# Conformed to Federal Register version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A69ccf1ccb40fa253 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register version SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 232, and 240 [Release Nos. 34-95607; File No. S7-07-15] RIN 3235-AL00 Pay Versus Performance AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting amendments to implement Section 14(i) (“Section 14(i)”) of the Securities Exchange Act of 1934 (“Exchange Act”), as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Section 14(i) directs the Commission to adopt rules requiring registrants to provide disclosure of pay versus performance. The disclosure is required in proxy or information statements in which executive compensation disclosure is required. The disclosure requirements do not apply to emerging growth companies, registered investment companies, or foreign private issuers. DATES: Effective date: This final rule is effective on October 11, 2022. Compliance date: Companies (other than emerging growth companies, registered investment companies, or foreign private issuers) must begin to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 of Regulation S-K (as defined below) disclosure for fiscal years ending on or after December 16, 2022. FOR FURTHER INFORMATION CONTACT: John Byrne, Special Counsel, Office of Small Business Policy, at (202) 551-3460, Division of Corporation Finance. 1 SUPPLEMENTARY INFORMATION: The Commission is adopting an amendment to add new paragraph (v) to 17 CFR 229.402 (“Item 402 of Regulation S-K”); and amending 17 CFR 232.405 (“Item 405 of Regulation S-T”), 17 CFR 240.14a-101 (“Schedule 14A”), and 17 CFR 240.14c-101 (“Schedule 14C”), each under the Exchange Act. Table of Contents I. INTRODUCTION ............................................................................................................5 A. Background .....................................................................................................................5 B. Overview of Final Amendments ...................................................................................10 II. DISCUSSION OF FINAL AMENDMENTS ................................................................14 A. New Item 402(v) of Regulation S-K .............................................................................14 1. Application and Operation of Item 402(v) of Regulation S-K ......................................14 i. Proposed Amendments .............................................................................................. 14 ii. Comments .................................................................................................................. 15 iii. Final Amendments ................................................................................................... 16 2. Format and Location of Disclosure ...............................................................................16 i. Proposed Amendments .............................................................................................. 16 ii. Comments .................................................................................................................. 19 iii. Final Amendments ................................................................................................... 24 B. Executives Covered .......................................................................................................29 1. Proposed Amendments ..................................................................................................29 2. Comments ......................................................................................................................30 3. Final Amendments ........................................................................................................32 C. Determination of Executive Compensation Actually Paid............................................36 1. Deduction of Change in Actuarial Present Value and Addition of Actuarially Determined Service Cost and Prior Service Cost ..............................................................38 i. Proposed Amendments .............................................................................................. 38 ii. Comments .................................................................................................................. 39 iii. Final Amendments ................................................................................................... 42 2. Inclusion of Above-Market or Preferential Earnings on Deferred Compensation That Is Not Tax Qualified ..........................................................................................................48 i. Proposed Amendments .............................................................................................. 48 2 ii. Comments .................................................................................................................. 48 iii. Final Amendments ................................................................................................... 48 3. Equity Awards ...............................................................................................................49 i. Proposed Amendments .............................................................................................. 49 ii. Comments .................................................................................................................. 51 iii. Final Amendments ................................................................................................... 