Among a cavalcade of resources and articles published by compensation consultants regarding the recently finalized Pay Versus Performance rules, Pay Governance’s new “Illustrative Disclosure for the SEC's New PVP Rules” provides some concrete examples of what the disclosure could look like.
The illustration takes a comprehensive approach to disclosure, understanding that companies will decide for themselves whether a more conservative approach is appropriate in year one given the newness of the rule. The model is based on a hypothetical company whose 3-year cumulative TSR is lower than peers, but whose 6-year TSR far outperforms peers. Highlights of the model are below:
- Supplemental TSR Column. Pay Governance supplements the required table with a column called “Supplemental: 3-Year Cumulative TSR.” This column would provide the same TSR value as is used in the 3-year TSR plan of the hypothetical company, versus the mandatory “cumulative TSR” column that all companies are required to provide. The benefit of this is that it tracks much more closely with pay.
- Supplemental Equity Footnote. This provides a breakdown of equity awards by type, so that it is clearer what is driving the changes from Summary Compensation Table pay.
- Supplemental Graphs. The Company vs. Peer Group TSR chart is supplemented with 6-year TSR to show long-term outperformance.
- Sample Charts. The Pay Governance example provides a separate chart for each relationship (pay vs TSR, pay vs net income, etc.) and describes why the elements are or aren’t aligned. For example, the chart notes that net income increases steadily while pay varies, and “the Company does not use net income to determine compensation levels or incentive plan payouts.”
- Comparing Forms of Pay. Another option is to include a chart comparing the new definition of pay, “Compensation Actually Paid,” with Summary Compensation Table pay to drive home the significant differences between the two.
The Center recently sent out a survey to Center survey takers (those whom we have tagged as the appropriate contact to receive Center surveys) on how companies are considering various factors within the disclosure. If you received the survey and haven’t taken it yet, please do so! There is still time. In addition, here is the Center’s comprehensive guide to the decisions the Compensation Committee will need to make on the disclosure.