Center Survey Explores Company Approaches to Pay for Performance Disclosures

The Center recently conducted a survey on how employers intend to comply with the new Pay Versus Performance regulations. The survey was conducted from October 19 – November 3, 2022. In total, 68 members provided responses. A summary of the results is outlined below and comprehensive results can be found here. We will rerun this survey early next year to see how thinking evolves.

Peer Group Selection

• 54% of respondents intend to select a “line of business or industry index” as required by item 201e of Regulation SK in the 10-K report.
  
  
• 22% reported they intend to use the peer group disclosed in the CD&A for compensation benchmarking purposes.

Company-Selected Metric

• In addition to TSR, peer TSR and Net Income, companies are required to select the single “most important” financial metric for linking pay and performance.
  
  
  1. 28% of respondents are leaning toward a metric from the long-term incentive plan
     
     
  2. 22% are leaning toward a metric from the annual plan
     
     
  3. 19% expect to use a metric from both the annual and long-term incentive plan
     
     

Tabular List of Metrics

• The new rule requires a list of the 3-7 most important financial metrics used to link pay and performance. Most respondents indicated they expect to use the minimum of three metrics (57%).

Description of Relationships

• The performance relationship can be shown using graphs, narrative or a combination of the two.
  
  
  1. 62% companies plan to use both graphs and narrative.

Disclosure Location

• The rule stipulates that the disclosure must go in the proxy, but not necessarily in the CD&A.
  
  
  1. 67% of respondents expect disclosures to be located at the end of the proxy (near Pay Ratio)
     
     
  2. 11% expect to locate disclosures with pay tables just after the CD&A

Equity Valuations

• The new table will require multiple equity valuations per vesting date and type of equity. Respondents reported varying estimates for the number of required valuations, likely based on their use of stock options.
  
  
• Of those that use stock options, 50% anticipate using the Black-Scholes valuation method to calculate year-end values; 15% plan to use the lattice model.
  
  
• 83% of respondents plan to outsource the equity valuation calculations.

Preparing The Committee

• Companies will need to provide Compensation Committees with a mock-up of the disclosure soon in order to leave enough time for a 2023 disclosure. 63% of respondents plan to do so in the November-December meeting; 11% in January and 18% in February.

Thanks to all who participated. If you have any questions or would like to request a survey, please contact Megan Wolf at [email protected].