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August 31, 2022

SEC Releases Final Regulations for Pay Versus Performance


On August 25, 2022, the US Securities and Exchange Commission (SEC) issued final rules setting forth new pay for performance disclosure requirements originally required by the Dodd-Frank Act. The final rules are intended to show the relationship between compensation actually paid to a company’s principal executive officer (PEO) and its other named executive officers (NEOs) and the financial performance of the company. This Advisory reviews the new rules and identifies several areas that SEC registrants should begin to focus on now in preparation for the 2023 proxy season.

Summary of New Disclosures

The disclosures, which are set forth in new Regulation S-K Item 402(v), will be required to be included in proxy statements or information statements in which executive compensation disclosures are required under Item 402.1 In adopting the new requirements, the SEC noted that although the Compensation Discussion & Analysis already mandates an explanation of “all material elements of the registrant’s compensation of the named executive officers,” the new rules prescribe standalone disclosures which require a direct comparison of compensation actually paid to NEOs and specified financial metrics.

Tabular Disclosure of Comparative Data: The Item 402(v) requires a tabular disclosure of the following metrics for each of the prior five fiscal years:

  • For the PEO (typically the chief executive officer), the total compensation as reported in the Summary Compensation Table. If more than one person served as a PEO during the covered fiscal year, a column should be included for each PEO;
  • The compensation actually paid to the PEO (calculated as discussed below);
  • For the NEOs other than the PEO, the average of the total compensation reported in the Summary Compensation Table;
  • The average compensation actually paid to the NEOs other than the PEO (calculated as discussed below);
  • The cumulative total shareholder return (TSR) of the company, as calculated under Item 201(e) of Regulation S-K, which governs the preparation of the summary performance graph;
  • The cumulative TSR of a selected peer group;
  • The company’s net income for each fiscal year; and
  • An additional financial performance measure designated as the “Company-Selected Measure” (discussed below).

Additional measures may also be provided if they are clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure.

The following is the format for the required table:

 Summary Compensation Table Total for PEO
Compensation Actually Paid to PEO 
 Average Summary Compensation Table Total for Non-PEO NEOs
 Average Compensation Actually Paid to Non-PEO NEOs
 Value of Initial Fixed $100 Investment Based On: Net Income   
 Net Income
 [Company-Selected Measure]
Total Shareholder Return  [Peer Group Total Shareholder Return] 
(a) (b)  (c) (d) (e)   (f)  (g)  (h)  (i)


The final rules require footnote disclosure of the amounts that are deducted from, and added to, the Summary Compensation Table amounts reported in the new table (these adjustments are discussed below). In addition, companies must identify in footnote disclosure the individual NEOs whose compensation amounts are included in the average for each year. Companies may not remove signing bonuses, severance bonuses, and other one-time payments from the amount of compensation actually paid.2

Comparative Disclosure: Companies are required to provide a clear description of:

  • the relationship between the compensation actually paid to the company’s PEO and the average of the compensation actually paid to the company’s other NEOs, and each of (i) the cumulative TSR of the company, (ii) the net income of the company, and (iii) the Company-Selected Measure, in each case across the last five completed fiscal years; and
  • the comparison of the company’s cumulative TSR and the cumulative TSR of the peer group across the last five completed fiscal years.

The comparative disclosure can be provided in graphical form, narrative form or a combination of the two. Companies will also have the flexibility to decide whether to group any of these relationship disclosures together, but any combined description of multiple relationships must be “clear.”3

If any additional measures are included, a similar comparison must also be provided for each additional measure.

Tabular List of Performance Measures: Companies must provide an unranked tabular list of at least three, and up to seven, financial performance measures which represent the most important financial performance measures used to link compensation actually paid to its NEOs for the most recently completed fiscal year to company performance. A company may elect to provide separate tabular lists for the PEO and the non-PEO NEOs (either individually or collectively). Non-financial performance measures may be included if they are among the company’s three to seven most important performance measures and the company has disclosed its most important three (or fewer, if fewer than three were used) financial performance measures. If fewer than three financial measures were used, then all of the financial measures that were used, if any, should be included in the tabular list. Although companies may include non-financial performance measures in the tabular list, they must select a financial performance measure from the tabular list as the Company-Selected Measure (described below).

Compensation Actually Paid

In determining compensation “actually paid” for inclusion in the prescribed table, the following additions and deductions should be made to and from the Summary Compensation Table amounts:

  • For defined benefit and actuarial pension plans, (i) deduct the aggregate change in the actuarial present value of the NEO’s accumulated benefit under the plans and (ii) add a service cost which generally reflects increased benefits to the NEO related to the fiscal year;
  • Deduct the amounts reported in the Summary Compensation Table for equity grants and then include an amount for stock awards and option awards calculated by:
    • adding the year-end fair value of all awards granted during the fiscal year that are outstanding and unvested as of the end of the fiscal year;
    • adding the change in fair value as of the end of the fiscal year (from the end of the prior fiscal year) of any awards granted in a prior fiscal year that are outstanding and unvested as of the end of the fiscal year;
    • adding the fair value as of the vesting date for awards that are granted and vest in the same year;
    • adding the change in fair value as of the vesting date (from the end of the prior fiscal year) of any awards granted in any prior fiscal year which vest during the fiscal year;
    • subtracting the fair value at the end of the prior fiscal year for any awards granted in a prior fiscal year that fail to meet vesting conditions during the fiscal year; and
    • adding any dividends or other earnings paid in the fiscal year prior to the vesting date that are not otherwise included.

