Regulatory Compliance Update SEC Adopts Final Pay Vs. Performance Executive Compensation Rules

The U.S. Securities and Exchange Commission (the “SEC”), after over a decade, adopted final rules in August regarding executive compensation disclosures to implement the pay-versus-performance rule required under the 2010 Dodd-Frank Act.

Under the rules, publicly traded companies will now be required to disclose information reflecting the relationship between executive compensation the company pays to certain executives and the company’s performance, in essence having to justify compensation paid. The rules require publicly traded companies to disclose additional details about their executive compensation policies and how senior executives are compensated, including the payment of performance bonuses and reasoning therefor.

New Requirements

The rules add a new Item 402(v) to Regulation S-K, which requires companies to provide a “Pay Versus Performance Table” disclosing specified executive compensation and financial performance measures for the past five (5) most recently completed fiscal years.  The item requires companies to include in such Table the measure used in the Summary Compensation Table for total compensation and a measure reflecting executive compensation actually paid for the principal executive officer and, as an average, for the other named executive officers.

With respect to the measures of performance, a company subject to the new rule will be required to report total shareholder return (“TSR”), the TSR of companies in the company’s peer group, the company’s net income and a financial performance measure, which is chosen by the company.  Using the information presented in the table, companies must provide a narrative, graphical, or combined narrative and graphical description of the relationships between the executive compensation actually paid by the company and each of the performance measures, as well as the relationship between the company’s TSR and the TSR of its selected peer group.

In addition, companies subject to the rule will be required to provide a list of three (3) to seven (7) financial performance measures that the company believes are the most important performance measures to consider for linking executive compensation actually paid to executives to the company’s performance. Companies may also, although are not required to do so, include non-financial measures in such list if the company considers such measures to be among the three (3) to seven (7) “most important” measures.

The rules apply to all reporting companies, with the exception of foreign private issuers, registered investment companies, and Emerging Growth Companies. Smaller Reporting Companies are permitted to provide scaled disclosures.

Deadline for Compliance

Companies must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 - Executive Compensation disclosures for fiscal years ending on or after Dec. 16, 2022.

Jennifer L. DiBella is a Shareholder in UKS’ Hartford office, practicing in the areas of Financial Institutions and Transactions, Securities, Commercial Lending and General Corporate Law.  She can be reached at jdibella@uks.com or 860.548.2630.