56 D. Measures of Performance ..............................................................................................65 1. Requirement to Disclose TSR and Peer Group TSR .....................................................65 i. Proposed Amendments .............................................................................................. 65 ii. Comments .................................................................................................................. 66 iii. Final Amendments ................................................................................................... 72 2. Requirement to Disclose Net Income ............................................................................77 i. Amendments Considered in the Reopening Release ................................................. 77 ii. Comments .................................................................................................................. 77 iii. Final Amendments ................................................................................................... 79 3. Tabular List of the Registrant’s “Most Important” Performance Measures .................81 i. Amendments Considered in the Reopening Release ................................................. 81 ii. Comments .................................................................................................................. 82 iii. Final Amendments ................................................................................................... 85 4. Requirement to Disclose a Company-Selected Measure ..............................................91 i. Amendments Considered in the Reopening Release ................................................. 91 ii. Comments .................................................................................................................. 91 iii. Final Amendments ................................................................................................... 94 E. Time Period Covered.....................................................................................................99 1. Proposed Amendments ..................................................................................................99 2. Comments ....................................................................................................................100 3. Final Amendments ......................................................................................................101 F. Permitted Additional Pay-Versus-Performance Disclosure ........................................103 1. Proposed Amendments ................................................................................................103 2. Comments ....................................................................................................................104 3. Final Amendments ......................................................................................................104 G. Required Disclosure for Smaller Reporting Companies .............................................105 1. Proposed Amendments ................................................................................................105 2. Comments ....................................................................................................................106 3 3. Final Amendments ......................................................................................................107 III. OTHER MATTERS .....................................................................................................108 IV. COMPLIANCE DATES ..............................................................................................108 V. ECONOMIC ANALYSIS ............................................................................................109 A. Background .................................................................................................................109 B. Baseline .......................................................................................................................112 1. Affected Parties ...........................................................................................................112 2. Existing Disclosures and Analyses..............................................................................113 3. Executive Compensation Practices .............................................................................125 C. Discussion of Economic Effects..................................................................................135 1. Introduction .................................................................................................................136 2. Benefits ........................................................................................................................139 3. Costs ............................................................................................................................156 4. Implementation Alternatives .......................................................................................168 i. Registrants and Filings Subject to the Disclosure Requirement .............................. 168 ii. General Disclosure Requirements ........................................................................... 172 iii. Compensation Measures ........................................................................................ 180 iv. Performance Measures .......................................................................................... 