SEC Proposes “Pay-Versus-Performance” Rule

SEC Proposes “Pay-Versus-Performance” Rule by Davis Polk & Wardwell LLP

On April 29, 2015, a divided Securities and Exchange Commission proposed requiring U.S. public companies to disclose the relationship between executive compensation and the company’s financial performance.1 The proposed “pay versus performance” rule, one of the last Dodd-Frank Act rulemaking responsibilities for the SEC, mandates that a company provide, in any proxy or information statement:

  • A new table, covering up to five years, that shows:
    • compensation “actually paid” to the CEO, and total compensation paid to the CEO as reported in the Summary Compensation Table;
    • average compensation “actually paid” to other named executive officers, and average compensation paid to such officers as reported in the Summary Compensation Table; and
    • cumulative total shareholder return (TSR) of the company and its peer group; and
  • Disclosure of the relationship between:
    • executive compensation “actually paid” and company TSR; and
    • company TSR and peer group TSR.

The proposed rule (attached to this memo as Appendix A) would provide flexibility in some areas, such as permitting companies to select their peer groups. In other respects, however, the proposed rule would be highly prescriptive in ways not mandated by the Dodd-Frank Act — for example, in creating a new measure of compensation “actually paid,” as well as requiring the use of cumulative TSR as the metric by which to compare the company’s performance to its executives’ pay and to the performance of its peers.

The Q&A below addresses some of the issues raised by the proposed rule.


Section 953(a) of the Dodd-Frank Act amended Section 14 of the Securities Exchange Act of 1934 to direct the SEC to implement rules requiring each registrant to disclose, in proxy or information statements in which Item 402 executive compensation disclosure is required, a clear description of the relationship between compensation actually paid to the registrant’s “named executive officers” and the financial performance of the registrant, taking into account any change in the value of the registrant’s shares and any dividends and distributions.

The proposed pay versus performance rule implements Section 953(a) by adding a new Item 402(v) to Regulation S-K.


Q: When will pay-versus-performance disclosure first be required?

A: In the first proxy or information statement filed after the final rule becomes effective.

Pay-versus-performance disclosure must be provided in the first proxy or information statement filed after the final rule becomes effective. Because it is possible that the rule will be finalized in 2015, calendar year companies may be required to provide this disclosure in the 2016 proxy season.

Q: Which filings must include pay-versus-performance disclosure?

A: Any proxy or information statement in which Item 402 compensation disclosure is required.

Pay-versus-performance disclosure would be required in proxy statements for annual and special shareholder meetings filed on Schedule 14A and information statements filed on Schedule 14C. The disclosure is not required in Form S-1 registration statements or Form 10-K annual reports, regardless of whether such forms include Item 402 compensation disclosure.

Because the disclosure will be provided pursuant to Item 402, it will be covered by the advisory (non-binding) say-on-pay vote.

The disclosure will 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 company specifically incorporates it by reference.

Q: Which companies are subject to pay-versus-performance disclosure?

A: Most companies that file proxy and information statements.

The following types of companies are exempted from compliance with the proposed rule:

  • emerging growth companies, or EGCs;
  • foreign private issuers (even those filing on U.S. periodic disclosure forms); and
  • registered investment companies.

Smaller reporting companies are subject to the proposed rule, but with more limited disclosure requirements that are phased in over time, as discussed below.

Q: Do any transition rules apply to new companies?

A: Yes. Pay-versus-performance disclosure is not required in an IPO. In addition, a newly public company that does not otherwise qualify for EGC relief need not provide disclosure for fiscal years prior to the most recently completed fiscal year if the company was not an Exchange Act filer during those years.


See full PDF below.