopting the tabular disclosure format, as proposed, with
the addition of two new financial performance measures--net income and
the Company-Selected Measure--as considered in the Reopening Release.
Each of these financial performance measures is discussed in more
detail below.\67\ We are not persuaded by commenters who characterized
the tabular disclosure requirement as overly simplistic. The simplicity
of the tabular disclosure should allow investors to more easily
understand and analyze the relationship between pay and performance. In
addition, registrants can supplement the tabular disclosure, so long as
any additional disclosure is clearly identified as supplemental, not
misleading, and not presented with greater prominence than the required
disclosure. We also believe the simplicity of the tabular disclosure
matches the requirement in Section 14(i) that registrants provide a
``clear description'' of their pay-versus-performance, and, consistent
with Section 14(i), will better allow investors to compare disclosures
within companies over time and across companies, making the disclosure
more useful.
---------------------------------------------------------------------------
\67\ See infra Sections II.D.1 (discussing TSR and peer group
TSR); II.D.2 (discussing net income); and II.D.4 (discussing the
Company-Selected Measure).
---------------------------------------------------------------------------
We are adopting the requirement to include the Summary Compensation
Table total compensation amounts for the PEO and the average (i.e.,
mean) of the remaining NEOs, as proposed. Those amounts will appear in
columns (c) and (e) of the Pay Versus Performance table, respectively.
We believe including these figures as proposed will provide useful
information to investors, especially as the ``actually paid'' figures
are directly related to those figures. Requiring disclosure of the
Summary Compensation Table measure of total compensation together with
executive compensation actually paid will provide shareholders with
disclosure of two measures in one single table and, we believe, will
facilitate comparisons of the two measures of a registrant's executive
compensation to the registrant's performance.\68\ For example, to the
extent that some shareholders may be interested in considering the
relationship of performance with a measure of pay that excludes changes
in the value of equity awards, they would be able to refer to the
Summary Compensation Table measure of total compensation alongside
executive compensation actually paid in the tabular disclosure. As
proposed, the final rules will require registrants to provide footnote
disclosure of the amounts that are deducted from, and added to, the
Summary Compensation Table total compensation amounts reported in
columns (c) and (e) to calculate the executive compensation actually
paid amounts reported in columns (d) and (f), respectively. We believe
any confusion created by the inclusion of the Summary Compensation
Table totals in the table will be mitigated by this required footnote
disclosure.
---------------------------------------------------------------------------
\68\ For example, placing the Summary Compensation Table and
actually paid figures side-by-side may make it easier for investors
to follow the footnote disclosures in which the registrant explains
how compensation actually paid differs from the Summary Compensation
Table amounts.
---------------------------------------------------------------------------
As proposed, registrants must also provide a narrative, graphical,
or combined narrative and graphical description of the relationships
between executive compensation actually paid and the registrant's TSR,
and between the registrant's TSR and peer group TSR. We believe the
disclosure of the relationship between executive compensation actually
paid and TSR will satisfy the language of Section 14(i) that
registrants disclose the ``relationship'' between executive
compensation and registrant performance. Further, as noted in the
Proposing Release, we believe disclosure about the relationship between
registrant TSR and peer group TSR may provide a useful point of
comparison to assess the relationship between the registrant's
executive compensation actually paid and its financial performance
compared to the performance of its peers during the same time
period.\69\
---------------------------------------------------------------------------
\69\ Peer comparisons are a component companies often use to
assess the performance of their executives. See, e.g., John Bizjak,
Swaminathan Kalpathy, Zhichuan Frank Li, & Brian Young, The Choice
of Peers for Relative Performance Evaluation in Executive
Compensation, 26 Rev. Fin. __(forthcoming 2022), available at
<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2833309">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2833309</a> (finding
that, in a sample of the largest 750 U.S. companies (by market
capitalization), ``over 50%'' of companies in 2017 used performance
awards based on performance relative to a peer group, ``comprising
approximately one-third of the value of total compensation'').
---------------------------------------------------------------------------
In light of the addition of two new performance measures to the
table, we are also adopting a requirement that registrants provide a
clear description of the relationships between executive compensation
actually paid and net income, and between executive compensation
actually paid and the Company-Selected Measure. These descriptions may
also be provided in narrative, graphical, or combined narrative and
graphical format. Since some of these measures and
[[Page 55141]]
relationships may be more important to some companies or investors than
others, we believe including disclosure about each of these
relationships will provide investors with a more complete picture of
how pay relates to performance.
We believe permitting, but not mandating, graphical disclosure is
consistent with an acknowledgement in the Senate Report that there
could be many ways to disclose the relationship between executive
compensation and financial performance of the registrant,\70\ and the
specific language of Section 14(i), which provides the pay-versus-
performance disclosures ``may'' include graphic representations. We
encourage registrants to present this disclosure in the format that
most clearly provides information to investors about the relationships,
based on the nature of each measure and how it is associated with
executive compensation actually paid. As discussed in the Proposing
Release, the required relationship disclosure could include, for
example, a graph providing executive compensation actually paid and
change in the financial performance measure(s) (TSR, net income, or
Company-Selected Measure) on parallel axes and plotting compensation
and such measure(s) over the required time period. Alternatively, the
required relationship disclosure could include narrative or tabular
disclosure showing the percentage change over each year of the required
time period in both executive compensation actually paid and the
financial performance measure(s) together with a brief discussion of
how those changes are related. The required table, along with the
required relationship disclosures, should provide investors with clear
information from which to determine the relationship between executive
compensation actually paid and some basic facets of registrant
financial performance. In addition, although the presentation format
used by different registrants to demonstrate the relationship between
executive compensation actually paid and the financial performance
measures included in the table pursuant to Item 402(v) of Regulation S-
K may vary, these more variable descriptions may allow investors to
understand more easily the registrant's perspective on these required
relationship disclosures.
---------------------------------------------------------------------------
\70\ See supra note 4 and accompanying text.
---------------------------------------------------------------------------
The final rules require registrants to separately tag each value
disclosed in the table, block-text tag the footnote and relationship
disclosure, and tag specific data points (such as quantitative amounts)
within the footnote disclosures, all in Inline XBRL. We recognize that,
as noted by commenters,\71\ the requirement that registrants use Inline
XBRL will increase costs for registrants. However, we believe these
costs will be incremental, as registrants are subject to Inline XBRL
tagging requirements for other Commission disclosures.\72\ In addition,
we believe that requiring the data to be structured will lower the cost
to investors of collecting this information, permit data to be analyzed
more quickly, and facilitate comparisons among public companies, all of
which justify the incremental cost to registrants. We also believe that
the registrants who will be subject to the pay-versus-performance rule
are familiar with Inline XBRL,\73\ and for that reason do not believe
additional data about the complexity of Inline XBRL, or a phase-in
period for the application of the requirement (other than as proposed
for SRCs, as discussed below \74\), are necessary. With respect to
comments questioning the utility of a structured data language, we note
that investors and market participants have gained experience with XBRL
and Inline XBRL filings since the time of the Proposing Release, and
that there is increased evidence that data in these formats is useful
to investors.\75\
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\71\ See, e.g., letter from Davis Polk 2022.
\72\ See supra note 35 (noting that subsequent to issuing the
Proposing Release, the Commission adopted rules replacing XBRL
tagging requirements for registrant financial statements with Inline
XBRL tagging requirements). See also Inline XBRL Filing of Tagged
Data, Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16,
2018)].
\73\ See infra Section V.C.4.ii.
\74\ See infra Section II.G.iii.
\75\ See infra Section V.C.4.ii.
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B. Executives Covered
1. Proposed Amendments
Under the approach included in the Proposing Release, registrants
other than SRCs would have been required to provide disclosure about
``named executive officers,'' as defined in 17 CFR 229.402(a)(3); \76\
and SRCs would have been required to provide disclosure about ``named
executive officers,'' as defined in 17 CFR 229.402(m).\77\ These are
the executive officers for whom, under our current rules, compensation
disclosure is required under Item 402 of Regulation S-K, including in
the Summary Compensation Table and the other executive compensation
disclosure requirements. Specifically, we proposed requiring
registrants to separately disclose compensation information for the
PEO, and as an average for the remaining NEOs. We also proposed that,
if more than one person served as the PEO of the registrant in any
year, the disclosure for those multiple PEOs would be aggregated for
that year, because this reflects the total amount that was paid by the
registrant for the services of a PEO.
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\76\ 17 CFR 229.402(a)(3) defines the NEOs for whom Item 402 of
Regulation S-K executive compensation is required as (1) all
individuals serving as the registrant's PEO during the last
completed fiscal year, regardless of compensation level, (2) all
individuals serving as the registrant's principal financial officer
or acting in a similar capacity during the last completed fiscal
year (``PFO''), regardless of compensation level, (3) the
registrant's three most highly compensated executive officers other
than the PEO and PFO who were serving as executive officers at the
end of the last completed fiscal year, and (4) up to two additional
individuals for whom Item 402 of Regulation S-K disclosure would
have been provided but for the fact that the individual was not
serving as an executive officer of the registrant at the end of the
last completed fiscal year. Because the pay-versus-performance
disclosure was proposed as new paragraph (v) to Item 402 of
Regulation S-K, the disclosure also would be required for the NEOs.
\77\ For SRCs, 17 CFR 229.402(m)(2) defines the NEOs for whom
Item 402 of Regulation S-K executive compensation is required as (1)
all individuals serving as the smaller reporting company's PEO
during the last completed fiscal year, regardless of compensation
level, (2) the smaller reporting company's two most highly
compensated executive officers other than the PEO who were serving
as executive officers at the end of the last completed fiscal year,
and (3) up to two additional individuals for whom Item 402 of
Regulation S-K disclosure would have been provided but for the fact
that the individual was not serving as an executive officer of the
smaller reporting company at the end of the last completed fiscal
year.
---------------------------------------------------------------------------
2. Comments
A number of commenters supported requiring Item 402(v) of
Regulation S-K to cover both PEOs and NEOs.\78\ These commenters noted
that requiring Item 402(v) of Regulation S-K to cover PEOs and NEOs
would be consistent with the disclosure in the Summary Compensation
Table,\79\ and what Congress intended; \80\ and would provide investors
with useful information about the registrant's compensation practices
more broadly.\81\ However, a number of other commenters suggested we
limit the disclosure to PEOs.\82\ Such commenters
[[Page 55142]]
raised concerns about the inclusion of non-PEO NEOs, including that:
NEO groups may vary considerably from year to year; \83\ NEOs are more
likely to have business-segment-based compensation, the performance of
which might not be reflective of the registrant's overall performance;
\84\ and not all NEOs are in positions to affect overall company
performance.\85\ Commenters also stated that PEOs are under the most
scrutiny from investors \86\ and are the only executives comparable
across companies; \87\ and that requiring disclosure of non-PEO NEOs
would create an increased reporting burden.\88\ In addition, one
commenter expressed belief that Section 14(i) did not require the pay-
versus-performance disclosures to include non-PEO NEOs.\89\
---------------------------------------------------------------------------
\78\ See letters from CalPERS 2015; CII 2015; CFA; Hay Group,
Inc., dated July 6, 2015 (``Hay''); David Hook, dated May 3, 2015
(``Hook''); OPERS; National Association of Corporate Directors,
dated July 10, 2015 (``NACD 2015''); National Association of
Corporate Directors, dated Mar. 10, 2022 (``NACD 2022''); and TIAA.
\79\ See letters from CalPERS 2015; CFA; and Hay.
\80\ See letter from CII 2015.
\81\ See letter from CII 2015; CFA; OPERS; and TIAA.
\82\ See letters from AON; BorgWarner Inc., dated Aug. 20, 2015
(``BorgWarner''); CAP; CEC 2015; CCMC 2015; Celanese; Coalition;
Corning; Davis Polk 2015; Exxon; FedEx 2015; FSR; Hall; Hodak Value
Investors, dated July 2, 2015 (``Hodak''); Honeywell; Hyster-Yale;
McGuireWoods; Mercer; NACCO; NIRI 2015; National Investor Relations
Institute, dated Mar. 4, 2022 (``NIRI 2022''); Pearl; PNC Financial
Services Group, dated July 6, 2015 (``PNC''); TCA 2015; TCA 2022;
and WorldatWork, July 6, 2015 (``WorldatWork'').
\83\ See letters from CCMC 2015; CEC 2015; Exxon; FSR; Meridian;
Pearl; and PNC.
\84\ See letters from Celanese; FSR; and PNC.
\85\ See letters from CCMC 2015 and Coalition.
\86\ See letters from CCMC 2015; CEC 2015; Corning; Davis Polk
2015; FSR; NIRI 2015; NIRI 2022; Pearl; PNC; TCA 2015; and
WorldatWork.
\87\ See letter from TCA 2015.
\88\ See letters from Davis Polk 2015 and WorldatWork.
\89\ See letter from Coalition.
