Although 12 years in the making, the SEC’s final “Pay Versus Performance” rules have arrived, and most companies will need to comply beginning with the 2023 proxy. The first year of the new disclosure has put organizations who provide annual equity awards in a “scramble” because of the numerous retroactive valuations that must be performed. Compensation consultants, equity solution firms and corporate governance experts have all weighed in with guidance. We have consolidated some of the thought leadership put forth this week:
- Equity Methods recommends companies complete a full pay versus performance (PvP) table mock-up right away and discussed the complexity of the equity award valuations that go into the compensation actually paid columns of the PvP table in a recent blog. They used a case study depicting a single RSU award to a single NEO over the five-year disclosure period to demonstrate the “mental and calculation gymnastics.” The process will be further complicated by several factors such as NEO changes, graded vesting schedules, off-cycle awards, forfeitures and dividends.
- Willis Towers Watson has also issued valuation guidance, focusing on stock options using either the Black Scholes or lattice model and relative TSR awards that use the Monte Carlo model. They recommend management determine which model they will use and decide if they have the in-house resources or if the work will need to be outsourced.
- Agenda published an article focused on what board members should be asking at the fall board meetings. Discussions around peer group recommendations and the company selected metrics should take place and directors will be asking to see the 2020 and 2021 PvP mock-ups so they can “pressure test” if pay and performance look aligned – or not – and how the narrative should be explained.
The Center published its own Guide to help Center members negotiate not only the technical aspects of the rule but the potential external ramifications of the disclosure. We will discuss the Guide and other aspects of the rule in our webinar next month.