191 VI. PAPERWORK REDUCTION ACT ............................................................................196 A. Background .................................................................................................................196 B. Summary of Comment Letters and Revisions to PRA Estimates ...............................197 C. Summary of Collection of Information Requirements ................................................198 D. Incremental and Aggregate Burden and Cost Estimates for the Final Amendments ..204 VII. FINAL REGULATORY FLEXIBILITY ANALYSIS ................................................207 A. Need For, and Objectives of, the Final Rules..............................................................208 B. Significant Issues Raised by Public Comments ..........................................................209 C. Small Entities Subject to the Final Amendments ........................................................210 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements .............211 E. Agency Action to Minimize Effect on Small Entities .................................................212 STATUTORY AUTHORITY AND TEXT OF AMENDMENTS .........................................214 4 I. INTRODUCTION A. Background Section 953(a) of the Dodd-Frank Act 1 (“Section 953(a)”) added Section 14(i) 2 to the Exchange Act. 3 Section 14(i) mandates that the Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders of the issuer a clear description of any compensation required to be disclosed by the issuer under Item 402 of Regulation S-K (or any successor thereto), including, for any issuer other than an emerging growth company, information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. Section 14(i) also states that an issuer may include a graphic representation of the information required to be disclosed. As a part of the Dodd-Frank Act legislative process, in a 2010 report, the Senate Committee on Banking, Housing and Urban Affairs stated that the disclosure required under Section 14(i) “may take many forms.” 4 In addition, the report indicated that the relationship between executive pay and performance has become a “significant concern of shareholders,” 1 Pub. L. 111-203, 124 Stat. 1376 (2010). 2 15 U.S.C. 78n(i). 3 15 U.S.C. 78a et seq. Subsequent to the addition of Section 14(i) to the Exchange Act, Section 102(a)(2) of the Jumpstart Our Business Startups Act amended Section 14(i) to exclude registrants that are “emerging growth companies” from the pay-versus-performance disclosure requirements. Pub. L. 112-106, 126 Stat. 306 (2012). 4 Report of the Senate Committee on Banking, Housing and Urban Affairs to accompany S. 3217, S. REP. NO. 111-176, at 135 (2010) (“Senate Report”). The report stated with respect to Section 953(a): “This disclosure about the relationship between executive compensation and the financial performance of the issuer may include a clear graphic comparison of the amount of executive compensation and the financial performance of the issuer or return to investors and may take many forms.” 5 and that the required disclosure should “add to corporate responsibility,” as registrants will be required to provide clearer executive pay disclosures. 5 In 2015, the Commission proposed a new rule to implement Section 953(a) by creating a new requirement in Item 402 of Regulation S-K. The proposed new item would require a registrant to provide a clear description of (1) the relationship between executive compensation actually paid to the registrant’s named executive officers (“NEOs”) (including the registrant’s principal executive officer (or persons acting in a similar capacity during the last completed fiscal year) (“PEO”)) and the cumulative total shareholder return (“TSR”) of the registrant, and (2) the relationship between the registrant’s TSR and the TSR of a peer group chosen by the registrant, over each of the registrant’s five most recently completed fiscal years. 6 The comment period for the Proposing Release was reopened in 2022 to permit commenters to further analyze and comment upon the proposed rules in light of developments since the publication of the Proposing Release and our further consideration of the Section 953(a) mandate. 7 In the Reopening Release, we stated that we were considering, and requested public comment on, certain additional disclosure requirements that may better implement the Section 953(a) mandate by providing investors with additional decision-relevant data. 8 5 Id. 6 See Pay Versus Performance, Release No. 34-74835 (Apr. 29, 2015) [80 FR 26329 (May 7, 2015)] (“Proposing Release”). 7 This reopening of the comment period was set out in Reopening of Comment Period for Pay Versus Performance Release No. 34-94074 (Jan. 27, 2022) [87 FR 5939 (Feb. 2, 2022)] (“Reopening Release”). 8 A comment letter from two members of Congress raised concerns about the Reopening Release. See letter from Sen. Pat Toomey and Sen. Richard Shelby, dated Feb. 1, 2022 (“Toomey/Shelby”). Specifically, the letter criticized the Commission for reopening the comment period on the Proposing Release and seeking comment on a number of regulatory alternatives without updating the cost-benefit analysis and analysis required by the Paperwork Reduction Act and the Regulatory Flexibility Act. The letter asserted that the approach taken in the Reopening Release significantly impaired the public’s ability to comment thoughtfully on the proposals and was inconsistent with the Administrative Procedure Act. In response to these concerns, we note that the Reopening Release included a robust discussion of the additional disclosures under 6 We believe the disclosure mandated by Section 953(a) is intended to provide investors with more transparent, readily comparable, and understandable disclosure of a registrant’s executive compensation, so that they may better assess a registrant’s executive compensation program when making voting decisions, for example when exercising their rights to cast advisory votes on executive compensation under Exchange Act Section 14A or electing directors. 