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Commenters were generally opposed to the proposal's approach of
aggregating multiple PEOs for years when a registrant had more than one
individual serve as PEO.\90\ These commenters proposed a number of
alternatives to aggregation, including: allowing separate disclosure
for each PEO; \91\ only requiring aggregation for external successors;
\92\ only disclosing the compensation of the PEO serving at the end of
the year (either annualized \93\ or not \94\); requiring disclosure of
the outgoing PEO only; \95\ only aggregating payments for services
rendered as PEO; \96\ requiring aggregated and disaggregated
disclosures; \97\ or excluding any disclosures in years where the
registrant has multiple PEOs.\98\ Additionally, a number of commenters
opposed including signing and severance bonuses, either generally,\99\
or if the compensation of multiple PEOs were to be aggregated,\100\
while some other commenters more specifically stated that these bonuses
were reasons not to aggregate PEO compensation.\101\
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\90\ See letters from AFL-CIO 2015; BorgWarner; Business
Roundtable, dated July 6, 2015 (``BRT''); CCMC 2015; Coalition;
Celanese; FedEx 2015; FSR; Hall; Honeywell; IBC 2015; McGuireWoods;
Mercer; PG 2015; Pearl; TCA 2015; and TCA 2022.
\91\ See letters from AFL-CIO 2015; BorgWarner; CCMC 2015; FedEx
2015; Honeywell; SCSGP; TCA 2015; and TIAA.
\92\ See letters from Cook and Pearl.
\93\ See letters from FSR and Mercer.
\94\ See letters from Mercer.
\95\ See letters from Hodak and PG 2015.
\96\ See letters from AON and SCSGP.
\97\ See letters from As You Sow 2015 and Hermes.
\98\ See letter from McGuireWoods.
\99\ See letters from FedEx 2015 and SCSGP.
\100\ See letters from CCMC 2015; Celanese; and Davis Polk 2015.
\101\ See letters from FSR and Honeywell.
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A few commenters also opposed using the average NEO compensation in
the table,\102\ while others supported average NEO compensation.\103\ A
number of other commenters did not expressly oppose the use of average
NEO compensation, but stated that this type of disclosure would provide
little investor insight,\104\ could confuse investors,\105\ or would
limit comparability.\106\ Two commenters suggested requiring separate
disclosure for each NEO.\107\
---------------------------------------------------------------------------
\102\ See letters from CEC 2015; Coalition; and Meridian.
\103\ See letters from NACD 2015 and Pearl (generally opposing
the disclosure of NEO compensation, but stating that it should be
aggregated if required to be disclosed).
\104\ See letter from Honeywell.
\105\ See letter from IBC 2015.
\106\ See letter from Meridian.
\107\ See letters from Loring, Wolcott & Coolidge, dated Mar. 4,
2022 (``LWC'') and OPERS.
---------------------------------------------------------------------------
3. Final Amendments
We are adopting requirements for registrants to disclose
information pertaining to both NEOs and PEOs in their Item 402(v) of
Regulation S-K disclosure, as proposed. As noted in the Proposing
Release, Section 14(i) does not specify which executives must be
included in the pay-versus-performance disclosure. While we are mindful
of concerns raised by commenters that individual NEOs may be in
positions less likely to affect overall company performance than the
PEO, may have more varied performance measures driving their
compensation (including because NEOs within a company have different
roles), can vary from year to year, and are less comparable across
registrants (with respect to compensation), we believe that Congress
intended for the rules to provide disclosure about both PEOs and the
remaining NEOs because Section 14(i) specifically refers to
``compensation required to be disclosed by the issuer under [Item 402
of Regulation S-K],'' and Item 402 requires disclosure of NEO
compensation. Further, while we agree that investors are typically most
interested in the compensation of the PEO, as indicated by
commenters,\108\ investors also are interested in how the incentives of
NEOs relate to company performance, and our rationale of simplifying
and reducing costs for investors who monitor executive performance
therefore extends to NEOs.
---------------------------------------------------------------------------
\108\ See supra note 86 and accompanying text.
---------------------------------------------------------------------------
We are also adopting, as proposed, the requirement that registrants
provide separate disclosure of the PEO's compensation. We believe this
is appropriate because, as noted by commenters, investors frequently
have more interest in PEO compensation, PEOs are generally more
comparable across companies, and PEOs are frequently in a position to
impact performance more than any other NEO.
Similarly, we are adopting as proposed a requirement to include an
average of compensation for the remaining NEOs. We disagree with
commenters that suggested that average NEO compensation would provide
little investor insight, could confuse investors, or would limit
comparability. Rather, we believe disclosure of the relationship of
performance to average NEO compensation will be more meaningful to
shareholders than individual or aggregate NEO compensation. Because a
registrant's individual NEOs may change from year to year, we believe
that the disclosure of the average NEO compensation will make it easier
for investors to compare the registrant's pay-versus-performance
disclosure over time. Further, we believe disclosure of compensation
for all NEOs (consisting of the PEO, and the remaining NEOs in the
aggregate) aligns with our understanding of the intent of Congress that
all NEOs be included in the pay-versus-performance disclosure. In
addition, we are adopting a requirement that registrants identify in
footnote disclosure the individual NEOs whose compensation amounts are
included in the average for each year, so that investors can consider
whether changes in the average compensation reported from year to year
were due to compositional changes in the included NEOs. We believe this
will alleviate concerns raised by commenters that the aggregation of
NEOs could confuse investors.
Although some commenters opposed our proposal to require an average
of NEO compensation and suggested that we instead require the
disclosure of compensation for each of the NEOs as separate columns in
the table, we believe that approach could result in a lengthy and
potentially confusing table, due to the fact that in any year there are
multiple NEOs and, as noted by several
[[Page 55143]]
commenters,\109\ there can be frequent turnover in a registrant's NEOs
from year to year. In addition, we are not permitting registrants to
remove signing bonuses, severance bonuses, and other one-time payments
from the amount of executive compensation actually paid, because,
although those figures may not represent the executive's compensation
in a `typical' year where no such payment is made, they do reflect
amounts that are ``actually paid'' to the executives. Even if such
payments are not ordinarily recurring with respect to a particular
executive, shareholders voting on executive compensation or directors
may wish to take into account the company resources devoted to such
payments in light of the company's performance.
---------------------------------------------------------------------------
\109\ See supra note 83.
---------------------------------------------------------------------------
In a change from the proposal, in response to comments, the final
rules do not require aggregating the compensation of PEOs in years when
a registrant had multiple PEOs. Instead, the final rules require that,
in those years, registrants include separate Summary Compensation Table
total compensation and executive compensation actually paid columns for
each PEO. For example, the below table shows the disclosure that would
be required when there were two PEOs in ``Year 2'':
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Value of initial fixed
Average $100 investment based
Summary Summary Compensation Compensation summary Average on:
compensation compensation actually actually compensation compensation -------------------------- [Company-
Year table total table total paid to paid to table total actually Peer group Net income selected
for first for second first PEO second PEO for non-PEO paid to non- Total total measure]
PEO PEO NEOs PEO NEOs shareholder shareholder
return return
(a) (b) (b) (c) (d) (e) (f) (g) (h) (i)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Y1...................................................... N/A $ N/A $ $ $ $ $ $ $
Y2...................................................... $ $ $ $ $ $ $ $ $ $
Y3...................................................... $ N/A $ N/A $ $ $ $ $ $
Y4...................................................... $ N/A $ N/A $ $ $ $ $ $
Y5...................................................... $ N/A $ N/A $ $ $ $ $ $
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
We believe including separate disclosure for each PEO, as
recommended by some commenters,\110\ would address commenters' concerns
that aggregating PEO disclosure could lead to confusing or misleading
disclosure.\111\ In the case of multiple PEOs in a single year, this
approach would make the table itself slightly longer, but it would have
the added benefit of distinguishing the compensation paid to separate
PEOs both visually and in the structured data, instead of presenting a
potentially confusing aggregated figure in the table and only having
discussion of the separate PEOs in footnote and narrative disclosure.
---------------------------------------------------------------------------
\110\ See supra note 91.
\111\ We note that a registrant may elect to provide additional
information about its PEO or PEOs, such as the amount of time during
the year each individual served as PEO, if the registrant believes
that information would provide relevant context to investors.
---------------------------------------------------------------------------
C. Determination of Executive Compensation Actually Paid
We proposed that ``executive compensation actually paid'' under
Item 402(v) of Regulation S-K would be total compensation as reported
in the Summary Compensation Table, modified to adjust the amounts
included for pension benefits and equity awards. In both the Proposing
and Reopening Releases, we requested comment on the proposed approaches
to calculating these amounts, and whether the proposed definition
appropriately captures the concept of ``executive compensation actually
paid,'' and in the Proposing Release we offered an economic analysis of
an alternative approach to calculating equity awards. We received
significant comment, as discussed below, on the proposed approaches to
calculating the amounts of pension benefits and equity awards to be
included as ``actually paid.'' In addition, several commenters to the
Proposing Release noted that the definition of compensation actually
paid as proposed may result in some misalignment between the time
period to which pay is attributed and the time period in which the
associated performance is reported.\112\ After considering the
statutory language and the comments received, we are adopting final
rules for calculating the amounts reported for pension benefits and
equity awards that are modifications of our proposed approach,
including, as discussed further below, requiring equity awards to be
revalued more frequently than as proposed. We believe that these
approaches will more accurately reflect executive compensation actually
paid, as required by Section 14(i), and mitigate commenter concerns
about timing mismatches by more closely associating compensation with
the period of the corresponding performance.
---------------------------------------------------------------------------
\112\ See, e.g., letters from Allison; Celanese; CEC 2015; Cook;
Coalition; Farient; Faulkner; FSR; Honeywell; NACCO; NACD 2015; NAM
2015; Pearl; Ross Stores, Inc. dated June 26, 2015 (``Ross''); SVA;
SBA-FL; TIAA; TCA 2015; and WorldatWork.
---------------------------------------------------------------------------
Although Section 14(i) refers to compensation required to be
disclosed under Item 402 of Regulation S-K, it also uses the phrase
``actually paid,'' which differs from disclosure required under Item
402 of ``compensation awarded to, earned by or paid to'' the NEOs.
Because Congress was aware of the language of Item 402 at the time of
the Dodd-Frank Act, and adopted text that did not mirror the language
of that provision, we believe that Congress intended executive
compensation ``actually paid'' to be an amount distinct from the total
compensation as reported under Item 402 because it used a term not
otherwise referenced in Item 402. As such, we believe using as a
starting point the total compensation that registrants already are
required to report in the Summary Compensation Table and making
adjustments to some of those figures is appropriate to give effect to
the statutory language and reflect executive compensation that is
``actually paid.'' \113\ Commenters generally agreed that adjustments
to the Summary Compensation Table total
[[Page 55144]]
were appropriate to determine ``executive compensation actually paid,''
\114\ noting that there are some items reportable in the Summary
Compensation Table total that are not reflective of compensation
``actually paid''; \115\ or more generally suggesting that the Summary
Compensation Table total is not reflective of ``executive compensation
actually paid.'' \116\
---------------------------------------------------------------------------
\113\ A few commenters on the proposed rules sought clarity on
the disclosure required in circumstances where a registrant recovers
(or ``claws back'') any portion of an executive officer's
compensation. See letters from Hyster-Yale; IBC 2015; and NACCO. See
also letters from BRT and NACD 2015 (noting that the proposed rules
did not account for claw-backs). Consistent with the approach
currently taken by registrants when reporting claw-backs in the
Summary Compensation Table, when any portion of an executive
officer's compensation for a fiscal year that is included in the
table is clawed back, the amounts of executive compensation
disclosed in response to Item 402(v) as the Summary Compensation
Table Total and as the Compensation Actually Paid initially reported
for such year should be adjusted to reflect the effects of the claw-
back, with footnote disclosure of the amount(s) recovered, when
applicable.
\114\ See, e.g., letters from AON; CAP; CEC 2015; Exxon; FedEx
2015; FSR; Hall; Honeywell; Hyster-Yale; KPMG LLP, dated July 1,
2015 (``KPMG''); Meridian; NACCO; NACD 2015; PG 2015; Public Citizen
2015; SCSGP; SVA; TCA 2015; TCA 2022; TIAA; Towers Watson, dated
July 6, 2015 (``Towers''); and WorldatWork. But see letter from IBC
2015 (stating that ``the Summary Compensation Table already required
by Regulation S-K is sufficient'').
\115\ See letters from AON; CAP; CEC 2015; FedEx 2015; Hall;
Honeywell; KPMG; Meridian; NACD 2015; Public Citizen 2015; SCSGP;
SVA; TIAA; Towers; and WorldatWork.
\116\ See letters from CEC 2015; Exxon; FSR (stating that
``Congress did not intend that compensation [actually paid] would be
determined by reference to the Summary Compensation Table''); Hall;
Hyster-Yale (suggesting an approach where companies are permitted to
define ``actually paid'' independently, and then reconcile those
amounts with the Summary Compensation Table totals); NACCO (same);
PG 2015; SVA; TCA 2015; and TCA 2022.
---------------------------------------------------------------------------
1. Deduction of Change in Actuarial Present Value and Addition of
Actuarially Determined Service Cost and Prior Service Cost
i. Proposed Amendments
We proposed requiring registrants to deduct the change in actuarial
present value of all defined benefit and actuarial pension plans \117\
from the Summary Compensation Table total compensation figure, and to
add back the actuarially determined service cost for services rendered
by the executive during the applicable year,\118\ when calculating
executive compensation actually paid. We proposed removing the change
in actuarial present value of these plans in order to avoid potential
volatility associated with revaluing previously accumulated benefits
with changes in actuarial inputs and assumptions. However, as discussed
in the Proposing Release, we believed that including the service cost
from the applicable year was appropriate because it more closely
reflected compensation ``actually paid'' during that year, in that it
could be seen as an estimate of the value that would be set aside by
the registrant to fund the benefits payable in retirement for the
service provided during the applicable year. We also stated that we
believed that using the actuarially determined service cost, instead of
the Summary Compensation Table pension measure, may increase
comparability across registrants of the amounts ``actually paid'' under
both defined benefit and defined contribution plans. For defined
contribution plans, the Summary Compensation Table requires disclosure
of registrant contributions or other allocations to vested and unvested
defined contribution plans for the applicable fiscal year,\119\ which
will also be included in computing compensation actually paid for
purposes of the new disclosure.
