KMK Law Corporate & Securities Blog

On April 29, 2015, the U.S. Securities and Exchange Commission (“SEC”) approved the issuance of proposed rules to implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), regarding the disclosure of pay versus performance. The proposed rules would require reporting issuers to disclose the relationship between named executive officer “actual” pay and the issuer’s and its peer’s total shareholder return (“TSR”). Once implemented, the rule would require disclosure in proxy statements and consent solicitations in which compensation disclosure is required. Foreign private issuers, registered investment companies and emerging growth companies will be exempted from the proposed disclosure.

According to the proposed rules, a new tabular disclosure will be required that contains executive compensation disclosures including the following: (A) the CEO’s total compensation and the average of the other named executive officer’s total compensation as reported in the summary compensation table; (B) the CEO’s “actual” pay and the average of the other named executive officers’ “actual” pay; and (C) the issuer’s and its peers’ annual TSR, using the definition of TSR from Item 201(e) of Regulation S-K and using the peer group from either the Item 201(e) performance graph or reported in the compensation discussion and analysis.

To determine the “actual” pay, the company will start with the total amount reported in the summary compensation table with the following adjustments: (A) equity awards will be considered actually paid on the date of vesting and at fair value on that date, rather than fair value on the grant date as required in the summary compensation table; and (B) change in pension value will excluded and replaced with an actuarially determined service cost (although this is not required for smaller reporting companies).

The disclosure will cover the last five fiscal years, but smaller reporting companies will only be required to show the last three fiscal years and will not be required to disclose peer group TSR information.

The proposed rules will require the issuer to describe, using the information identified in the new table, the relationship between executive compensation actually paid and the issuer’s TSR, and the relationship between the issuer’s TSR and the TSR of its selected peer group. This disclosure may be accomplished through narrative or graphical disclosure, or a combination of the two. In addition, the disclosure will be required to be tagged in an interactive data format using XBRL, which would be the first table in a proxy statement required to be in XBRL format.

A phase-in period of the requirements has been proposed. For issuers other than smaller reporting companies, the proposed rules will be phased in over three years with three years of disclosure initially required and five years of disclosure eventually required. Smaller reporting companies will initially be required to disclose two years of information and three years of information thereafter.

The proposed rules are subject to comment for 60 days after publication in the Federal Register. We will continue to provide updates as appropriate on the proposed rules and their affect on issuers.