9 This belief is supported by the fact that Section 953(a) was enacted contemporaneously with other executive compensation-related provisions in the Dodd-Frank Act that are “designed to address shareholder rights and executive compensation practices.” 10 These included Section 951 of the Dodd-Frank Act, which enacted new Exchange Act Section 14A, 11 and Section 953(b) of the Dodd-Frank Act. These provisions required, respectively, that, not less than every three years, a separate resolution be put to a non-binding shareholder vote to approve compensation of executives; 12and that registrants provide disclosure of the ratio of the consideration and solicited comment on specific aspects of those disclosures. The Reopening Release also discussed the potential benefits and costs of the additional disclosures, including their impact on efficiency, competition and capital formation. Finally, the Reopening Release discussed how the additional disclosures might affect smaller registrants and solicited comment on approaches that would minimize the impact on smaller registrants, such as exempting smaller reporting companies from certain aspects of the additional disclosures. Given the discussion included in the Proposing Release and subsequent Reopening Release, we believe the final rules satisfy the requirements of the Administrative Procedure Act and other applicable statutes. Moreover, we received numerous comments from members of the public on the additional disclosures described in the Reopening Release, including comments on the economic effects of the additional disclosure, and we have considered those comments in adopting the final rules and made certain changes in response. 9 See generally Proposing Release at Section I. 10 Dodd-Frank Act, H.R. Rep. 111-157, at 827 (2010). 11 15 U.S.C. 78n-1. 12 Pursuant to the mandate in Section 14A of the Exchange Act, we adopted rules requiring a shareholder advisory vote to approve the compensation of a registrant’s NEOs, as disclosed pursuant to Item 402 of Regulation S-K, at an annual or other meeting of shareholders at which directors will be elected and for which such executive compensation disclosure is required under Commission rules. See Shareholder Approval of Executive Compensation and Golden Parachute Compensation, Release No. 33-9178 (Jan. 25, 2011) [76 FR 6010] (Feb. 2, 2011). 7 median annual total compensation of employees to the annual total compensation of the chief executive officer. 13 We believe the disclosure mandated by Section 14(i) will allow investors to assess a registrant’s executive compensation actually paid relative to its financial performance more readily and at a lower cost than under the existing executive compensation disclosure regime. Under Item 402 of Regulation S-K, which specifies the information that must be included when the applicable form or schedule requires executive compensation disclosure, specific information regarding financial performance is already required, including in the Performance Graph in 17 CFR 229.201(e) (“Item 201(e) of Regulation S-K”), the Supplementary Financial Information in 17 CFR 229.302 (Item 302), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in 17 CFR 220.303 (Item 303). In addition, Item 402 of Regulation S-K also requires detailed disclosure of executive compensation and principles-based disclosure requirements regarding the relationship between pay and performance. 14 There is no single place, however, where issuers must provide investors with direct comparisons of an executive’s pay with their company’s performance, and specifically financial performance, particularly if investors are interested in that comparison over a timespan longer 13 In 2015, we adopted rules to implement Section 953(b) of the Dodd-Frank Act. See Pay Ratio Disclosure, Release No. 33-9877 (Aug. 5, 2015) [80 FR 50103] (Aug. 18, 2015). 14 The Compensation Discussion and Analysis (“CD&A”) required by 17 CFR 229.402(b) (“Item 402(b) of Regulation S-K”) requires registrants to provide an explanation of “all material elements of the registrant’s compensation of the named executive officers.” 17 CFR 229.402(b)(1). With respect to performance, Item 402(b)(2) of Regulation S-K includes non-exclusive examples of information that may be material, including (i) specific items of corporate performance taken into account in setting compensation policies and making compensation decisions; (ii) how specific forms of compensation are structured and implemented to reflect these items of the registrant’s performance; and (iii) how specific forms of compensation are structured and implemented to reflect the NEO’s individual performance and/or individual contribution to these items of the registrant’s performance. 17 CFR 229.402(b)(2)(v) through (vii). 8 than the most recent reporting period. Existing disclosures generally provide the necessary components to make these comparisons, including data required for calculations that aid in these comparisons, but doing so may be time-consuming and costly. We believe this information is important to investors in evaluating executive compensation, and that disclosures about executive compensation may be most meaningful to investors when placed in the context of the company’s financial performance. 