---------------------------------------------------------------------------
\117\ The change in actuarial present value, generally, reflects
the difference between the actuarial present value of accumulated
benefits at the end of the fiscal year and at the end of the prior
fiscal year.
\118\ Service cost is defined in FASB ASC Topic 715 as the
actuarial present value of benefits attributed by the pension plan's
benefit formula to services rendered by the employee during the
period. The measurement of service cost reflects certain
assumptions, including future compensation levels to the extent
provided by the pension plan's benefit formula.
\119\ 17 CFR 229.402(c)(2)(ix)(E).
---------------------------------------------------------------------------
In the Reopening Release, we stated that some commenters had
noticed challenges with using the pension service cost approach to
determining the value of pension benefits ``actually paid,'' and
requested comment on whether there is an alternative measure of the
change in pension value attributable to the applicable fiscal year that
is better representative of the amount of pension benefits ``actually
paid.''
ii. Comments
Some commenters generally supported limiting the pension benefits
included in executive compensation actually paid to service cost.\120\
In addition, some commenters supported the proposed deduction of the
change in actuarial present value of defined benefit and pension plans
not attributable to the applicable year of service,\121\ or generally
supported the Commission's choice to exclude the value associated with
actuarial assumptions.\122\
---------------------------------------------------------------------------
\120\ See letters from Chris Barnard, dated June 24, 2015
(``Barnard 2015''); Chris Barnard, dated Mar. 2, 2022 (``Barnard
2022''); CAP; Hall; Exxon; and WorldatWork.
\121\ See letters from CAP; CEC 2015; Exxon; TIAA; and Towers.
\122\ See letter from NACD 2015.
---------------------------------------------------------------------------
There were also a number of commenters who opposed the inclusion of
pension service cost in executive compensation actually paid,\123\
noting it may remain subject to vesting conditions and may not ever
actually be paid; \124\ has assumptions built in that would prevent
comparability across registrants or distort the figure; \125\ is not
presently calculated on a per participant basis, so would add cost;
\126\ or generally that it does not equal compensation ``actually
paid.'' \127\ However, a number of commenters who opposed the inclusion
of service cost noted their view that it would be a better
representation of compensation ``actually paid'' than the current
Summary Compensation Table figure.\128\ A few commenters suggested
excluding changes in pension values entirely,\129\ while some others
suggested that the registrant should have the option to exclude service
cost, if the executive is not vested in the pension benefits.\130\
---------------------------------------------------------------------------
\123\ See letters from AON; CCMC 2015; CEC 2015; Honeywell; IBC
2015; and NACCO.
\124\ See letters from Honeywell and Towers.
\125\ See letters CCMC 2015; IBC 2015; and Towers.
\126\ See letters NACCO.
\127\ See letters CEC 2015.
\128\ See letters from AON; Honeywell; Pearl; and Towers.
\129\ See letters from Coalition; Honeywell; and Pearl
(advocating a realized pay approach that would exclude all pension
associated values).
\130\ See letters from AON (generally supporting the exclusion
of all non-vested pension benefits); Hyster-Yale; and NACCO.
---------------------------------------------------------------------------
A number of commenters suggested other ways to include pension
amounts in executive compensation actually paid. Some commenters
recommended an approach requiring registrants to calculate the change
in pension value to equal the actuarial present value of the benefit
earned during the year,\131\ noting that it tracks the actual pattern
of benefit increases resulting from pay increases and plan
amendments,\132\ and links directly to the existing approach and
assumptions used for the Summary Compensation Table.\133\ Another
suggested multiplying the value of the pension increase during the
year, net of any inflationary increase and contribution by the
employee, by twenty.\134\
---------------------------------------------------------------------------
\131\ See letters from Mercer and Towers; see also letter from
AON (suggesting the same, if pensions must be included in
compensation actually paid). Other commenters recommended approaches
similar to this approach. See letters from Barnard 2022
(recommending that we include the change in the actuarial present
value of pension benefits over the applicable fiscal year using the
same economic assumptions as used in the calculation at the start of
the applicable fiscal year); Exxon (recommending that we include the
portion of the currently-reported change in pension values that is
attributable to an additional year of service); and WorldatWork
(same).
\132\ See letter from Mercer.
\133\ See letters from Mercer and Towers; see also letter from
AON (suggesting the same, if pensions must be included in
compensation actually paid).
\134\ See letter from Hermes (specifically suggesting the
Commission follow the United Kingdom's method of multiplying the
value of the increase in annual pension benefit, net of any
inflationary increase and contribution by the employee, by twenty).
---------------------------------------------------------------------------
Some commenters requested clarification regarding the calculation
of the service cost amount. Two commenters suggested alternatives to
the application of FASB ASC Topic
[[Page 55145]]
715,\135\ with one suggesting that the Commission instead clarify that
the intended measurement is the change in pension values attributable
to an additional year of service,\136\ and the other suggesting the
Commission use the accumulated benefit obligation service cost or the
change in present value of accrued benefits, using the same assumptions
at the beginning and end of each year.\137\ Two commenters suggested
the Commission eliminate the reference to the required use of future
salary increases to estimate service cost, because it would require
significant new data and reveal new information to investors,\138\ with
one also suggesting the Commission clarify that the intended
measurement is the change in pension values attributable to an
additional year of service.\139\
---------------------------------------------------------------------------
\135\ See letters from AON and Exxon.
\136\ See letter from Exxon.
\137\ See letter from AON (alternatively suggesting a third
alternative of disclosing the present value, using year end
assumptions, of the increase in accrued benefit during the year).
\138\ See letters from Towers and WorldatWork.
\139\ See letter from WorldatWork.
---------------------------------------------------------------------------
Three commenters responded to our request for comment in the
Reopening Release asking if there is an alternative measure of the
change in pension value attributable to the applicable fiscal year that
is better representative of the amount of pension benefits ``actually
paid.'' One suggested that the ``value of dollars set aside to provide
a pension benefit to an executive'' be disclosed.\140\ Another
suggested that registrants should be required to disclose the ``change
in (increase) the actuarial present value of pension benefits over the
applicable fiscal year using the same economic assumptions as used in
the calculation at the start of the applicable fiscal year.'' \141\ The
third stated that pension benefits should be fully excluded from the
``actually paid'' amount, but also stated that service cost was ``far
more representative of the compensation received'' than the change in
actual present value amount included in the Summary Compensation Table
total.\142\
---------------------------------------------------------------------------
\140\ Letter from ICGN.
\141\ Letter from Barnard 2022.
\142\ Letter from Aon Human Capital Solutions, dated Mar. 4,
2022 (``Aon HCS'').
---------------------------------------------------------------------------
iii. Final Amendments
With respect to pension compensation, we are adopting final rules
largely as proposed with a modification in response to commenters'
suggestion to also include the value of plan amendments in the
calculation of compensation actually paid. The final rules will require
registrants to deduct from the Summary Compensation Table total the
aggregate change in the actuarial present value of all defined benefit
and actuarial pension plans,\143\ and add back the aggregate of two
components: (1) actuarially determined service cost for services
rendered by the executive during the applicable year, as proposed (the
``service cost''); and (2) the entire cost of benefits granted in a
plan amendment (or initiation) during the covered fiscal year that are
attributed by the benefit formula to services rendered in periods prior
to the plan amendment or initiation (the ``prior service cost''), in
each case, calculated in accordance with U.S. Generally Accepted
Accounting Principles (``U.S. GAAP'').\144\
---------------------------------------------------------------------------
\143\ As discussed below, smaller reporting companies would not
need to deduct this amount or add the service cost because the
Summary Compensation Table requirements for smaller reporting
companies do not require disclosure of the change in actuarial
present value. See infra Section II.G.3.
\144\ See FASB ASC Topic 715.
---------------------------------------------------------------------------
As noted above, the change in actuarial present value, generally,
reflects the difference between the actuarial present value of
accumulated benefits at the end of the fiscal year and at the end of
the prior fiscal year. The change in actuarial present value would be
deducted only if the value is positive, and therefore included in the
sum reported in column (h) of the Summary Compensation Table. Where
such amount is negative (and therefore not reflected in the Summary
Compensation Table and reported only in a footnote to column (h)), no
amounts should be deducted for purposes of Item 402(v) of Regulation S-
K.
The below table shows the changes from the proposed rules to the
final rules with respect to pension compensation (specific changes are
bolded and italicized):
------------------------------------------------------------------------
Proposed Rules Final Rules
------------------------------------------------------------------------
Deduct (from Summary The aggregate change The aggregate change
Compensation Table total):. in the actuarial in the actuarial
present value of present value of
all defined benefit all defined benefit
and actuarial and actuarial
pension plans. pension plans.
Add back:................... Service cost........ The aggregate of:
(1) Service cost;
and
(2) Prior service
cost.
------------------------------------------------------------------------
We believe that it is appropriate to include pension compensation
in the calculation of compensation ``actually paid.'' The adopted
approach in particular provides an appropriate measure for purposes of
determining compensation ``actually paid'' during the applicable year
because it reflects the benefits an executive may expect to receive
based on additional service the executive provided during the year (or
service cost), and it incorporates additional benefits attributable to
changes in the pension contract between the executive and the company
(or prior service cost). In many cases, this measure will approximate
the value that would be set aside currently by the registrant to fund
the pension benefits payable upon retirement for the service provided,
and any plan amendments made, during the applicable year. In addition,
the inclusion of pension compensation is consistent with other
compensation disclosure requirements, such as Item 402(c) of Regulation
S-K. These same rationales apply whether or not the pension amounts are
vested. Consistent with the equity compensation adjustment, the pension
adjustment will be included even when unvested until an officer leaves
the company.
Another advantage to the approach we are adopting is that it is
more closely associated with underlying information from the GAAP
financial statements. In particular, the pension's service cost and
prior service cost, while not required to be reported separately and
for a subset of employees, is computed in the process of calculating
the aggregate service cost and prior service cost at the plan level. As
a result, a registrant would not be required to collect significant new
data or prepare a new calculation of the actuarial present value of the
benefit earned during the year, but would rather calculate service cost
and prior service cost for a subset of employees for which the
underlying information is already available and subject to internal
control over financial reporting. The direct
[[Page 55146]]
relationship of this information to the amounts recognized in the
audited financial statements may also provide an additional level of
comfort to investors as to its accuracy and reliability. In addition,
because this approach excludes changes that derive only from
differences in the actuarial assumptions used to estimate the value of
benefits already earned in prior periods, it will provide for a more
meaningful comparison across registrants of the amounts ``actually
paid'' under both defined benefit and defined contribution plans.
Further, as noted above, commenters were generally more supportive of a
service cost approach rather than an approach that would include the
amount required to be disclosed in the Summary Compensation Table.\145\
---------------------------------------------------------------------------
\145\ See supra notes 120 and 128.
---------------------------------------------------------------------------
One weakness in the proposed approach, identified by
commenters,\146\ was that the service cost approach would not fully
account for changes in the value of an executive's expected benefit
arising from plan amendments or initiations. Our modified approach as
adopted addresses this concern by requiring that the registrant
include, as a component of this item of compensation actually paid, the
entire cost of benefits granted in a plan amendment (or initiation)
that are attributed by the benefit formula to services rendered in
periods prior to the plan amendment or initiation. Such prior service
cost information is part of the underlying information required to
account for a defined-benefit plan under U.S. GAAP.\147\
---------------------------------------------------------------------------
\146\ See letters from AON and Mercer; see also letters from
AON; Towers; and WorldatWork.
\147\ See FASB ASC Topic 715.
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For purposes of the final rules, ``prior service cost'' also refers
to any credit arising from a reduction in benefits related to services
rendered in prior periods as a result of a negative plan amendment. We
acknowledge that including the prior service credit associated with
such a negative plan amendment would result in a reduction of
compensation actually paid. We believe that such an outcome would be
consistent with the statutory objective of capturing compensation
actually paid, because the reduction in the accrued benefit reflects a
reduction in compensation in the same manner that an increase in the
accrued benefit reflects an increase in compensation.
Although one commenter also noted that service cost would exclude
the costs related to unexpected compensation changes,\148\ we are not
adopting a modification in this regard. Under U.S. GAAP,\149\ the
effects on the projected benefit obligation of unexpected compensation
changes (i.e., changes from the estimated future compensation levels
used in measuring service cost) are recorded in actuarial gain or loss.
In considering whether to add another component to the tabular pension
measure related to actuarial gain or loss due to unexpected
compensation changes, we determined that the benefits of isolating
these items from other actuarial gains and losses did not merit the
costs and complexities associated with calculating the additional
adjustment. However, we note that information about compensation
changes should still generally be discernible by investors, as such
compensation amounts would be included as other components of the
compensation disclosed in the Item 402(v) of Regulation S-K table.
---------------------------------------------------------------------------
\148\ See letter from Mercer.
