On April 29, 2015, the Securities and Exchange Commission (SEC) proposed rules that would require public companies to disclose the relationship between executive compensation and the company’s financial performance. The rules would apply to public companies other than emerging growth companies, foreign private issuers, and registered investment companies, and the disclosure would be required in proxy statements or information statements in which disclosure of executive compensation currently must be included under Item 402 of Regulation S-K.
The rules were proposed in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act mandate that the SEC adopt rules requiring companies to disclose the relationship between their performance and executive compensation.
The disclosure required under the proposed rules would consist of two elements: (1) a table covering the five most recently completed fiscal years (three years in the case of smaller reporting companies) that will include specified information, as explained below, and (2) a clear description, using the information in the table, of the relationship between executive compensation “actually” paid and the company’s cumulative total shareholder return (TSR).
The New Table
The new table would use the following format, covering the five most recently completed fiscal years (three years in the case of smaller reporting companies):
Pay Versus Performance
Summary Compensation Table Compensation. The summary compensation table total compensation column for the principal executive officer would be based on the same column in the existing summary compensation table. For the other named executive officers (NEOs), the column would be the average of the values in the summary compensation table.
Compensation Actually Paid. The “Compensation Actually Paid” column would be modified from summary compensation table total compensation as follows:
Total Shareholder Return. The company’s TSR would need to be calculated on a basis similar to that used to calculate the performance graph required in the annual report under Item 201(e) of Regulation S-K. The peer group TSR would need to be calculated using either the peer group used for the performance graph or, at the company’s election, its peer group as disclosed in the Compensation Discussion and Analysis section, if it has such a peer group. Smaller reporting companies would not be required to present a peer group TSR.
XBRL Formatting Required. Each amount in the table would need to be electronically formatted and tagged using eXtensible Business Reporting Language (XBRL). Currently, no other proxy statement disclosures are required to be formatted for XBRL.
In addition to the table described above, the proposed rules would require a “clear description,” using the information in the table, of the relationship between executive compensation actually paid and the company’s cumulative TSR for each of the last five years (three in the case of smaller reporting companies). For companies other than smaller reporting companies, the description would also need to include a comparison of the cumulative TSR of the company and the TSR of its peer group over the same period.
The proposed rules would not mandate that the description use any specific format, but the proposing release suggests that it could be presented in narrative, a graphic, or a combination of the two. The release also indicates that the presentation should be consistent with plain English principles.
The description would need to be block formatted for XBRL.
Neither the table nor the additional description would be incorporated by reference into any securities filings of the company unless the company specifically incorporated them.
The comment period for the proposed rules will run for 60 days after the rules are published in the Federal Register.
The SEC has not indicated the expected timing of final rules. In particular, it has not yet ruled out the potential for final rules to be adopted in time for the disclosure to be required in 2016 proxy statements, so that remains a possibility.
The rules would provide for transition relief under which companies other than smaller reporting companies could initially provide disclosure for only three years, adding an additional year over the next two years until the full five years of disclosure is provided. For smaller reporting companies, only two years of disclosure would need to be included in the first year, followed by three years of disclosure in the second year. Smaller reporting companies also would not be required to comply with the XBRL tagging requirement until the third year.
New reporting companies would initially be required to provide only one year of disclosure and would add an additional year of disclosure each year until reaching the full five years of disclosure.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss the topic further, please contact your Foley attorney or the following:
Joshua A. Agen
Mark T. Plichta
Leigh C. Riley