SEC Drops Much-Needed Guidance on PvP Disclosure

In an unexpected after-hours release last night, the SEC finally published Compliance and Disclosure Interpretations (CDIs) on the new Pay Versus Performance rules. With most companies rushing to model and finalize the disclosures before proxies are filed, the CDIs are critical and should be carefully reviewed with internal counsel and outside advisors as soon as possible in case changes are needed.

Here are some highlights of the most relevant interpretations - a keyword search on “Item 402(v)” will bring the full list up.

First-Time NEO.  The CDIs state that equity awards granted to a first-time NEO in a year prior to their appointment as NEO must be included, even though they are not required to be included in the Summary Compensation Table. "The change in value of such awards during the executive’s tenure as a NEO should be included in the calculation of compensation actually paid."

Peer Groups. The CDIs confirm that companies may use any peer group disclosed in the CD&A as "a peer group actually used by the registrant to help determine executive pay, even if such peer group is not used for “benchmarking.” However, it is still unclear whether this would include peer groups used solely for the purpose of determining relative TSR payouts.

Company-Selected Measure. Companies have raised several questions regarding how the CSM is to be determined. According to the CDIs, the CSM can be a measure derived from or similar to existing measures in the table, such as earnings per share, gross profit, income or loss from continuing operations, or relative total shareholder return. However, the CSM cannot be the company's stock price. The SEC notes that "if the only impact of stock price...is through changes in the value of share-based awards (which would be evident from the registrant’s Summary Compensation Table disclosure), the registrant could not include its stock price as the Company-Selected measure. However, if, for example, the registrant’s stock price is a market condition applicable to an incentive plan award, or is used to determine the size of a bonus pool, it may be included..."

The SEC further stipulates that the CSM cannot be measured over a multi-year period (as with three-year relative TSR) but must be the most important financial measure used to link pay to performance over the most recent fiscal year. The implication seems to be that companies would be safer selecting an annual plan measure, although this is not stated outright.

The above is just a sampling of the items covered in the CDIs. We will review them fully and provide further detail as needed.