\149\ See FASB ASC Topic 715.
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We are not persuaded that the other alternative approaches
recommended by commenters \150\ would more accurately reflect
compensation ``actually paid.'' Although some of the suggested
alternatives could more fully account for changes in compensation
levels by reflecting unexpected increases in pay as well as plan
amendments,\151\ we believe that the benefits discussed above with
respect to the adopted approach, including its direct relationship to
the values already calculated for the purpose of financial statement
reporting, outweigh the potential benefits of the alternatives.
Further, while we acknowledge there may be an additional cost to obtain
the service cost and prior service cost information on a per
participant basis, the other calculations suggested by commenters also
would include additional costs since registrants are not currently
performing those calculations in the manner suggested.\152\ In the case
of commenters who suggested that we omit all pension cost amounts, we
disagree that their suggested approach would be a reasonable
interpretation of compensation ``actually paid.'' Although the approach
we are adopting may not always perfectly reflect all potential changes
in pension value, the resulting measure is considerably more accurate
than a measure that treats the value of promised pension awards as zero
when they may ultimately cost the registrant millions of dollars.
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\150\ See supra notes 131-134 and accompanying text.
\151\ See infra Section V.C.4.iii.
\152\ See letters from AON; Barnard; Exxon; Hermes (suggesting
multiplying the value of the pension increase during the year, net
of any inflationary increase and contribution by the employee, by
twenty); Mercer; Towers; and WorldatWork.
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We are also requiring that the calculation of ``service cost'' and
``prior service cost'' be consistent with the definitions provided
under U.S. GAAP.\153\ As discussed above,\154\ we acknowledge that some
commenters suggested alternatives to the U.S. GAAP definition; however,
we believe that this definition is appropriate because it reflects the
service cost amount included in the financial statements, and therefore
is familiar to registrants. The final rules require the entire amount
of prior service cost related to a plan amendment to be included in the
pension measure rather than the amortized portion of prior service cost
recognized as part of periodic pension cost under U.S. GAAP for the
year.
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\153\ See FASB ASC Topic 715.
\154\ See supra notes 131-134 and accompanying text.
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2. Inclusion of Above-Market or Preferential Earnings on Deferred
Compensation That Is Not Tax Qualified
i. Proposed Amendments
Consistent with Summary Compensation Table disclosure requirements,
we proposed that the executive compensation actually paid would include
above-market or preferential earnings on deferred compensation that is
not tax qualified.\155\
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\155\ These earnings are reported pursuant to 17 CFR
229.402(c)(2)(vii), or, for smaller reporting companies, 17 CFR
229.402(n)(2)(viii).
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ii. Comments
Two commenters generally agreed with the proposed rules on
disclosure of deferred compensation that is not tax qualified.\156\ Two
other commenters recommended permitting registrants to exclude unvested
amounts of deferred compensation that is not tax qualified.\157\
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\156\ See letters from NACCO and TIAA.
\157\ See letters from Hyster-Yale and NACCO.
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iii. Final Amendments
We are adopting, as proposed, the requirement that executive
compensation actually paid include above-market or preferential
earnings on deferred compensation that is not tax qualified. We
believe, as discussed in the Proposing Release, that excluding those
amounts until their eventual payout would make the amount ``actually
paid'' contingent on an NEO's choice to withdraw or take a distribution
from their account, rather than the registrant's compensatory decision
to pay the above-market return, which we do not believe would be an
[[Page 55147]]
accurate representation of compensation ``actually paid.'' As with
pension awards, these amounts may be viewed to approximate the value
that would be set aside currently by the registrant to satisfy its
obligations in the future. In addition, excluding those amounts would
be inconsistent with the approach in the Summary Compensation Table,
which requires disclosure of the underlying deferred amounts when
earned.\158\ We believe that, to the extent the Summary Compensation
Table approach aligns with the statutory ``actually paid'' language and
purpose of the disclosure, we should minimize adjustments to the
Summary Compensation Table figures, in order to make disclosures easier
to understand for investors and easier to produce for registrants.\159\
To that end, we are also not permitting registrants to voluntarily
exclude unvested amounts of deferred compensation that is not tax
qualified, as we believe that could complicate investors' understanding
of the disclosure, and would limit the comparability of the ``actually
paid'' amounts across different registrants.\160\
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\158\ See Instruction 1 to 17 CFR 229.402(c) and Instruction 1
to 17 CFR 229.402(n) (each providing that ``[a]ny amounts deferred,
whether pursuant to a plan established under section 401(k) of the
Internal Revenue Code (26 U.S.C. 401(k)), or otherwise, shall be
included in the appropriate column for the fiscal year in which
earned'').
\159\ See letters from Hyster-Yale and NACCO (both stating that
``[t]he fewer adjustments that are made to the SCT earnings, the
easier the new proxy table will be for investors to understand and
for companies to produce.'').
\160\ See infra Section II.C.3.iii (discussing the general
approach taken in the final rules with respect to unvested amounts
of compensation).
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3. Equity Awards
i. Proposed Amendments
We proposed that equity awards be considered ``actually paid'' on
the date of vesting, and valued at fair value on that date, rather than
fair value on the date of grant as required in the Summary Compensation
Table. In proposing this approach, we noted that an executive does not
have an unconditional right to an equity award before vesting, and
therefore unvested options or other equity awards may not be ``actually
paid'' prior to the vesting conditions being satisfied, which can be
viewed as representing payment by the registrant. In addition, we noted
that using the vesting date fair value would incorporate changes in the
value of the equity awards from the grant date to the vesting date,
with that change being one of the key ways that pay is linked to
registrant performance.
With respect to the calculation of the vesting date fair value, we
noted that the vesting date fair value of stock awards is already
disclosed (by registrants other than SRCs) in the Option Exercises and
Stock Vested Table,\161\ and that the vesting date fair value of option
awards can be calculated using existing models and methodologies.
Specifically, the proposed approach would require (i) the amounts
reported pursuant to 17 CFR 229.402(c)(2)(v) and (vi) to be deducted
from Summary Compensation Table total, and (ii) the vesting date fair
value of stock awards and options (with or without stock appreciation
rights), each computed in accordance with the fair value guidance under
U.S. GAAP,\162\ to be added. As proposed, a registrant would be
required to disclose vesting date valuation assumptions if they are
materially different from those disclosed in its financial statements
as of the grant date.
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\161\ See 17 CFR 229.402(g)(2)(v).
\162\ See FASB ASC Topic 718.
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In response to comments received on the Proposing Release
(discussed below), we included a request for comment in the Reopening
Release, noting commenters' concerns that there was a potential
misalignment between the time period to which pay is attributed and the
time period in which the associated performance is reported, and asking
if there were other approaches that would alleviate this misalignment,
or if the inclusion of the additional measures considered in the
Reopening Release would affect this misalignment.
ii. Comments
We received a number of comments on both the proposal to use fair
value methodology to value equity awards in the calculation of
executive compensation actually paid, and on the proposal to value such
awards as of the vesting date.
Some commenters supported the proposed fair value methodology.\163\
However, a number of commenters opposed the approach,\164\ noting that
the calculation of fair value is time consuming and expensive,
particularly when many separate fair value calculations would be
required, as in the case of awards that are on a pro-rata vesting
schedule or with multiple tranches in a given year; \165\ few companies
have familiarity with valuing options that have been outstanding for
several years; \166\ the assumptions that are included in fair value
calculations are company-specific and therefore would reduce
comparability; \167\ and that the fact that assumptions and projections
are included in fair value calculations is inconsistent with the
concept of ``actually paid.'' \168\ As an alternative to fair value, a
number of commenters suggested the Commission require options to be
valued at their intrinsic value,\169\ or permit registrants to choose
between disclosure of fair value and intrinsic value (with the non-
chosen value being provided in footnote disclosure).\170\ These
commenters argued that intrinsic value is easier and cheaper to
calculate; \171\ aligns with the value that the executives would
receive upon immediate exercise; \172\ and does not include the
valuation assumptions that accompany the fair value methodology.\173\
Some commenters suggested that if the final rules did not use intrinsic
value, they should instead use fair value with certain safe harbors or
simplified assumptions that would reduce the effort required to compute
the valuation.\174\
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\163\ See letters from AFL-CIO 2015; CII 2015; The
Predistribution Initiative and Responsible Asset Allocator
Initiative, dated Mar. 4, 2022 (``PDI''); and TIAA.
\164\ See letters from BRT; CEC 2015; Celanese; Cook; FSR;
Honeywell; Meridian; and PG 2015.
\165\ See letters from CAP; Cook; KPMG; and WorldatWork.
\166\ See letter from CAP.
\167\ See letter from IBC 2015.
\168\ See letters from CEC 2015; Meridian; and SCSGP.
\169\ See letters from CEC 2015 (supporting the use of intrinsic
value if the Commission requires vesting date reporting); Celanese
(supporting the use of intrinsic value if the Commission requires
vesting date valuation); Coalition (supporting the use of intrinsic
value if the commenter's preferred principles-based approach to the
pay-versus-performance disclosure was not adopted); Corning; Hall;
Honeywell (supporting the use of intrinsic value if the commenter's
preferred principles-based approach to the pay-versus-performance
disclosure was not adopted); Mercer; Meridian; Pearl (supporting the
use of intrinsic value if the Commission does not adopt a realizable
pay methodology) PG 2015; SCG; SCSGP; TCA 2015 (supporting the use
of intrinsic value if the commenter's preferred principles-based
approach to the pay-versus-performance disclosure was not adopted);
and WorldatWork. Many of these commenters had slightly different
concepts of how options should be valued, but they all generally
supported using intrinsic value, or the difference between the
exercise price and the market price.
\170\ See letter from Hall.
\171\ See letters from Corning and Davis Polk 2015.
\172\ See letter from Corning.
\173\ See letter from Davis Polk 2015.
\174\ See letters from Mercer; TCA 2015 and TCA 2022. See also
letter from Infinite Equity, dated Mar. 3, 2022 (``Infinite'')
(suggesting that certain existing safe harbors should be acceptable
for the new disclosures).
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Some commenters supported valuing equity at the vesting date,\175\
stating that valuing equity at the vesting date will incorporate the
grant date fair value and changes until vesting (which ``represent a
direct channel, and one of the primary means, through which pay is
linked to
[[Page 55148]]
registrant performance''), but will not include post-vesting changes
(which ``generally reflect investment decisions made by the executive
rather than compensation decisions made by the registrant''); \176\
will avoid ``underestimating the actual compensation received by
executives,'' which could occur if grant date reporting was required;
\177\ and ``better reflect[s] the value ultimately delivered to
executives.'' \178\ Some commenters specifically opposed exercise date
valuation,\179\ while others supported requiring the vesting date
valuation of stock awards, but the exercise date valuation of options
\180\ or requiring the vesting date valuation of performance-based
awards, but the grant date valuation of time-based awards.\181\ Some
commenters opposed vesting date valuation,\182\ with one arguing that
valuing options at vesting date would be misleading because executives
do not generally include the option value in their income at the time
of vesting.\183\ As alternatives, commenters suggested: valuing awards
at the end of a multi-year period, such as a three-year period; \184\
valuing equity at grant date but reversing the value at the vesting
date for awards that fail to vest; \185\ revaluing outstanding equity
awards annually; \186\ or revaluing all equity granted during a period
at the end of the most recent completed fiscal year.\187\
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\175\ See letters from AFL-CIO 2015; CII 2015; Honeywell; PDI;
and TIAA.
\176\ See letter from CII 2015.
\177\ See letter from PDI.
\178\ See letter from TIAA.
\179\ See letters from AFL-CIO 2015; CII 2015; and Honeywell.
\180\ See letters from Coalition (specifically recommending that
compensation be deemed ``actually paid'' when reported on Form W-2
for income tax purposes, which they state would include vested stock
awards and amounts received in connection with exercised options);
Hall; and Mercer.
\181\ See letter from McGuireWoods.
\182\ See letters from Celanese; CCMC 2015; Cook; and NACD 2015.
\183\ See letter from Cook.
\184\ See letter from Farient.
\185\ See letter from SVA.
\186\ See letters from Hodak; Farient; Infinite; TCA 2015; and
TCA 2022.
\187\ See letter from CAP; PG 2015; and PG 2022.
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A number of commenters opposed the reporting of equity as of the
vesting date.\188\ Some of these commenters noted that vesting date
reporting of equity would lead to a timing misalignment between actual
performance and executive compensation actually paid, as the
performance that ``earned'' the equity would have occurred between the
grant date and the vesting date, but only the total amounts of equity
would be reported on the vesting date.\189\ However, two commenters,
who acknowledged the misalignment, indicated that there was no other
approach that would eliminate all misalignment.\190\
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\188\ See letters from CAP; Celanese; CCMC 2015; Cook; FSR;
McGuireWoods; NACCO; NACD 2015; NAM 2022; Ross; SVA; and TIAA. But
see Hermes (expressly supporting vesting date reporting of equity).
\189\ See letters from CEC 2015; Celanese; CCMC 2015; Cook;
Faulkner; FSR; Hyster-Yale; NACCO; PG 2015; Pearl; Ross; SBA-FL;
SVA; TIAA; TCA 2015; and WorldatWork.
\190\ See letters from Aon HCS and Teamsters.
