Pay Versus Performance

A Small Entity Compliance Guide [*]

Introduction

On August 25, 2022, the Securities and Exchange Commission (the “Commission”) adopted amendments to its rules to implement Section 14(i) of the Securities Exchange Act of 1934, which was added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The amendments created new Item 402(v) of Regulation S-K, which requires registrants to disclose in a clear manner the relationship between the executive compensation actually paid by the registrant and the financial performance of the registrant over the applicable time period of the disclosure. Registrants will be required to provide the disclosure in a structured data language using Inline eXtensible Business Reporting Language (“Inline XBRL”).

Who is affected by the amendments?

The amendments apply to all reporting companies that file proxy or information statements in which executive compensation disclosure is required under SEC rules, except foreign private issuers, registered investment companies, and Emerging Growth Companies.[1] Business Development Companies (“BDCs”), which are a type of closed-end investment company that is not registered under the Investment Company Act of 1940, are subject to the amendments. As discussed below, Smaller Reporting Companies (“SRCs”) are subject to the amendments but are permitted to provide scaled disclosures.[2]

What specific changes were made?

Pay versus performance table. Under new Item 402(v), registrants are required to provide a table disclosing specified executive compensation and financial performance measures for the registrant’s five most recently completed fiscal years, for registrants other than SRCs, or the registrant’s three most recently completed fiscal years, for SRCs.

Registrants are required to include in the table, for (1) the principal executive officer (“PEO”) and, (2) as an average, for the other named executive officers (“NEOs”), the measure of total compensation and a measure reflecting “executive compensation actually paid.” The method of calculation of “executive compensation actually paid” is prescribed by the amendments, using as a starting point the total compensation reported in the Summary Compensation Table, with certain adjustments with respect to pension compensation (for non-SRCs) and equity awards.

In addition, the following financial performance measures are required to be included in the table:

• The registrant’s cumulative total shareholder return (“TSR”) , calculated based on a fixed investment of one hundred dollars as of the measurement point;[3]
• For registrants other than SRCs, cumulative TSR for the registrant’s peer group, also calculated on the basis of a fixed investment;[4]
• The registrant’s net income; and
• For registrants other than SRCs, a financial performance measure chosen by the registrant and specific to the registrant (the “Company-Selected Measure”) that, in the registrant’s assessment, represents the most important financial performance measure not otherwise required to be included in the table that the registrant uses to link compensation actually paid to the registrant’s NEOs to company performance for the most recently completed fiscal year.

For registrants that are not SRCs, the table will be presented in the following format:

For registrants that are SRCs, the table will be presented in the following format:

Footnotes to the table. Under the amendments, registrants are required to disclose specified information in footnotes to the table, including the name of each PEO and each non-PEO NEO included in the average compensation amount and amounts deducted or added to calculate executive compensation actually paid.

Relationship disclosure. New Item 402(v) also requires a registrant to provide a clear description of the relationships between (1) each of the financial performance measures included in the table and (2) the executive compensation actually paid to its PEO and, on average, to its other NEOs over the registrant’s five most recently completed fiscal years (or three most recently completed fiscal years for SRCs). Registrants other than SRCs are required to also include a description of the relationship between the registrant’s TSR and its peer group TSR. Registrants may present the descriptions of these relationships by means of graphical or narrative disclosures or a combination of both.

Tabular List. Registrants other than SRCs are also required to provide a list (“Tabular List”) of three to seven financial performance measures that the registrant determines are its most important measures (using the same approach as taken for the Company-Selected Measure). Registrants are permitted, but not required, to include non-financial measures in the Tabular List if they considered such measures to be among their three to seven “most important” measures.

Inline XBRL. All registrants are required to use Inline XBRL to tag their pay versus performance disclosure in the relevant proxy or information statement, subject to a transition period for SRCs, as described below. Registrants will be required to separately tag each value in the pay versus performance table, block-text tag the footnote and relationship disclosures and, for non-SRCs, the Tabular List, and tag specific data within the footnote disclosures.

What are the compliance dates for the amendments?

The amendments are effective as of October 11, 2022.Registrants subject to Item 402(v) must begin to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 of Regulation S-K disclosure for any annual meeting of shareholders for fiscal years ending on or after December 16, 2022.

Registrants other than SRCs are required to provide the information for three years in the first proxy or information statement in which they provide the disclosure, adding another year of disclosure in each of the two subsequent annual proxy filings that require this disclosure. SRCs are initially required to provide the information for two years, adding another year of disclosure in the subsequent annual proxy or information statement that requires this disclosure. In addition, SRCs are only required to provide the required Inline XBRL data beginning in the third filing in which they provide pay versus performance disclosure, instead of the first.

Other Resources

The adopting release can be found on the Commission’s website at https://www.sec.gov/rules/final/2022/34-95607.pdf.

Contacting the Commission’s Staff

The Commission’s Division of Corporation Finance is happy to assist small entities and other parties with questions regarding the amendments. You may contact the Division for this purpose at (202) 551-3440 or at https://www.sec.gov/forms/corp_fin_interpretive.

Questions on other Commission regulatory matters involving smaller reporting companies may be directed to the Division of Corporation Finance’s Office of Small Business Policy at (202) 551-3460.

[*]This guide, dated as of October 11, 2022, was prepared by the staff of the Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. This guide summarizes and explains amendments adopted by the Commission but it is not a substitute for the amendments themselves. Only the amendments can provide complete and definitive information regarding their requirements.