15 Indeed, we are aware that certain third parties (e.g., proxy advisors or compensation consultants) perform such analyses and charge clients for access to the resulting data. 16 Requiring registrants to compute and report this information will make this information equally accessible to all investors in a consistent manner. By specifically referencing disclosure of “information that shows the relationship between executive compensation actually paid and … financial performance of the issuer,” Section 14(i) calls for information that will supplement management’s discussion of material elements of executive compensation in the CD&A. In addition, we believe this disclosure will provide investors with important and decision-useful information for comparison purposes in one place when they evaluate a registrant’s executive compensation practices and policies, including for purposes of the shareholder advisory vote on executive compensation, votes on other compensation matters, director elections, or when making investment decisions. 17 15 See infra Section V.C.2. 16 See infra Section V.B.2. 17 For example, academic researchers find that the salience and readability of disclosures about executive compensation affect say-on-pay votes. See, e.g., Danial Hemmings, Lynn Hodgkinson, & Gwion Williams, It’s OK to Pay Well, if You Write Well: The Effects of Remuneration Disclosure Readability, 47 J. BUS. FIN. & ACCOUNTING 547 (2020); and Reggy Hooghiemstra, Yu Flora Kuang, & Bo Qin, Does Obfuscating Excessive CEO Pay Work? The Influence of Remuneration Report Readability on Say-on-Pay Votes, 47 ACCOUNTING & BUS. RES. 695 (2017). 9 Section 14(i) did not expressly prescribe the manner in which issuers would disclose the required information and we have exercised our discretion to provide for a consistent format that we believe furthers the statutory objectives of making pay-versus-performance data clear and easy for investors to evaluate. Standardizing the format and presentation of data, in particular quantitative metrics, to promote such ease of use requires incremental costs for issuers. We have elected not to pursue a wholly principles-based approach because, among other reasons, such a route would limit comparability across issuers and within issuers’ filings over time, as well as increasing the possibility that some issuers would choose to report only the most favorable information. In addition, as we describe more extensively below, the final rules require that issuers calculate the value of certain equity and pension awards in more detail than would have been required in the proposed rule. These changes, in our view, will result in disclosures that more accurately represent the time when the awards change in value, which is important for investors to be able to assess whether such changes correspond to company performance over the appropriate time period. We received many comment letters in response to the Proposing Release and the Reopening Release. After taking into consideration these public comments, we are adopting the proposed rules, together with certain of the supplemental disclosure requirements considered in the Reopening Release, with some modifications to reflect public comment. As discussed in more detail below, the final rules require registrants to present disclosure that reflects the specific situation of the registrant with respect to pay-versus-performance, and while also providing pay-versus-performance disclosure that can be readily compared across registrants. B. Overview of Final Amendments The amendments add new 17 CFR 229.402(v) (“Item 402(v) of Regulation S-K”), which requires registrants to describe the relationship between the executive compensation actually 10 paid by the registrant and the financial performance of the registrant over the time horizon of the disclosure. Item 402(v) of Regulation S-K requires disclosure of the cumulative TSR of the registrant (substantially as defined in Item 201(e) of Regulation S-K), 18 the TSR of the registrant’s peer group, the registrant’s net income, and a measure chosen by the registrant and specific to the registrant (“Company-Selected Measure”) as the measures of financial performance. The final rules require the following tabular disclosures, with the asterisked items indicating portions of the final rules from which smaller reporting companies (“SRCs”) 19 are exempt: 20 18 Item 201(e) of Regulation S-K sets forth the specific disclosure requirements for the issuer’s stock performance graph, which is required to be included in the annual report to security holders provided for by 17 CFR 240.14a-3 and 240.14c-3. The Item provides that cumulative TSR is calculated by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the registrant’s share price at the end and the beginning of the measurement period; by the share price at the beginning of the measurement period. 19 A “smaller reporting company” means, in the case of issuers required to file reports under Sections 13(a) or 15(d) of the Exchange Act, an issuer that is not an investment company, an asset-backed issuer, or a majorityowned subsidiary of a parent that is not a smaller reporting company and that: (1) had a public float of less than $250 million (as of the last business day of the issuer’s most recently completed second fiscal quarter); or (2) had annual revenues of less than $100 million (as of the most recently completed fiscal year for which audited financial statements are available) and either: (i) no public float (as of the last business day of the issuer’s most recently completed second fiscal quarter); or (ii) a public float of less than $700 million (as of the last business day of the issuer’s most recently completed second fiscal quarter). 17 CFR 240.12b-2; and 17 CFR 229.10. Business development companies (“BDCs”), which are a type of closed-end investment company that is not registered under the Investment Company Act, do not fall within the SRC definition, and thus do not qualify for the scaled disclosures that we are adopting for SRCs. See infra Section II.G (discussing our considerations with respect to SRC disclosure requirements). 