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Several commenters requested clarifications about the proposed
approach. A few commenters expressed that reporting equity on the
vesting date creates uncertainty in application, and either sought
clarification regarding the vesting date or the meaning of when ``all
applicable vesting conditions were satisfied.'' \191\ One commenter
suggested that an award should be considered vested on the date the
executive is able to monetize the award,\192\ while another suggested
that awards should only be considered ``actually paid'' when
restrictions on equity lapse, even if already vested.\193\ Two
commenters also made suggestions that awards should be considered
vested when the associated performance period is completed, even if the
vesting of the award is still subject to board certification.\194\
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\191\ See letters from Cook; IBC 2015; Mercer; Pearl; and
Towers.
\192\ See letters from Davis Polk 2015 and Davis Polk 2022.
\193\ See letter from CEC 2015.
\194\ See letters from Mercer and Towers.
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Commenters suggested a number of alternatives to vesting date
reporting of equity, including: grant date reporting; \195\ exercise
date reporting; \196\ exercise date reporting of the equity's intrinsic
value; \197\ principles-based reporting (i.e., allowing companies to
make their own modifications to the reporting date); \198\ reporting
``in the fiscal year for which the compensation was considered as
paid''; \199\ and annual reporting, starting in the grant year, of the
year-end fair value of the award, with annual reporting of any change
in the fair value until, and including, the year of vesting.\200\ Two
commenters also suggested the Commission adopt the ``2 \1/2\ month
rule,'' under which equity vesting in the first two and one half months
of the calendar year would be attributed to the prior year.\201\ One
commenter stated that, because the proposed rules would move away from
grant date fair value calculations for equity awards, it would be
important that the disclosure include dividends paid on unvested equity
or equivalents for a given year.\202\
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\195\ See letters from CAP and NAM 2022.
\196\ See letters from CEC 2015; Coalition; and FSR.
\197\ Letter from Corning.
\198\ See letter from Hall.
\199\ See letter from TIAA.
\200\ See letters from Infinite; TCA 2015; and TCA 2022. Other
commenters made similar suggestions that vary slightly from this
suggestion, including by using intrinsic rather than fair value for
options, measuring pay over an aggregate time horizon rather than
presenting data broken out by year, and revaluing vested as well as
unvested equity holdings. See letters from CAP; Farient; Hodak; PG
2015; and Pay Governance, dated Mar. 3, 2022 (``PG 2022'').
\201\ See letters from Hyster-Yale and NACCO.
\202\ See letter from TIAA.
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A few commenters supported the proposed requirement that changes in
the underlying assumptions for valuation that are materially different
from those made in the financial statements as of the grant date must
be disclosed, with one specifically supporting the proposed
requirement,\203\ one supporting requiring any changes from the
assumptions in the current financial statements to be disclosed,\204\
and two opposing the disclosure of changes in valuation
assumptions.\205\
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\203\ See letter from CII 2015.
\204\ See letter from Towers.
\205\ See letters from Davis Polk 2015 and McGuireWoods.
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In response to a request for comment in the Reopening Release, one
commenter indicated that the additional performance measures considered
in the Reopening Release would not exacerbate the timing
misalignment,\206\ while another stated the additional measures would
not improve the misalignment.\207\
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\206\ See letter from Aon HCS.
\207\ See letter from McGuireWoods.
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iii. Final Amendments
After consideration of the comments received, we are modifying our
approach to the treatment of equity awards in relation to the total
compensation reported in the Summary Compensation Table. While the
final amendments continue to use ``fair value'' as the measure of the
amount of an equity award, which is consistent with accounting in the
financial statements, we are adjusting the date on which the award is
valued in response to comments, so that the first fair value disclosure
is made in the year of grant, and changes in value of the award are
reported from year to year until the award is vested.\208\ We believe
this approach will better align the timing of the disclosure and
valuation with when
[[Page 55149]]
the award is actually ``earned'' by the executive, resulting in
disclosure that more clearly shows the relationship between executive
compensation and the registrant's performance.
---------------------------------------------------------------------------
\208\ This approach was discussed as an implementation
alternative in the Proposing Release. See Proposing Release at
Section IV.C.3.c. Two commenters specifically noted this
implementation alternative and were supportive of its adoption. See
letters from Infinite; TCA 2015; and TCA 2022.
---------------------------------------------------------------------------
In particular, the proposed rules would have required the deduction
of the equity award amounts reported in the Summary Compensation Table
total and the addition of:
<bullet> The vesting date fair value of stock awards and options
(with or without stock appreciation rights), each computed in
accordance with the fair value guidance under U.S. GAAP.
The final rules also require the deduction of the equity award
amounts reported in the Summary Compensation Table total; however,
instead of the addition of the vesting date fair value of stock awards
and options, the final rules require the addition (or subtraction, as
applicable) of the following:
<bullet> The year-end fair value of any equity awards granted in
the covered fiscal year that are outstanding and unvested as of the end
of the covered fiscal year;
<bullet> The amount of change as of the end of the covered fiscal
year (from the end of the prior fiscal year) in fair value of any
awards granted in prior years that are outstanding and unvested as of
the end of the covered fiscal year;
<bullet> For awards that are granted and vest in the same covered
fiscal year, the fair value as of the vesting date; \209\
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\209\ There is no adjustment for awards that are granted and
determined not to vest in the same covered fiscal year because those
awards result in no compensation actually paid.
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<bullet> For awards granted in prior years that vest in the covered
fiscal year, the amount equal to the change as of the vesting date
(from the end of the prior fiscal year) in fair value;
<bullet> For awards granted in prior years that are determined to
fail to meet the applicable vesting conditions during the covered
fiscal year, a deduction for the amount equal to the fair value at the
end of the prior fiscal year; \210\ and
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\210\ For any of an executive's equity awards that are
determined to fail to vest, a negative amount equal to the fair
value at the end of the prior fiscal year would be included as part
of the executive's compensation actually paid as of the date the
registrant determines the award will not vest. This negative amount
takes the cumulative reported value of that award to $0 since it did
not vest.
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<bullet> The dollar value of any dividends or other earnings paid
on stock or option awards in the covered fiscal year prior to the
vesting date that are not otherwise reflected in the fair value of such
award or included in any other component of total compensation for the
covered fiscal year.
We believe fair value is an appropriate measure for compensation
``actually paid.'' Although fair value calculations, like all
accounting estimates, do involve some subjective assumptions, we do not
agree with commenters that stated that the assumptions and projections
included in fair value calculations render such amounts inconsistent
with the concept of ``actually paid.'' \211\ Fair value is an estimate
of the amount by which an executive is compensated as a result of an
award, and therefore represents a reasonable measure of that
executive's ``actual pa[y].'' Specifically, the fair value of an option
is a widely-used measure to estimate the total value of the asset,
including both its value if exercised immediately (``intrinsic value'')
and the additional value created by the holder's contractual right to
exercise at some time in the future (``time value'' of the option). In
our view it also represents a more accurate measure of actual pay than
alternatives recommended by some commenters.
---------------------------------------------------------------------------
\211\ See supra note 168 and accompanying text.
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We are not adopting the approach suggested by some commenters that
we use other measures such as intrinsic value. Intrinsic value would
ignore the option value inherent in exercisable awards prior to
exercise, including the option value inherent in an option award that
is at-the-money or out-of-the-money (i.e., the stock price is equal to
or less than the strike price of the options), and therefore has zero
intrinsic value. Intrinsic value (or any similar measure used to
calculate compensation ``actually paid'') would also be a departure
from the primary disclosures related to equity compensation, and the
recognition and measurement of such compensation in the financial
statements under U.S. GAAP, and we believe would not allow investors to
as easily link and analyze ``compensation actually paid'' with the
other information they are receiving about executive compensation.
Further, in 2004, the accounting for stock-based compensation in U.S.
GAAP was revised to require fair value accounting.\212\ In the revised
accounting standard, it was noted that other equity instruments and the
consideration the issuing entity receives in exchange for them are
recognized in the financial statements based on the fair value of the
instrument at the date issued. The fact that the equity instruments
would be issued for goods or services rendered or to be performed did
not seem to be a reason to measure the cost of the goods or services
performed on a different basis. The standard further noted that most
advocates of intrinsic value favored its use only at a grant date
measurement, and noted that there are weaknesses in its use even in
that case, such as treating most fixed share options as though they
were a ``free good.'' \213\ However, even at the grant date, employee
services received in exchange for share options are not free and there
is value in the employee services performed and the related stock and
stock options received.
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\212\ See FASB SFAS No. 123 (Revised 2004), Accounting for
Stock-Based Compensation (``FAS 123R''), which was issued in
December 2004 and superseded Accounting Bulletin Opinion No. 25,
Accounting for Stock Issued to Employees, which was an intrinsic
value approach to stock-based compensation. FAS 123R was codified in
FASB ASC Topic 718.
\213\ Id.
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Registrants and investors are already familiar with fair value
calculations and the determination of the assumptions for such
calculations through their use in existing Commission disclosure
requirements as well as U.S. GAAP. For example, the Grants of Plan-
Based Awards Table requires grant date fair value disclosure of each
individual equity award granted during the last completed fiscal
year.\214\ U.S. GAAP requires information about grant date fair value
for equity awards, including the weighted-average grant-date fair value
of awards that were granted, vested and forfeited during the year and a
description of the significant assumptions used during the year to
determine the fair value of share-based compensation awards.\215\
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\214\ See 17 CFR 229.402(d)(2)(vii) and Instruction 8 to 17 CFR
229.402(d).
\215\ See FASB ASC Topic 718-10-50-2.
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We do not agree with the suggestion from commenters that we
consider an option or other award requiring exercise to be ``actually
paid'' only upon its exercise, as we believe doing so would commingle
the registrant's compensatory decision with the executive's investment
decision about when to exercise and would allow executives to influence
pay-versus-performance disclosure by controlling the fiscal year in
which they receive the compensation. We additionally determined that
year-over-year change in fair value better meets the statutory purposes
than grant-date fair value, because valuing awards only at grant date
fails to reflect increases in value to the executive after the grant
date, during the period over which the compensation actually paid is
earned. Even if year-over-year change in fair value is only a
reasonable estimate, we believe it is far more accurate to include this
estimate than to omit such increases in value entirely.
[[Page 55150]]
We have changed the reporting and valuation date requirements from
the Proposing Release to first require the year-end reporting and
valuation of awards granted during the fiscal year and then the year-
over-year change in fair value of such awards until the vesting date
(or the date the registrant determines the award will not vest).
We have made these changes to the reporting and valuation
requirements to address commenters' concerns about potential
misalignment between the time period to which pay is attributed and the
time period in which the associated performance is reported, and the
degree to which this would affect the usefulness of the disclosure. We
believe that, compared to the vesting date valuation approach included
in the Proposing Release, the adopted approach will more effectively
allow registrants to describe the relationship between compensation and
registrant performance, as the reported amounts of compensation will
annually adjust based on the registrant's performance, among other
things, in that year. In addition, we acknowledge commenters'
observation that comparability may be somewhat reduced by the
assumptions that are included in fair value calculations, which, as
noted by a commenter, may differ from issuer to issuer. Because
investors are already familiar with fair value as the measurement
approach for equity awards under U.S. GAAP, they are aware of the
reduced comparability that may occur due to the use of different
assumptions from issuer to issuer. However, we believe that the use of
a consistent measurement approach to equity compensation in the Summary
Compensation Table, the financial statements, and the calculation of
compensation ``actually paid,'' along with the required disclosures
about significant assumptions under U.S. GAAP in the final rules,
allows for comparability with respect to an individual issuer's
disclosures from year to year. Further, as discussed in the Proposing
Release,\216\ we believe that, overall, comparability regarding the
awards included by registrants in the disclosure will be greater under
the adopted approach than it would have been under the proposed
approach, as volatility in executive compensation actually paid across
the disclosure periods that is due simply to vesting patterns should
decrease (as the amount of executive compensation actually paid will be
adjusted each year as it is ``earned'' over the course of the vesting
period).\217\
---------------------------------------------------------------------------
\216\ See Proposing Release, Section IV.C.3.c (considering the
adopted approach as an implementation alternative).
\217\ See supra note 210.
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Investors will also be able to more easily understand the impact of
performance on awards-based compensation over time, because under the
final rules as adopted investors will be able to observe the amount by
which the value of an executive's compensation changes each year,
rather than only observing the value of that compensation in the year
an award vests. Furthermore, we believe that the adopted approach in
the final rules is similar to the concept of realizable pay,
recommended by some commenters, as it reflects an attempt to measure
the change in value of an executive's pay package after the grant date,
as performance outcomes are experienced.
This approach to unvested equity compensation is consistent with
the treatment of other unvested elements of compensation under the
final rules, such as unvested pension benefits and contributions to
unvested defined contribution plans. In each case, the adopted approach
reflects this compensation as it is earned rather than at vesting. We
believe the consistent use of this approach should reduce misalignment
between the timing of when compensation is earned and when it is
reported, and allow the disclosure to more clearly represent the
relationship of pay with performance over time.
