On Aug. 25, 2022, the Securities and Exchange Commission (SEC) adopted Release No. 34-95607 (Final Rule), amending Item 402 of Regulation S-K to include a pay versus performance disclosure requirement. The amendment was initially proposed in 2015 following a mandate in the Dodd-Frank Act requiring registrants to disclose information on the relationship between their financial performance and amount of executive compensation paid.
The Final Rule will apply to all reporting companies, except foreign private issuers, registered investment companies, and emerging growth companies. Smaller reporting companies (SRCs) will be permitted to provide scaled disclosures.
Registrants must begin to comply with these disclosure requirements in any proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after Dec. 16, 2022. Registrants, other than SRCs, will be 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 will initially be required to provide the information for two years, adding an additional year of disclosure in the subsequent annual proxy or information statement that requires this disclosure.
For each of the five most recently completed fiscal years or, for SRCs, the three most recently completed fiscal years, covered reporting companies must disclose the following. Note: SRCs are subject to abridged reporting requirements under the new rule, and as such, are not required to provide some of the disclosures listed below. Disclosures not required of SRCs are denoted below with an asterisk.
Using the data provided above, for the five most recently completed fiscal years, registrants are required to provide clear descriptions of the relationships between the following. Note: SRCs will only be required to present such descriptions with respect to the measures they are required to include:
The Final Rule requires that covered companies provide executive compensation and financial performance data in table format, as depicted below. Note: SRCs are not required to include those items marked with an asterisk. Both company TSR (column f) and peer group TSR (column g) should be calculated based on a fixed investment of $100 at the measurement point.
Under the Final Rule, covered companies have flexibility as to the format in which to present the descriptions of these relationships, whether graphical, narrative or a combination of the two. Companies also have the flexibility to decide whether to group any of these relationship disclosures together when presenting their clear description disclosure, but any combined description of multiple relationships must be made clear.
All covered companies, except SRCs, must use Inline XBRL to tag the pay versus performance disclosure in their initial year. SRCs will only be required to provide the required Inline XBRL data beginning in the third filing in which it provides pay versus performance disclosure, instead of the first.
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 Under the Final Rules, compensation “actually paid” is calculated for a given fiscal year by adjusting the officer’s total compensation, as reported in the SCT, for certain amounts relating to defined benefit pension plans and equity awards. Note: SRCs are not required to disclose amounts related to pensions for purposes of disclosing compensation actually paid.
 According to the Final Rules and SEC comments, both the company cumulative TSR and peer group cumulative TSR measurements should be calculated for in the same cumulative manner as calculated under Item 201(e) of Regulation S-K for the performance graph. Both company cumulative TSR and peer group cumulative TSR should be calculated based on a fixed investment of $100 at the measurement point.