20 The title of column (i) of the table, “Company-Selected Measure,” would be replaced with the name of the registrant’s most important measure, and that column would include the numerically quantifiable performance of the issuer under such measure for each covered fiscal year. For example, if the Company-Selected Measure for the most recent fiscal year was total revenue, the company would title the column “Total Revenue” and disclose its quantified total revenue performance in each covered fiscal year. 11 Average Summary Value of Initial Fixed $100 Summary Average Compensation Compensation Investment Based On: Compensation Compensation Table Total Actually Paid Total Peer Group Total Table Total Actually Paid for Non-PEO to Non-PEO Shareholder Shareholder Net Selected Year for PEO to PEO NEOs NEOs Return Return* Income Measure]* (a) (b) (c) (d) (e) (f) (g) (h) (i) [Company- Y1 Y2 Y3 Y4* Y5* In addition, registrants are required to use the information in the above table to provide clear descriptions of the relationships between compensation actually paid and three measures of financial performance, as follows: describe the relationship between (a) the executive compensation actually paid to the registrant’s PEO and (b) the average of the executive compensation actually paid to the registrant’s remaining NEOs to (i) the cumulative TSR of the registrant, (ii) the net income of the registrant, and (iii) the registrant’s Company-Selected Measure, in each case over the registrant’s five most recently completed fiscal years. Registrants are also required to provide a clear description of the relationship between the registrant’s TSR and the TSR of a peer group chosen by the registrant, also over the registrant’s five most recently completed fiscal years. Registrants have flexibility as to the format in which to present the descriptions of these relationships, whether graphical, narrative, or a combination of the two. Registrants will also have the flexibility to decide whether to group any of these relationship disclosures together when presenting their clear description disclosure, but any combined description of multiple relationships must be “clear.” SRCs will only be required to 12 present such clear descriptions with respect to the measures they are required to include in the table and for their three, rather than five, most recently completed fiscal years. A registrant that is not an SRC also will be required to provide an unranked list of the most important financial performance measures used by the registrant to link executive compensation actually paid to the registrant’s NEOs during the last fiscal year to company performance. Although, as discussed below, registrants may include non-financial performance measures in this list, they must select the Company-Selected Measure from the financial performance measures included in this list, and it must be the financial performance measure that in the registrant’s assessment represents the most important performance measure (that is not otherwise required to be disclosed in the table) used by the registrant to link compensation actually paid to the registrant’s NEOs, for the most recently completed fiscal year, to company performance. 21 As discussed below, the final rules permit registrants to voluntarily provide supplemental measures of compensation or financial performance (in the table or in other disclosure), and other supplemental disclosures, so long as any such measure or disclosure is clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure. 22 The final rules apply to all reporting companies except foreign private issuers, registered investment companies, and emerging growth companies (“EGCs”). 23 As proposed, BDCs will 21 Registrants that do not use any financial performance measures to link executive compensation actually paid to company performance, or that only use measures already required to be disclosed in the table, would not be required to disclose a Company-Selected Measure or its relationship to executive compensation actually paid. 22 See infra Section II.F.3. 23 “Emerging growth company” means an issuer that had total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of: (i) the 13 be treated in the same manner as issuers other than registered investment companies and, therefore, be subject to the disclosure requirement of new Item 402(v) of Regulation S-K. II. DISCUSSION OF FINAL AMENDMENTS A. New Item 402(v) of Regulation S-K 1. Application and Operation of Item 402(v) of Regulation S-K i. Proposed Amendments We proposed including the pay-versus-performance disclosure in a new Item 402(v) of Regulation S-K, as Section 14(i) explicitly refers to Item 402 of Regulation S-K as the reference point for the executive compensation to be addressed by the new disclosure relating compensation to performance. We proposed requiring registrants to include the Item 402(v) of Regulation S-K disclosure in any proxy or information statement for which disclosure under Item 402 of Regulation S-K is required. 24 By including the requirement in Item 402 of Regulation S-K and requiring this disclosure in proxy statements on Schedule 14A and in information statements on Schedule 14C, shareholders would have available the pay-versus-performance disclosure, along with all other executive compensation disclosures last day of the fiscal year of the issuer during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933 [15 U.S.C. 77a et seq.]; (iii) the date on which such issuer has, during the previous three year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which such issuer is deemed to be a large accelerated filer. 