We also believe this revised approach for equity awards comports
with the statutory term ``executive compensation actually paid.'' While
non-vested amounts of compensation could be considered unpaid due to
their contingent nature, over time the values reported in connection
with a particular award will aggregate to its ultimate value upon
vesting. Aligning the compensation reporting more closely with when the
compensation changes in value also provides investors with a clearer
picture of ``the relationship between executive compensation actually
paid and the financial performance of the issuer.'' For example, where
an award vests over a three-year period and the registrant's financial
performance is positive in the first of those two years and negative in
the third, reporting the full value of the award only in the vesting
year may give investors the misleading impression that the executive
was not rewarded for positive performance in years one and two and was
rewarded despite negative performance in year three. In addition, the
required reporting of the year-over-year change in fair value of such
awards until the vesting date (or a deduction for prior reported
amounts as of the date the registrant determines the award will not
vest) will account for any amounts that fail to vest; will address
concerns, noted by commenters, that grant date reporting undervalues
compensation ``actually paid''; and will not include those post-vesting
changes that generally reflect the executives' investment decisions,
not compensation.\218\
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\218\ Not all post-vesting date changes reflect the executives'
investment decisions, as vested awards could remain subject to other
restrictions (e.g., anti-hedging restrictions or holding
requirements) that would limit the investment decisions available to
an executive.
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We recognize that requiring fair value calculations for each equity
award at a date other than the grant date may be burdensome for some
issuers, as noted by some commenters,\219\ particularly those that have
compensation programs with numerous and complex equity grants. However,
in the final rules we are not adopting a safe harbor or simplified
assumptions other than those generally accepted under U.S. GAAP, as
suggested by some commenters.\220\ Since accounting for share-based
compensation in U.S. GAAP was revised in 2004 to require fair value
accounting,\221\ registrants have been accounting for equity
compensation based on a fair value approach and must determine
valuation assumptions every time a new award is granted. While
commenters correctly noted that companies are not as familiar with the
fair valuation of options after the grant date, U.S. GAAP requires the
re-valuation of an award when modified,\222\ so the concept of valuing
a stock award before vesting is also not novel to registrants. As such,
registrants are required to have internal controls and processes over
the valuation of stock awards, including the assumptions used in
determining fair value.\223\ We believe that registrants will likely
rely upon the existing fair value
[[Page 55151]]
processes and internal controls for stock-based compensation, which
should mitigate the concerns raised by commenters about assumptions. In
addition, the option and contingent-equity valuation models are well-
developed and related software solutions are widely available, which
will further mitigate those additional burdens and concerns related to
valuation approach and related inputs.
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\219\ See, e.g., letters from CAP (stating that ``a fair value
calculation for previously granted stock options at the time of
vesting, registrants will undoubtedly encounter many
complications,'' and noting that few companies have familiarity with
valuing options that have been outstanding for several years); Cook
(stating that ``[c]alculating the fair value of stock options as of
each vesting date will be a time-consuming and tedious process'');
KPMG (stating that ``the vesting date fair value of share options
will be more difficult for companies than determining the grant date
fair value of those awards''); and WorldatWork (describing the
proposed vesting date fair value approach as ``burdensome'').
\220\ See supra note 174 and accompanying text.
\221\ See supra note 212 and accompanying text.
\222\ See FASB ASC Topic 718-20-35.
\223\ See also 17 CFR 240.13a-14, 13a-15, 15d-14 & 240.15d-15.
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The final rules also require footnote disclosure of any valuation
assumptions that materially differ from those disclosed at the time of
grant, as in the proposal.\224\ The proposal did not specify how to
disclose the valuation assumptions. Similar to U.S. GAAP, when multiple
awards are being valued in a given year, a registrant may disclose a
range of the assumptions used or a weighted-average amount for each
assumption. In addition, the fact that certain institutional investors
and third parties (often proxy advisors or compensation consultants)
are already incorporating similar computations in their own pay for
performance analyses,\225\ suggests that the adopted approach is
already considered useful and operational by some investors.
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\224\ For example, there may be a material difference in
assumptions if the registrant has made changes to key assumptions
that would have materially changed the grant date fair value if the
assumption(s) applied as of grant date.
\225\ See infra Section V.B.2.
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Further, we are also requiring the dollar value of any dividends or
other earnings paid on stock or option awards in the covered fiscal
year prior to the vesting date to be included in the amount of
executive compensation actually paid, if such amounts are not reflected
in the fair value of such award or included in any other component of
total compensation for the covered fiscal year. As noted by a
commenter, the pay-for-performance disclosure should include dividends
paid on unvested equity or equivalents ``as a result of the move away
from grant date fair value calculations for equity awards.'' \226\
Under the Summary Compensation Table total, any such amounts would be
typically included in the grant date fair value, as no such dividends
or earnings would have been paid on that date. However, if any
dividends or other earnings are paid on stock or option awards over
time, these amounts would decrease future fair value amounts. This
decrease would not be reflective of a decrease in the amount ``actually
paid'' to the executive, to the contrary, the amount of the decrease
would reflect actual dividends or earnings paid to the executive prior
to the valuation. We believe these amounts are compensation ``actually
paid'' and should be reflected in the disclosure.
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\226\ See letter from TIAA.
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D. Measures of Performance
1. Requirement To Disclose TSR and Peer Group TSR
i. Proposed Amendments
We proposed requiring all registrants subject to the proposed rule
to use TSR as the measure of financial performance of the registrant
for purposes of the required disclosure. In addition, we proposed
requiring registrants that are not SRCs to disclose peer group TSR,
using either the same peer group used for purposes of Item 201(e) of
Regulation S-K or a peer group used in the CD&A for purposes of
disclosing registrants' compensation benchmarking practices.\227\
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\227\ See 17 CFR 229.402(b)(xiv).
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ii. Comments
Commenters were divided on the use of TSR as a required financial
performance measure, with some commenters generally supportive,\228\
and some generally opposed.\229\ Additionally, some commenters opposed
TSR being used as the sole measure of financial performance.\230\
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\228\ See letters from Americans for Financial Reform
Educational Fund, dated Mar. 18, 2022 (``AFREF''); Barnard 2015;
Barnard 2022; BlackRock, dated July 2, 2015 (``BlackRock''); CalPERS
2015; CAP; CFA; CII 2015; Farient; Hook; Infinite; OPERS; Public
Citizen 2015; and TIAA.
\229\ See letters from American Securities Association, dated
Mar. 14, 2022 (``ASA''); Aspen; Better Markets, dated Mar. 4, 2022
(``Better Markets''); CCMC 2015; CEC 2015; Coalition; Cook;
Dimensional Fund Advisors LP, dated Mar. 3, 2022 (``Dimensional'');
FedEx 2015; FSR; Hay; Honeywell; International Bancshares Corp.,
dated Mar. 3, 2022 (``IBC 2022''); McGuireWoods; NAM 2015; NAM 2022;
NIRI 2015; NIRI 2022; and SBA-FL.
\230\ See letters from BorgWarner; BRT; Celanese; Hall;
Honeywell; Hyster-Yale; IBC 2015; ICGN; Mercer; NACCO; NACD 2015;
NACD 2022; PG 2015; Pearl; PNC; PDI; Judy Samuelson, dated Mar. 4,
2022 (``Samuelson''); SCG; SCSGP; Simpson Thacher & Bartlett, dated
July 6, 2015 (``Simpson Thacher''); and WorldatWork.
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Commenters in favor of including TSR as a required financial
performance measure noted that TSR is well-understood by investors;
\231\ is widely used by companies in setting compensation; \232\ is
generally a fair representation of company performance; \233\ will
assist companies ``in articulating and providing justification for
their compensation practices''; \234\ will increase comparability;
\235\ and reflects stock price fluctuations that regularly occur in
response to publicly known information and company leadership.\236\
Commenters in favor of TSR also observed that requiring its disclosure
is consistent with the language in Section 953(a) that the pay-versus-
performance disclosure should ``tak[e] into account any change in the
value of the shares of stock and dividends of the issuer and any
distributions.'' \237\
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\231\ See letters from Barnard 2015; Barnard 2022; CFA; and
Farient.
\232\ See letters from Barnard 2015; Barnard 2022; BlackRock;
CalPERS 2015; CFA; CII 2015; and Public Citizen 2015.
\233\ See letters from Barnard 2015; Barnard 2022; CII 2015;
Farient; and OPERS.
\234\ See letter from CalPERS 2015.
\235\ See letters from Barnard 2015; Barnard 2022; CAP; CII
2015; Hodak; and TIAA.
\236\ See letter from Infinite.
\237\ See letters from AFREF; CAP; CII 2015; and Public Citizen
2015.
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Commenters opposed to the use of TSR, generally or as the sole
measure of performance, as well as a few commenters in favor of the use
of TSR,\238\ noted that TSR has specific limitations, including: not
necessarily being used by the subject company to determine
compensation; \239\ being an unreliable performance measure for thinly-
traded stocks; \240\ incentivizing short-term performance at the
expense of investors' long-term best interests \241\ (which some
commenters indicated could incentivize companies to incorporate
strategies to inflate stock prices over the short term,\242\ or to
engage in buybacks \243\); requiring lengthy explanatory disclosures to
explain any misalignments between compensation and TSR; \244\ causing
companies to adjust their compensation programs to more heavily rely on
TSR; \245\ being subject to fluctuations based on circumstances outside
of the control of companies, industries, and executives; \246\ and
being affected by the
[[Page 55152]]
granting and vesting of stock options.\247\ In response to these
concerns, some commenters (including commenters in favor of using TSR
\248\), suggested permitting disclosure of other metrics alongside
TSR.\249\ Other commenters generally stated that there was no single
performance measure that would align with the compensation plan of
every registrant, and therefore suggested adopting a principles-based
approach, allowing companies to choose their own performance
measures.\250\ Alternatively, a number of commenters suggested
requiring registrants to disclose the actual metrics used in
determining their executive compensation,\251\ or revising Item 402 of
Regulation S-K to require disclosure of ``all'' metrics actually used
to determine NEO incentive compensation.\252\
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\238\ See letters from AFREF; CalPERS 2015; CFA; and CII 2015.
\239\ See letters from CCMC 2015 and Coalition.
\240\ See letters from Hyster-Yale and NACCO.
\241\ See letters from AFREF; ASA; BlackRock; BRT; CCMC 2015;
CEC 2015; Coalition; FedEx 2015; FSR; Hall; IBC 2015; IBC 2022;
Mercer; NACCO; NACD 2015; NAM 2015; NIRI 2015; Samuelson; SCG;
Simpson Thacher; and WorldatWork. But see letter from OPERS (stating
that the use of TSR alone is not likely to drive short-term
decision-making).
\242\ See letters from Better Markets; IBC 2022; McGuireWoods;
NACCO; Pearl; and PDI.
\243\ See letters from AFREF; Better Markets; PDI; and
Samuelson.
\244\ See letters from Aspen; Celanese; Coalition; Exxon;
Hyster-Yale; NACCO; NAM 2015; NIRI 2015; NIRI 2022; and PNC.
\245\ See letters from CEC 2015; CCMC 2015; Hall; Hay; Hermes;
FSR; George S. Georgiev, dated Mar. 4, 2022 (``Georgiev'');
McGuireWoods; Mercer; Pearl; PNC; SCSGP; Simpson Thacher; and
WorldatWork.
\246\ See letters from AFL-CIO 2015; Aspen; CEC 2015;
Dimensional; FSR; Hay; IBC 2015; IBC 2022; McGuireWoods; Mercer;
NACCO; NIRI 2015; NIRI 2022; PDI; Pearl; Samuelson; and SBA-FL.
\247\ See letter from IBC 2022.
\248\ See letters from CalPERS 2015; CAP; CFA; CII 2015;
Farient; OPERS; and TIAA.
\249\ See letters from CalPERS 2015; CAP; CFA; CII 2015; Davis
Polk 2015; Davis Polk 2022 (stating that TSR should be the only
required measure, but that we should permit registrants to
voluntarily disclose other measures, particularly ``[g]iven the
complexity and importance of long-term incentive compensation'');
Farient; Hall; Mercer; NIRI 2015; OPERS; Pearl; Sacred Heart
University, dated July 7, 2015; Simpson Thacher; and TIAA. But see
letter from IBC 2022 (stating, in response to the Reopening
Release's considered additional net income, income or loss before
income tax expense, and Company-Selected Measure measures, that the
inclusion of additional metrics does not fix the fact that the
inclusion of TSR ``overstates'' the importance of TSR).
\250\ See letters from BRT; Celanese; Exxon; Hall; Hay; Hyster-
Yale; McGuireWoods; NACCO; PNC; SCG; SCSGP; and Simpson Thacher.
\251\ See letters from AFL-CIO 2015; CCMC 2015; FedEx 2015; Hook
(supporting the proposal, but stating ``I would like to see the
metrics for comparison include focus on longer-term performance'');
Public Citizen 2015 (specifically suggesting that the Commission
``mandate a metric supplemental to the TSR of a company's own
choosing that it contends would capture long-term performance'');
and SBA-FL.
\252\ See letters from American Federation of Labor and Congress
of Industrial Organizations, dated Mar. 2, 2022 (``AFL-CIO 2022'');
AFREF; California Public Employees Retirement System Investment
Office, dated Mar. 4, 2022 (``CalPERS 2022''); California State
Teachers' Retirement System, dated Mar. 2, 2022 (``CalSTRS''); CII
2022; Georgiev; ICGN; and International Brotherhood of Teamsters,
dated Mar. 3, 2022 (``Teamsters'').
