A mere 12 years after they were mandated by Dodd-Frank, the SEC adopted so-called “pay versus performance” rules on August 25, 2022. The rules require companies to provide a new table in their proxy or information statements, disclosing certain specified executive compensation and financial performance measures for the five most recently completed fiscal years (subject to a phase-in period). Smaller reporting companies (“SRCs”) will be subject to a scaled-down version of the rule, and emerging growth companies, registered investment companies and foreign private issuers are exempt from the new disclosure requirements.

The table must include the following, for each of the years covered by the table:

• The total compensation (taken from the Summary Compensation Table) and compensation actually paid (which, per the rules, includes adjustments for pension benefits and equity awards) to the principal executive officer (“PEO”);
• An average of total compensation (taken from the Summary Compensation Table) and average of total compensation actually paid (adjusted in the same manner as the PEO), to the other named executive officers (“NEOs”);
• The registrant’s total share return (“TSR”);
• TSR for the registrant’s peer group;
• The registrant’s net income; and
• The amount of compensation attributable to an additional financial performance measure (the “Company-Selected Measure”) chosen by and specific to the registrant, that, in the registrant’s assessment, represents the most important link between the financial performance measure used by the registrant’s NEOs (including the PEO) compensation purposes, on the one hand, and the company’s performance, on the other hand.

Companies will also be required to clearly describe the following: 

1. The relationships between each of the financial performance measures included in the table and the compensation actually paid to its PEO and, on average, to its other NEOs, over the five most recently completed fiscal years; and 
2. The relationship between the registrant’s TRS and the TSR of its peer group.

Companies must also include a list of three to seven financial performance measures the company considers to be the most important measures to link to executive compensation actually paid. Non-financial measures can be included if the company deems them to be among the most important. One of these measures must be the Company-Selected Measure that is used in the new table. 

Registrants will also be required to use Inline XBRL to tag their pay versus performance disclosure.

The new rules are effective for fiscal years beginning after December 16, 2022 but allow for a transition period in which companies can initially provide three years of historical information, with an additional year added in its two subsequent proxy statements. SRCs begin with two years in their first proxy statement, with three (rather than five) years thereafter. The effective date means that, for many companies, disclosure will be required in the 2023 proxy statement.