17 CFR 240.12b-2. Section 102(a)(2) of the Jumpstart Our Business Startups Act amended Section 14(i) to exclude registrants that are EGCs from the pay-versus-performance disclosure requirements. Pub. L. 112-106, 126 Stat. 306 (2012). In accordance with this provision, the Commission did not propose to require EGCs to provide pay-versus-performance disclosure. 24 The disclosure called for under Item 402 of Regulation S-K is required under Item 8 of Schedule 14A, and Item 1 of Schedule 14C. Schedule 14C correlates with the items of Schedule 14A to generally require the disclosure of information called for by Schedule 14A to the extent that the item would be applicable to any matter to be acted on at a meeting if proxies were to be solicited. Schedule 14C implements Exchange Act Section 14(c) [15 U.S.C. 78n(c)] (“Section 14(c)”), which created disclosure obligations for registrants that choose not to, or otherwise do not, solicit proxies, consents, or other authorizations from some or all of their security holders entitled to vote. 14 called for by Item 402 of Regulation S-K, in circumstances in which shareholder action is to be taken with regard to executive compensation or an election of directors. Because the language of Section 14(i) calling for the disclosure to be provided in solicitation material for an annual meeting of the shareholders suggests that the disclosure was intended to be provided in conjunction with a shareholder vote, we proposed limiting the requirement to provide these disclosures to a registrant’s proxy or information statement, instead of in all filings where disclosure under Item 402 of Regulation S-K is required (which would also include a registrant’s Form 10-K 25 and Securities Act 26 registration statements). In addition, as proposed, the information would not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. ii. Comments Some commenters generally supported the proposed approach, 27 with one noting that including the disclosure in proxy and information statements would provide “relevant information at a time when (a) it is most useful to shareowners and (b) shareowners are equipped to act on the information if they are so inclined.” 28 One commenter suggested that the Commission limit the requirement to include the pay-versus-performance information to proxy statements only, noting that any other document could just make reference to the proxy 25 17 CFR 249.310. 26 15 U.S.C. 77a et seq. 27 See letters from Federal Home Loan Banks, dated July 2, 2015 (“FHL Banks”); Financial Services Roundtable, dated July 6, 2015 (“FSR”); and Ohio Public Employees Retirement System, dated July 6, 2015 (“OPERS”). Comment letters received in response to the Proposing Release and Reopening Release are available at https://www.sec.gov/comments/s7-07-15/s70715.htm. 28 Letter from OPERS. 15 statement; 29 while another commenter suggested the pay-versus-performance information “should be included in all materials/filings that discuss compensation.” 30 iii. Final Amendments As proposed, we are adopting the requirement to include the new Item 402(v) of Regulation S-K disclosure in any proxy or information statement for which disclosure under Item 402 of Regulation S-K is required. As noted by commenters 31 and in the Proposing Release, placing the pay-versus-performance information in proxy statements and information statements will provide shareholders with the pay-versus-performance disclosure (along with all other executive compensation disclosures called for by Item 402 of Regulation S-K) in circumstances in which shareholder action is to be taken with regard to an election of directors or executive compensation. We are not requiring the pay-versus-performance disclosure in other filings where disclosure under Item 402 of Regulation S-K is required, as we believe that, taken in context, the language of Section 14(i) calling for registrants to provide the disclosure “in any proxy or consent solicitation material for an annual meeting of the shareholders” suggests that the information was intended to be presented in conjunction with a shareholder vote. 2. Format and Location of Disclosure i. Proposed Amendments Section 14(i) requires us to adopt rules requiring disclosure of “information” that shows the relationship between executive compensation actually paid and registrant financial performance, but it does not specify the format or location of that disclosure. We proposed allowing registrants to decide where in the proxy or information statement to provide the 29 See letter from Hermes Investment Management, dated July 7, 2015 (“Hermes”). 30 Letter from Regis Quirin, dated June 24, 2015 (“Quirin”). 31 See letters from FHL Banks and OPERS. 16 required disclosure. Although the new disclosure item would show the historical relationship between executive pay and registrant financial performance, and may provide a useful point of comparison for the analysis provided in the CD&A, the Proposing Release indicated that it would be appropriate to provide flexibility for registrants in determining where in the proxy or information statement to provide the disclosure. We proposed requiring registrants to provide a standardized table containing the values of: • The total PEO compensation reported in the Summary Compensation Table; • The value of executive compensation actually paid to the PEO; • For NEOs (other than the PEO), the average total compensation reported in the Summary Compensation Table; • The value of the average executive compensation actually paid to the NEOs (other than the PEO); • The value of a fixed investment scaled by cumulative TSR, for the registrant; and • The value of a fixed investment scaled by cumulative TSR for the selected peer group. For the amounts disclosed as executive compensation actually paid, we proposed requiring footnote disclosure of the amounts that were deducted from, and added to, the Summary Compensation Table total compensation amounts to calculate the executive compensation actually paid, 32 and footnote disclosure of vesting date valuation assumptions. Because the statute specifically references disclosure of the relationship between executive compensation actually paid and registrant’s financial performance, we proposed 32 See infra Section II.C (discussing the adjustments proposed to be made to the Summary Compensation Table total compensation to calculate executive compensation actually paid). 