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A number of commenters raised questions or made comments regarding
the calculation of TSR. A few commenters suggested that TSR should be
presented as a percentage change instead of an indexed dollar
value.\253\ Others generally raised questions about the method used for
calculating TSR,\254\ with some suggesting TSR should be calculated and
disclosed as a one-year measure,\255\ others suggesting that TSR should
be calculated as a rolling average,\256\ and a third group suggesting
TSR be calculated as a cumulative average over the time period of the
disclosure.\257\ Other commenters suggested that we permit registrants
to decide the time period used to calculate their TSR.\258\
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\253\ See letters from AON and Towers.
\254\ See letters from Anonymous, dated May 27, 2015;
BorgWarner; CEC 2015; Cook; Hall; Honeywell; Mercer; PG 2015; Pearl;
TCA 2015; and Towers.
\255\ See letters from Cook; Infinite (suggesting that a one-
year TSR would be consistent with Item 201(e) of Regulation S-K, but
that also including three-year and five-year TSRs may provide
helpful context); TCA 2015; TCA 2022; and Towers. But see letter
from Farient (opposing the calculation of TSR as a year-over-year
measurement). See also Davis Polk 2015 (stating that, if the
Commission requires an annual TSR, we should permit registrants to
also disclose a multi-year TSR, because compensation may be based on
multi-year performance).
\256\ See letters from AFREF (supporting a ``five year
cumulative and rolling average''); CEC 2015 (supporting the use of a
three-year or five-year rolling average TSR); Honeywell (stating
that a multi-year rolling TSR would be more meaningful); ICGN; NACD
2015 (recommending the Commission require a three-year or five-year
TSR in addition to an annual TSR); and NACD 2022 (also recommending
the Commission require a three-year or five-year TSR in addition to
an annual TSR). But see letter from PG 2015 (noting that a five-year
rolling TSR calculation would not be consistent with the Commissions
intent).
\257\ See letters from Pearl (supporting a cumulative 5-year TSR
measurement); PG 2015 (noting that a cumulative TSR would be
consistent with the Commission's intent, but could ``complicate[ ]
comparisons by causing the starting point for TSR measurement to
change each year''); and Teamsters.
\258\ See letters from BorgWarner; Davis Polk 2015; Davis Polk
2022 (suggesting that TSR should be calculated ``in a manner that is
consistent with the ways in which the compensation committee
considers TSR in the pay setting process''); Exxon (generally
opposing the use of TSR, but stating that, if we require its use, we
should allow registrants to choose the time period for measuring
cumulative TSR that best suits them); and NIRI 2015; see also letter
from Huddart (suggesting each component of the PEO's compensation
actually paid be associated with a requisite service period, and
then requiring the calculation of TSR and peer group TSR over the
requisite service period of the component of the PEO's compensation
having the largest dollar value in a given year).
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Commenters were also divided on our proposal to require
registrants, other than SRCs, to disclose peer group TSR. Some
commenters supported requiring the inclusion of peer group TSR,\259\
while others suggested peer group disclosure should be optional.\260\ A
number of other commenters opposed the requirement to disclose peer
group TSR,\261\ arguing peer group disclosure: is already disclosed in
the performance graph required by Item 201(e) of Regulation S-K; \262\
is beyond the mandate of the Dodd-Frank Act; \263\ will confuse or
mislead investors; \264\ will be expensive and/or time-consuming for
registrants to calculate; \265\ is difficult for registrants to explain
and would require lengthy disclosures; \266\ is difficult to understand
given that frequent changes in peer groups \267\ and different market
conditions or performance cycles affect different ``peer'' companies
differently; \268\ and creates issues relating to the difficulty for
companies to find adequate peers, limiting the ability to make direct
comparisons between registrants.\269\ A number of commenters also
opposed requiring weighted peer group TSR (weighted by market
capitalization), as used in Item 201(e) of Regulation S-K.\270\ In
addition, one commenter suggested we permit multiple peer groups to be
disclosed, if peer group TSR disclosure is required.\271\
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\259\ See letters from As You Sow 2015; CalPERS 2015; OPERS; and
TIAA.
\260\ See letters from AON and Hay.
\261\ See letters from ActiveAllocator Activist Capital Advisors
L.P., dated Feb. 3, 2022; CCMC 2015; CEC 2015; Celanese; Cook; Davis
Polk 2015; FSR; Georgiev; Hyster-Yale; IBC 2015; IBC 2022; LWC;
McGuireWoods; Meridian; NACCO; NAM 2015; NIRI 2015; NIRI 2022;
Pearl; PNC; SCG; SCSGP; TCA 2015; TCA 2022; and WorldatWork.
\262\ See letters from Exxon; Georgiev; Pearl; PNC; SBA-FL; and
TCA 2015.
\263\ See letters from BRT; CEC 2015; Celanese; Davis Polk 2015;
Exxon; FSR; Hay; Meridian; Pearl; PNC; and WorldatWork.
\264\ See letters from CEC 2015; Celanese; Davis Polk 2015;
Georgiev; Hay; Hyster-Yale; LWC; NACCO; and PNC.
\265\ See letters from Celanese; Hyster-Yale; and NACCO.
\266\ See letters from BRT; CCMC 2015 (also noting that
registrants may face public liability for assumptions made regarding
a peer's performance); Davis Polk 2015 (similar); and SCSGP.
\267\ See letters from Hay; Hyster-Yale; and NACCO.
\268\ See letters CCMC 2015; Exxon; and Pearl.
\269\ See letters from Hay; Hyster-Yale; IBC 2015; FSR; NACCO;
NAM 2015; and Pearl.
\270\ See letters from Allison; AON; Cook; Meridian; and Ross.
\271\ See letter from Pearl.
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Commenters generally supported allowing registrants to have
flexibility in setting their peer groups for the pay-versus-performance
disclosure. Commenters had various suggestions as to how to achieve
this flexibility, including allowing registrants to choose any peer
group referenced in the CD&A; \272\ allowing the use of the peer group
from either Item 201(e) of Regulation S-K or the CD&A; \273\ or
allowing registrants to choose a peer group other than the Item 201(e)
of Regulation S-K or CD&A peer groups.\274\ These commenters generally
supported requiring registrants to provide disclosure explaining the
make-up of their peer group.\275\ One commenter,
[[Page 55153]]
however, opposed giving flexibility to registrants in setting their
peer groups, and instead suggested requiring that the peer group should
be the same as the peer group used in benchmarking executive
compensation.\276\
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\272\ See letter from SCSGP.
\273\ See letter from Quirin.
\274\ See letters from Barnard 2015; Corning; and Towers
(specifically supporting allowing registrants to use the peer group,
if any, that is used in setting compensation).
\275\ See letters from Barnard 2015; Quirin; and SCSGP.
\276\ See letter from AFL-CIO 2015; see also letter from As You
Sow 2015 (stating that ``ideally'' all registrants would use the
benchmarking peer group in their pay-versus-performance disclosure).
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Commenters raised questions about the impact of a registrant
changing its peer group. Some commenters advocated for requiring
additional disclosure in the event that a registrant changes its peer
group,\277\ including requiring the disclosure of comparative results
of TSR for all peer groups used in the disclosed time period.\278\
Others questioned what impact the change of a peer group would have on
cumulative TSR,\279\ with some commenters suggesting we only require
disclosure of the current peer group.\280\ One commenter suggested
that, if annual TSR is used, the peer group in place in the respective
year of disclosure should be the peer group used to calculate the peer
group TSR for that year of disclosure.\281\
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\277\ See letters from AFL-CIO 2015; Hermes; and SBA-FL.
\278\ See letter from Hermes.
\279\ See letters from Cook and Pearl.
\280\ See letters from Cook and Quirin.
\281\ See letter from Cook.
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iii. Final Amendments
We are adopting the requirement, as proposed, that all registrants
subject to the final rules use TSR, and that registrants (other than
SRCs) use peer group TSR, as measures of performance. As noted in the
Proposing Release, Section 14(i) does not mandate we require specific
measures in the pay-versus-performance disclosure. However, the statute
does provide that the disclosures should ``tak[e] into account any
change in the value of the shares of stock and dividends of the issuer
and any distributions.'' \282\ While we recognize commenters' concerns
that TSR is not an equally useful measure for all registrants (as it is
not necessarily used by all registrants to set compensation and is seen
by some commenters to be an unreliable performance measure for thinly-
traded stocks), is subject to fluctuations based on circumstances
outside of the control of the registrant, and may be affected by the
granting and vesting of stock options, we believe that TSR is
consistent with that statutory language. In addition, we believe
mandating a consistently calculated measure for all registrants will
further the comparability of the pay-versus-performance disclosures
across registrants, as noted by some commenters.\283\ We acknowledge,
as noted by some commenters, that some registrants may need to provide
somewhat lengthy explanatory disclosures to explain any misalignments
between compensation and TSR; however, we believe those disclosures are
the types of disclosures intended by the language of Section 14(i), and
will help investors understand the relationship between executive
compensation actually paid and the registrant's performance.
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\282\ 15 U.S.C. 78n(i).
\283\ See supra note 235.
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We are not requiring registrants to disclose all measures they use
to set executive compensation, as recommended by some commenters,\284\
because we believe such a requirement would be a significant change
from the current executive compensation disclosure requirements, and
would be more appropriately considered by the Commission in a broader
context not related to the Section 953(a) mandate. In addition, as
noted below,\285\ as with other mandated disclosures, registrants would
be permitted to disclose additional measures of performance, so long as
any additional disclosure is clearly identified as supplemental, not
misleading and not presented with greater prominence than the required
disclosure. While this does not provide registrants with the full
flexibility of a principles based approach suggested by some
commenters, we believe this ability to supplement the required
disclosures will provide registrants with adequate discretion to
provide sufficiently fulsome disclosure of the relationship between
their performance and the compensation actually paid to their
executives.
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\284\ See supra notes 251-252.
\285\ See infra Section II.F.3.
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We also believe that absolute company performance alone, as
reflected in TSR, may not be a sufficient basis for comparison between
companies, and that peer group TSR will provide investors with more
comprehensive information for assessing whether the registrant's
performance was driven by factors common to its peers or instead by the
registrant's own strategy and other choices. The final rules require a
registrant to disclose weighted peer group TSR (weighted according to
the respective issuers' stock market capitalization at the beginning of
each period for which a return is indicated), using either the same
peer group used for purposes of Item 201(e) of Regulation S-K or a peer
group used in the CD&A for purposes of disclosing registrants'
compensation benchmarking practices. If the peer group is not a
published industry or line-of-business index, the identity of the
issuers composing the group must be disclosed in a footnote. A
registrant that has previously disclosed the composition of issuers in
its peer group in prior filings with the Commission would be permitted
to comply with this requirement by incorporation by reference to those
filings. We believe this would avoid the potential for duplicative
disclosure. Consistent with the approach taken in Item 201(e) of
Regulation S-K, as proposed, if a registrant changes the peer group
used in its pay-versus-performance disclosure from the one used in the
previous fiscal year, it will only be required to include tabular
disclosure of peer group TSR for that new peer group (for all years in
the table), but must explain, in a footnote, the reason for the change,
and compare the registrant's TSR to that of both the old and the new
group.\286\ Some commenters advocated for more disclosure when a peer
group changes (including requiring the disclosure of comparative
results of TSR for all peer groups used in the disclosed time period),
while other commenters suggested we only require disclosure of the
current peer group. We believe the adopted approach strikes the
appropriate balance of providing investors information when a peer
group changes, while also not requiring overcomplicated disclosure. In
addition, as proposed, we are requiring weighted peer group TSR, as
calculated under Item 201(e) of Regulation S-K, as registrants are
already familiar with this calculation.\287\
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\286\ See 17 CFR 229.402(v)(2)(iv).
\287\ To calculated weighted peer group TSR, the returns of each
component issuer of the group must be weighted according to stock
market capitalization at the beginning of each period for which a
return is indicated. See Instruction 5 to Item 201(e) of Regulation
S-K.
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In response to commenters' questions about the calculation of TSR,
we are clarifying the definition of ``measurement period'' in the final
text of the rule. TSR will continue to be calculated on the same
cumulative basis as is used in Item 201(e) of Regulation S-K, measured
from the market close on the last trading day before the registrant's
earliest fiscal year in the table through and including the end of the
fiscal year for which TSR is being calculated (i.e., the TSR for the
first year in the table will represent the TSR over that first year,
the TSR for the second year will represent the cumulative TSR
[[Page 55154]]
over the first and the second years, etc.). We are also clarifying that
both TSR and peer group TSR should be calculated based on a fixed
investment of one hundred dollars at the measurement point. As noted by
a commenter,\288\ the TSR presented in the stock performance graph
includes a starting investment amount on the y-axis, from which the
subsequent TSR amounts are calculated. As the final rules mandate a
tabular not graphical disclosure of TSR, we are clarifying that the TSR
amounts should be calculated based on an initial fixed investment of
one hundred dollars, to clarify for investors what amount is used to
calculate the TSR figures, and to standardize the disclosure across
registrants. We are not requiring, as suggested by some commenters,
that TSR be calculated as a percentage change instead of a dollar
value; be disclosed as a one-year measure; be calculated as a rolling
average; or be calculated based on a time period chosen by the
registrant as we believe all of those approaches would depart from the
existing approach used in Item 201(e) of Regulation S-K, and therefore
could be burdensome to registrants and confusing to investors.
Similarly, we believe that permitting registrants to choose their own
criteria for calculating their TSR and peer group TSR for the pay-
versus-performance disclosure could also lead to investor confusion.
