SEC Releases More Guidance on Pay Versus Performance

If you found the SEC’s latest batch of Compliance & Disclosure Interpretations (C&DIs) on Pay Versus Performance confusing, you weren’t alone! The agency’s second barrage of interpretations to date was unusually complicated; Equity Methods provides a line-by-line review with the practical implications (or lack thereof) for each interpretation. The most important ones are below:

• Is an award considered “vested” once the holder reaches retirement eligibility? Surprisingly, the answer to this is yes. The SEC took the position that once an executive reaches retirement eligibility, the risk of forfeiture lapses and the award must be treated as vested in the table. This means that for the same grant, executives may have differing vesting dates, leading to misleading differences in “Compensation Actually Paid.” It also means less comparability between companies who have retirement eligibility provisions and those who do not.
  
  
•  Can options be valued using “simplifying methods” such as companies sometimes use? No, and the SEC specifically calls out as unacceptable the “elapsed term method” where a company simply starts with the expected term of the option assumed at grant and subtracts the number of years that have passed since then. 
  
  
• Can we skip the required footnotes on performance assumptions that go into equity valuations, since they would create competitive harm? Yes! However, the SEC qualifies this by saying companies must provide as much information as possible without creating harm, such as ranges of outcomes and a discussion of how the change in assumption affects the likelihood of achieving target. Equity Methods points out that since only 5% of companies even bothered to provide footnotes containing valuation assumptions, the SEC may be telegraphing a stricter view for next year.

SEC Comment Letters on 2023 Disclosures. Equity Methods also provided a helpful analysis of 17 comment letters sent out by the SEC to companies this summer asking about disclosures. The most common concerns were:

• Calculation. As expected, the SEC came after companies that used a broad market index for their peer group rather than either a) the compensation peer group or b) the industry index used in the 10-K.
  
  
• Disclosure. The SEC called out incomplete reconciliation of equity awards, pension costs, or otherwise omitting a required disclosure component.
  
  
• Presentation. The SEC was surprisingly focused on minor presentation problems like incorrect table headers or descriptions.