A company-selected financial performance measure that the company determines is the most important metric it uses to link compensation actually paid to its named executive officers with company performance.<\/li>\n<\/ul>\nCompanies also must describe the relationships between each of these financial performance measures and the executive compensation paid to the “principle executive officer” (typically, the chief executive officer) and, on average, to its other named executive officers.<\/p>\n
Whether the new disclosures will be burdensome, especially for smaller public companies, “depends on to what extent they are already tracking pay versus performance now, but it will be somewhat burdensome regardless,” said Brennan Rittenhouse, a managing director with consulting firm A&M Taxand LLC in Denver. <\/p>\n
“The specific items and tabular calculations may be different than what is presently being disclosed and require additional effort to detail,” he noted.<\/p>\n
For smaller reporting companies, “while the scaled disclosure requirements reduce some of these burdens, these entities are least likely to already be including the required information in their current disclosures,” Rittenhouse said. As a result, “the additional requirements, despite being scaled down, will still require a significant amount of effort that these companies are not accustomed to.”<\/p>\n
‘Most Important’ Measures<\/p>\n
Another disclosure under the final rule requires public companies to list, in a separate table, at least three and up to seven of the most important financial performance measures they use to link executive compensation “actually paid” to company performance during the most recently completed fiscal year. One of these metrics must be the company-selected measure included in the new “pay versus performance” table.<\/p>\n
As Rittenhouse explained, “the disclosures around the company-selected measure and the three to seven financial performance measures\u2014the ‘tabular list’\u2014will require additional narrative to explain how those are calculated and how they impact and influence executive compensation, no easy task given the complexity of some compensation arrangements.”<\/p>\n
ESG Metrics<\/p>\n
Brian Soares and Celia Soehner, partners at law firm Morgan Lewis in Washington, D.C., and Pittsburgh, respectively, blogged<\/a> that “some commenters asked that the SEC mandate the inclusion of ESG [environmental, social and government] metrics” in the disclosure of a company’s most important performance measures.<\/p>\n“While the final rules do not require disclosure of ESG metrics, [companies] may supplement their mandatory pay-for-performance disclosure with a discussion of ESG metrics (or any other nonfinancial performance measure),” Soares and Soehner wrote.<\/p>\n
Telling Their Story<\/p>\n
A key takeaway from the new rule, Rittenhouse said, is that “it’s as important as ever for companies to design their incentive metrics based on behaviors and financials that drive their business and are a good measure of success.” <\/p>\n
The new rule, he added, “continues the trend of pushing companies to better tell their story, and so it’s important to not fall into the trap of just filling out the table, but rather spend time crafting the narrative to really help the reader understand how your pay and performance are aligned.”<\/p>\n
Effective Dates<\/p>\n
Companies must begin to comply with the new disclosure requirements in proxy and information statements for fiscal years ending on or after Dec. 16, 2022.<\/p>\n
For the first annual filings after the new requirements take effect, large companies may provide three years of data, instead of five, and small companies may provide two years of data, instead of three.<\/p>\n
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