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\288\ See letter from CAP (noting that ``TSR is indexed based on
a $100 investment while compensation is reported in dollars so the
scales are fundamentally different'' and suggesting that ``[t]he
easiest solution would be to require companies to calculate
compensation actually paid for 6 years, with the sixth year indexed
to 100, similar to TSR in the stock performance graph'').
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We disagree with commenters who raised concerns that peer group TSR
would be confusing to investors, expensive to calculate, and hard to
understand. Peer group TSR is already included in other disclosures,
meaning both investors and registrants are generally familiar with it.
While peer group TSR is not specifically included in Section 14(i), we
believe it is a useful measure for evaluating a registrant's
performance, as noted by other commenters, and we are therefore using
our discretionary authority to require this additional information to
enhance the Dodd-Frank Act mandated disclosures. As we described above,
peer group comparisons are often used by registrants' compensation
committees,\289\ and may help in determining whether a registrant's
performance was driven by factors common to its peers, which may have
been outside of the control of its executives.
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\289\ See supra note 69 and accompanying text.
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As discussed below,\290\ to address commenters' concerns with
respect to the proposal to use TSR and peer group TSR as the sole
measures of performance (such as causing companies to adjust their
compensation programs to more heavily rely on TSR), we are also
requiring registrants to include net income and a Company-Selected
Measure as performance measures in the tabular disclosure, and also
permitting companies to voluntarily include additional measures of
their choosing in the table, as suggested by some commenters.\291\ The
inclusion of the Company-Selected Measure and the ability of
registrants to voluntarily include additional measures may also address
commenters' concerns with respect to incentivizing short-term
performance at the expense of shareholders' long-term best interests.
We believe these additional measures should help alleviate concerns
expressed by some commenters that disclosing only TSR (for a registrant
and its peer group) would put too much emphasis on that one measure.
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\290\ See infra Sections II.D.2; II.D.4; and II.F.3.
\291\ See supra note 249.
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2. Requirement To Disclose Net Income
i. Amendments Considered in the Reopening Release
In the Reopening Release, we requested comment on requiring
registrants to disclose both income or loss before income tax expense
and net income in their pay-versus-performance disclosure.\292\ We
stated we were considering these two measures because in reflecting a
registrant's overall profits (net of costs and expenses), they could be
additional important measures of company financial performance that may
be relevant to investors in evaluating executive compensation, and
could complement the market-based performance measures required in the
Proposing Release (TSR and peer group TSR) by also providing
accounting-based measures of financial performance. In addition, both
net income and income or loss before income tax expense are measures
that are familiar to registrants and investors, as both are generally
required to be presented on the face of the Statement of Comprehensive
Income by Regulation S-X. Net income is also a line item required by
U.S. GAAP and International Financial Reporting Standards (``IFRS'') as
issued by the International Accounting Standards Board.
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\292\ As discussed above, in this release, to be consistent with
the language in Regulation S-X, we are using the phrase ``income or
loss before income tax expense'' in lieu of the phrase ``pre-tax net
income,'' which was used in the Reopening Release. See supra note
33.
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ii. Comments
Commenters were divided over the potential inclusion of income or
loss before income tax expense and net income. A number of commenters
generally supported the inclusion of the measures as additional
measures in the table; \293\ noting that they will be useful to
investors in assessing executive compensation; \294\ will cause minimal
compliance challenges, as they are already calculated by registrants;
\295\ and will increase comparability.\296\ However, other commenters
opposed requiring registrants to disclose the measures,\297\ noting
they are not relevant for or comparable across all companies \298\
(particularly early stage companies and real estate investment trusts
(``REITs'') \299\); are not used by
[[Page 55155]]
many companies in setting executive compensation; \300\ would be
incomplete or misleading without appropriate context; \301\ and can
vary period over period due to one-time adjustments and events such
that the relationship with pay would be distorted.\302\ Other
commenters opposed the measures more generally, as non-company-specific
measures, indicating their inclusion would ``substantially lengthen''
the pay-versus-performance disclosure, without providing specific
insight into the registrant,\303\ would not address the shortcomings of
TSR because they have similar weaknesses (such as encouraging short-
termism or ``overemphasiz[ing] financial performance''),\304\ or would
stifle innovation by encouraging more uniform compensation structures
given the standardized disclosure across registrants.\305\
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\293\ See letters from As You Sow, dated Mar. 4, 2022 (``As You
Sow 2022''); Better Markets; Better Markets, Institute for Policy
Studies, Global Economy Project, and Public Citizen, dated Mar. 4,
2022 (``Better Markets et al.''); CalPERS 2022; CalSTRS; CII 2022;
ICGN; Mark C, dated Feb. 21, 2022 (``Mark C''); PRI; Public Citizen,
dated Mar. 4, 2022 (``Public Citizen 2022''); Teamsters; and Troop
Inc., dated Feb. 17, 2022 (``Troop'').
\294\ See letters from As You Sow 2022; Better Markets; Better
Markets et al.; CalPERS 2022; CalSTRS; CII 2022; ICGN (noting that
net income ``could be useful for companies that have a highly
complex tax structure''); PRI; Public Citizen 2022; Teamsters; and
Troop.
\295\ See letter from Better Markets; Better Markets et al.;
PRI; and Public Citizen 2022.
\296\ See letter from PRI.
\297\ See letters from AB; Aon HCS; ASA; Center on Executive
Compensation, dated Mar. 4, 2022 (``CEC 2022''); Davis Polk 2022;
Dimensional; FedEx Corp., dated Mar. 4, 2022; Georgiev; Infinite;
Legal & General Investment, dated Mar. 3, 2022 (``LGIM'');
McGuireWoods; Nareit, dated Mar. 4, 2022 (``Nareit''); NAM 2022;
NIRI 2022; PG 2022; SCG; and TCA 2022.
\298\ See letters from AB; CEC 2022; Dimensional; Infinite;
LGIM; Nareit; NIRI 2022; PG 2022; and SCG.
\299\ See letters from Dimensional (noting that changes to a
company's business plan (such as closing business lines, selling
certain assets, or investing in research and development) could
result in low or negative net income, ``even though the strategies
may ultimately pay off for shareholders over the long term'');
Infinite (noting that income or loss before income tax expense and
net income ``may not provide reliable insight into the results of
management's efforts at developmental or transitional stage
companies''); LGIM (noting that ``different growth stages'' of a
company might necessitate it focusing on metrics other than income
metrics); Nareit (stating that ``[d]ue to certain features of the
way REITs are organized and operated under [F]ederal tax law as well
as certain features of U.S. GAAP,'' income or loss before income tax
expense and net income are not typically used by investors or
management when evaluating the alignment of pay with performance for
REITs); and NIRI 2022 (stating that income measures are ``completely
impractical as measures of financial performance for smaller
companies that are at a startup or early phase and not generating
any net income under GAAP'').
\300\ See letter from ASA; CEC 2022; and Davis Polk.
\301\ See letters from ICGN; Infinite; and PG 2022.
\302\ See letter from Dimensional Infinite; and PG 2022.
\303\ Letter from Aon HCS.
\304\ See letters from Georgiev; and McGuireWoods.
\305\ See letter from SCG.
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iii. Final Amendments
We are adopting the final rules to require registrants to include
net income in their tabular disclosure. As discussed above,\306\
registrants would also be required to provide a clear description of
the relationship of net income to executive compensation actually paid,
in narrative or graphical form, or a combination of the two.
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\306\ See supra Section II.A.2.iii.
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Although, as noted by some commenters, net income itself may not be
frequently used by registrants directly in setting compensation, we
believe that net income is closely related to other profitability
measures that we believe, based on Commission staff experience, may be
used by registrants in setting compensation, while also being widely
understood and standardized, as a required disclosure item under
Regulation S-X, U.S. GAAP, and IFRS. The inclusion of net income as an
additional financial performance measure could complement the market-
based performance measure of TSR, and, to the extent that TSR does not
(in the view of management) fully reflect a company's performance,
could help to provide investors more ready access to an additional key
measure of the company's recent financial performance. As noted in the
Reopening Release, to the extent that net income would otherwise be
considered by investors when evaluating the alignment of pay with
performance, its inclusion in the table may lower the burden of
analysis for those investors.
We also believe that the standardized disclosure of net income
could assist investors in generally understanding and analyzing the
relationship between pay and performance. While, as noted by some
commenters, net income may not be relevant for all registrants at all
times,\307\ including it may allow investors to have a standard
baseline from which to analyze a registrant's pay-versus-performance
disclosure. Moreover, by requiring a Company-Selected Measure and
giving registrants the ability to disclose additional registrant-
specific measures, we believe registrants can avoid concerns raised by
commenters that financial performance would be overemphasized or
disclosure overly standardized \308\ by the required disclosure of net
income.
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\307\ See supra notes 298-300 and accompanying text.
\308\ See supra notes 304-305 and accompanying text.
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The final rules do not require disclosure of income or loss before
income tax expense, as considered in the Reopening Release. Net income
and income or loss before income tax expense are highly
correlated,\309\ so we believe requiring both could lead to
unnecessarily duplicative disclosure, which could have raised questions
for investors trying to understand what, if any, meaningful differences
there were between the measures. This potentially duplicative
disclosure also would have required registrants to prepare additional
relationship disclosure (about the relationship between income or loss
before income tax and executive compensation actually paid), which
would have created an additional burden on registrants, and may have
been less clear for investors. By requiring only one of the two net
income measures, we also partially address the concern that adding both
net income and income or loss before income tax expense could
``substantially lengthen'' the pay-versus-performance disclosure. In
addition, we believe net income may, based on statistics provided by a
commenter, be used by significantly more companies in linking pay to
performance than income or loss before income tax expense.\310\
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\309\ Based on staff analysis of data from Compustat, net income
and income or loss before income tax expense are roughly 95 percent
correlated.
\310\ See letter from CEC 2022.
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3. Tabular List of the Registrant's ``Most Important'' Performance
Measures
i. Amendments Considered in the Reopening Release
In the Reopening Release, we requested comment on requiring
registrants to provide a ranked tabular list of the five \311\ most
important measures that they use to link executive compensation
actually paid during the fiscal year to company performance, over the
time horizon of the disclosure. We requested comment on the inclusion
of such a ranked list, in part, in response to commenters who stated
that the proposal should be revised to require disclosure of the
quantitative metrics or key performance targets companies actually use
to set executive pay.\312\ We noted that this disclosure, if required,
would be supplemental to the existing CD&A disclosure, which requires
registrants to disclose ``all material elements of the compensation
paid,'' including, for example, which ``specific items of corporate
performance are taken into account in setting compensation policies and
making compensation decisions,'' but does not specifically mandate
disclosure of the performance measures that determined the level of
recent NEO compensation actually paid. We noted that, under the
considered approach, registrants would be able to cross-reference to
existing disclosures elsewhere in the applicable disclosure document
that describe the various processes and calculations that go into
determining NEO compensation as it relates to these performance
measures, if they elected to do so.
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\311\ The Reopening Release provided that, if the registrant
considers fewer than five performance measures when it links
executive compensation actually paid during the fiscal year to
company performance, the registrant would be required to disclose
only the number of measures it actually considers.
\312\ See, e.g., letters from AFL-CIO 2015; CII 2015; Public
Citizen 2015; and SBA-FL.
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ii. Comments
A number of commenters supported the inclusion of a ranked
list.\313\ Some of the commenters who supported the ranked list also
suggested additional
[[Page 55156]]
disclosures to supplement the list itself, including requiring ``clear
description of the relationship between the measures and executive
compensation,'' \314\ the metrics and methodology used to calculate the
measures,\315\ and the ``percentage of total compensation paid at the
vesting date'' with respect to each of the measures included in the
list.\316\ In addition, some commenters supported requiring or
permitting environmental, social and governance (``ESG'') metrics to be
included in the ranked list.\317\ One commenter also specifically
supported using a tabular format for the list, stating that it would
help make company-to-company comparisons.\318\
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\313\ See letters from As You Sow 2022; Better Markets; Better
Markets et al.; CalSTRS; Ceres and Ceres Accelerator for Sustainable
Capital Markets, dated Mar. 4, 2022 (``Ceres''); CII 2022;
Dimensional; Infinite; ICGN; Mark C (stating that the list ``would
give investors greater transparency into [registrants'] policies as
well as more tangible metrics by which to make their investment
decisions''); PRI; Public Citizen 2022; and Responsible Asset
Allocator Initiative at New America, and The Predistribution
Initiative, dated Mar. 3, 2022 (``RAAI''); see also letter from
AFREF (supporting the ranked list as an alternative to not
disclosing `all' performance measures).
\314\ Letter from PRI.
\315\ See letter from ICGN.
\316\ Letter from Infinite.
\317\ See letters from As You Sow 2022; Better Markets; Ceres;
PRI; Public Citizen 2022; and RAAI.
\318\ See letter from ICGN.
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A number of other commenters opposed the ranked list,\319\ with
some indicating that its ranking requirement would be difficult to
satisfy, as registrants do not rank their measures in the compensation
setting process and measures can interact in determining pay in complex
ways. Some commenters objected that the list oversimplifies the
compensation setting process, particularly because there could be
difficulty ranking multiple measures, which might be related or hold
equal importance at any given time.\320\ Others indicated the list and
associated clarifications and explanations would increase the lengt
[…truncated; see source link]Indexed from Federal Register on September 8, 2022.
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