Any valuation assumptions used in valuing equity awards that are materially different from the grant date assumptions that are otherwise disclosed must also be included in a footnote.


TSR will be calculated on the same cumulative basis as is used in Item 201(e) of Regulation S-K (which governs the performance graph) in the table through and including the end of the fiscal year for which TSR is being calculated. Both TSR and peer group TSR should be calculated based on a fixed investment of one hundred dollars at the measurement point.

For purposes of determining the peer group for the peer group TSR calculation, a company must use the same index or issuers used for the summary performance graph under Item 201(e)(1)(ii) of Regulation S-K, or, if applicable, the companies it uses as a peer group for disclosing benchmarking practices in its Compensation Discussion & Analysis. If the peer group utilized is not a published index, the companies in the peer group must be disclosed in a footnote or, if disclosed in prior filings, incorporated by reference. The returns of each component issuer of the group must be weighted according to the respective issuers’ stock market capitalization at the beginning of each period for which a return is indicated. If the company uses a different peer group from the peer group used by it for the immediately preceding fiscal year, it must explain in a footnote the reason(s) for the change and compare the company’s cumulative total return with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year. Note that companies may need to provide somewhat lengthy explanatory disclosures to explain any misalignments between compensation and TSR.

Company-Selected Measure

The Company-Selected Measure for the required table is a measure that, in the company’s assessment, represents the most important financial performance measure (not already required to be disclosed in the table) that is used to link compensation actually paid to the NEOs for the most recently completed fiscal year to company performance. If the company’s “most important” measure is already included in the tabular disclosure, it would select its next-most important measure as its Company-Selected Measure. In addition, the Company-Selected Measure may change from one filing to the next. If a Company-Selected Measure is not a financial measure under generally accepted accounting principles (GAAP), the company must disclose how the measure is calculated from the company’s audited financial statements. However, such measure will not be subject to Regulation G or Item 10(e) of Regulation S-K, which governs the use of non-GAAP financial information.

Effective Time and Transition Rules

The final rules are effective 30 days following the publication in the Federal Register, and companies are required to include the new disclosures in applicable filings in fiscal years ending on or after December 16, 2022. Accordingly, the final rules will apply to the 2023 proxy season. In the first year of disclosure, companies may provide information for the pay versus performance table for the prior three fiscal years and may provide an additional year of disclosure in each of the next two subsequent annual filings.

Smaller Reporting Companies

Smaller reporting companies have more limited disclosure obligations. Smaller reporting companies are only required to report information in the table for the three prior fiscal years, with only two fiscal years required to be provided in the first year of disclosure, and a third year provided in the next subsequent annual filing pursuant to the transition rules. Smaller reporting companies are also not required to include pension amounts in the calculation of compensation “actually paid” or provide the disclosure of peer group TSR, the Company-Selected Measure, or the tabular list of most important metrics.

Emerging Growth Companies, Foreign Private Issuers and Registered Investment Companies

Emerging growth companies, registered investment companies, and foreign private issuers are excluded from the disclosure requirements under the new rules.

Key Takeaways

  • With significant new disclosures required to be included in the 2023 fiscal year proxy statements and other information filings requiring executive compensation disclosures, Compensation Committees should be educated on the new requirements as soon as possible.
  • Compensation Committees should begin evaluating company financial and non-financial performance metrics to include in the list of 3-7 financial measures as well as the Company Selected Measure for the comparison table, keeping in mind that different measures may have been used for evaluating/determining different components of compensation.
  • Compensation Committees should also consider how to approach peer group selection for the TSR comparisons and whether to utilize the services of a compensation consultant to assist with that process.
  • Compensation Committees should be mindful of the new disclosure requirements when deciding compensation structures for the 2023 fiscal year and beyond.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. The final rules provide companies flexibility in determining where in the proxy or information statement to provide the required disclosure.

  2. Companies are required to separately tag in Inline XBRL each value disclosed in the table, the footnote and relationship disclosure, and specific data points (such as quantitative amounts) within the footnote disclosures.

  3. The relationship disclosure could include, for example, a graph providing 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 relationship disclosure could include narrative or tabular disclosure showing the percentage change over each year of the required time period in both compensation actually paid and the financial performance measure(s) together with a brief discussion of how those changes are related.