Pay versus Performance Disclosures: A Snapshot

Scaled Disclosures Applicable to Smaller Reporting Companies

SRCs may omit the following pay versus performance disclosures:

• Defined benefit and actuarial pension plan costs from the determination of compensation actually paid, which is consistent with the SCT disclosure requirements (S-K Item 402(c)) that do not require SRCs to calculate the actuarial change in pension value
• Peer group TSR and related discussion on the relationship to the company’s TSR
• Company-Selected Measure and related discussion on the relationship to compensation actually paid
• Tabular list of three to seven financial performance measures that they believe to be the “most important” to link executive compensation actually paid to the performance of the company for the most recently completed fiscal year

Additionally, SRCs may provide three fiscal years, rather than five, and two fiscal years, rather than three, in the first proxy or information statement that requires compliance. Further, SRCs are not required to comply with Inline XBRL requirements until the third filing disclosing pay versus performance.

Compensation “Actually Paid”

Compensation “actually paid” is determined by adjusting the “Total” column in the SCT for the following:

• Defined benefit and actuarial pension plans (not required for SRCs):
  • Add:
    • Actuarial “service cost” for services rendered during the fiscal year
    • “Prior service cost,” as determined in accordance with U.S. GAAP, of benefits granted during the fiscal year, whether by amendment or initiation of a plan, for services rendered in prior fiscal years
  • Deduct:
    • The increase in the actuarial present value from prior fiscal year⁵
      
• Equity awards: The fair value (FV) of equity-based awards is determined using the methodologies and assumptions required by U.S. GAAP. Examples of methodologies that are inconsistent with U.S. GAAP include using an expected term that:
  • Subtracts the elapsed life of the award from the expected term at the grant data
  • Is based on the “simplified” method  for awards that are not “plain vanilla” (such as for out-of-the-money awards at the valuation date) 

The following adjustments are required for equity-based awards:

• Add:
  • For awards granted during the fiscal year, FV of the following:
    • Outstanding and unvested awards as of the end of the fiscal year
    • Vested awards, as of the vesting date
  • For awards granted in prior fiscal years, the change in FV of the following:
    • Outstanding and unvested awards from the end of the prior fiscal year
    • Vested awards from the end of the prior fiscal year to the vesting date
  • The dollar value of any dividends (or dividend equivalents) or other earnings paid on unvested awards during the fiscal year that are not otherwise reflected in the FV of the award or in any other component of total compensation 
    • Dividends to be paid at a future date are excluded from the compensation actually paid as the FV of the award reflects that expectation.
    • Dividends that have been paid are included in compensation actually paid (separate from the FV of the equity award) when the FV of the award no longer reflects the expectation of paying that dividend.
• Deduct:
  • The FV, as of the end of the prior fiscal year, of awards granted in prior fiscal years that do not meet vesting conditions (awards forfeited) during the current fiscal year 
    • Awards that vest based on performance or market conditions are not deducted until the award is forfeited, even if the condition is not met during the fiscal year. 
  • The equity award amounts presented in the SCT (“Stock awards” and “Option awards”)

Required Disclosures

Footnote disclosure for each adjustment in the compensation actually paid calculation is required for each fiscal year presented in the table in the year the pay versus performance disclosures are first provided (a registrant may not aggregate equity award adjustments and pension value adjustments for disclosure). Footnote disclosure for adjustments made in later years is only required if the information is material to an investor’s understanding of the information presented.

Additionally, footnote disclosure is required when valuation assumptions used to calculate compensation actually paid materially differ from the assumptions used to determine the grant date FV of the award. To determine if assumptions materially differ, a registrant must consider whether applying the updated assumptions would result in a material change from the FV of the award on the grant date. When footnote disclosure is required, it may be appropriate to disclose the range of assumptions or the weighted average assumptions and include a discussion of the effect of the performance condition (if any) on the FV. Disclosure of quantitative or qualitative performance conditions that subject a registrant to competitive harm may be omitted. ⁷

Transition

Registrants are required to provide the pay versus performance disclosures for the five most recently completed fiscal years (three years for SRCs) after a transition period. Certain disclosure relief is available for registrants that lose SRC or EGC status in their most recent fiscal year.

Transition Period

The transition period allows registrants to disclose the following:

• Three years of information (two for SRCs) in the first proxy or information statement that requires compliance with S-K Item 402(v)
• Another year of information in each of the next two annual proxy or information statement filings (next year’s annual proxy filing for SRCs)

Newly public companies may provide the disclosures for the most recently completed fiscal year in their first proxy or information statement and add another year of information in future filings until all required years are presented.

The following table summarizes how many fiscal years of information are required to be presented, depending on the transition year and the status of the registrant:

_{(a) Excludes SRCs, newly public companies and those exempt from compliance with the rule.}

_{(b) Excludes emerging growth companies.}

_{(c) SRCs are not required to provide more than three years of information.}

Loss of SRC Status

Registrants may forward incorporate Part III information into their Form 10-K from their definitive proxy statement filed within 120 days of year-end. If the registrant’s Form 10-K for the fiscal year in which it loses SRC status forward incorporates Part III information from its definitive proxy statement, the SEC staff will not object to the registrant’s use of SRC scaled pay versus performance disclosures in that definitive proxy statement. Subsequent proxy or information statements must comply with non-scaled disclosures, except:

• There is no requirement to revise prior year disclosure to conform to non-SRC status
• Each year presented should include:
  • Peer group TSR, as it is calculated cumulatively
  • The numerically quantifiable performance under the Company-Selected Measure 
• The SEC staff will not object if a registrant does not present a year prior to those included in the registrant’s first filing requiring pay versus performance disclosures

Loss of EGC Status

A registrant that loses its EGC status must comply with pay versus performance disclosures in its first proxy or information statement filed following the loss of status. Registrants may follow the transition period relief and provide three years of information, rather than five (two, rather than three, if the registrant is a SRC).