17 requiring registrants, using the values presented in the table, to describe (1) the relationship between the executive compensation actually paid and registrant TSR, and (2) the relationship between registrant TSR and peer group TSR. The disclosure about the relationship would follow the table and could be described as a narrative, graphically, or a combination of the two. In the Reopening Release, we requested comment on requiring the tabular disclosure to include disclosure of income or loss before income tax expense, 33 net income, and a CompanySelected Measure. We also requested comment on requiring registrants to provide a clear description of the relationship of each of these additional measures to executive compensation actually paid, but, consistent with the relationship descriptions proposed with respect to TSR and peer group TSR, allowing the registrant to choose the format used to present the relationship, such as a graphical or narrative description (or a combination of the two). We also proposed that the disclosure be provided in interactive data format using machine-readable eXtensible Business Reporting Language (“XBRL”). Specifically, the proposal would require registrants to tag separately the values disclosed in the required table, and to separately block-text tag the required relationship disclosure and the footnote disclosures. 34 In the Reopening Release, we requested comment on whether we should require registrants also to tag specific data points (such as quantitative amounts) within the footnote 33 In the Reopening Release we used the term “pre-tax net income,” but are using the phrase “income or loss before income tax expense” in this release, to be consistent with the language in 17 CFR Part 210 (“Regulation S-X”). 34 Specifically, the proposed approach would require registrants to provide the interactive data as an exhibit to the definitive proxy or information statement filed with the Commission, in addition to appearing with and in the same format as the rest of the disclosure provided pursuant to proposed Item 402(v) of Regulation S-K; and to prepare their interactive data using the list of tags the Commission specifies and submit them with any supporting files the EDGAR Filer Manual prescribes. 18 disclosures that would be block-text tagged, and to use Inline XBRL rather than XBRL to tag their pay-versus-performance disclosure. 35 ii. Comments Commenters were divided over whether we should require registrants to include the pay-versus-performance disclosure in the CD&A, 36 or allow registrants to decide where in the proxy or information statement to provide the required disclosure, as proposed. 37 Commenters in favor of allowing registrants to decide where to provide the disclosure argued that including the disclosure in the CD&A could cause confusion, as registrants do not necessarily consider the information included in the pay-versus-performance disclosure when making decisions about executive compensation. Those in favor of locating the disclosure in the CD&A stated that locating the disclosure alongside other executive compensation disclosure would make the disclosure easier to locate for investors and provide investors the ability to more easily assess the pay-versus-performance disclosure. 35 Subsequent to the proposal, the Commission adopted rules replacing XBRL tagging requirements for registrant financial statements with Inline XBRL tagging requirements. Inline XBRL embeds the machine-readable tags in the human-readable document itself, rather than in a separate exhibit. See Inline XBRL Filing of Tagged Data, Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]. In 2020, the Commission adopted rules requiring BDCs to tag their financial statements and certain prospectus disclosures in Inline XBRL. See Securities Offering Reform for Closed-End Investment Companies, Release No. IC-33836 (Apr. 8, 2020) [85 FR 33290 (June 1, 2020)]. The following year, the Commission required operating companies, BDCs, and non-interval registered closed-end funds to tag their filing fee exhibits on certain forms in Inline XBRL. See Filing Fee Disclosure and Payment Methods Modernization, Release No. 33-10997 (Oct. 13, 2021) [86 FR 70166 (Dec. 9, 2021)]. 36 See letters from California Public Employees Retirement System Investment Office, dated July 6, 2015 (“CalPERS 2015”); CFA Institute, dated July 6, 2015 (“CFA”); Farient Advisors LLC, dated July 6, 2015 (“Farient”); and Teachers Insurance Annuity Association of America, dated July 6, 2015 (“TIAA”). 37 See letters from Compensation Advisory Partners, dated July 2, 2015 (“CAP”); Celanese Corp., dated June 12, 2015 (“Celanese”); Frederic W. Cook & Co., dated June 24, 2015 (“Cook”); Steven Hall ad Partners, dated July 6, 2015 (“Hall”); and Pearl, Myers and Partners, dated July 6, 2015 (“Pearl”). See also letter from Axcelis Technologies, Inc., dated Jan. 31, 2022 (suggesting that pay and performance data for all companies should be made available on a new Commission website, rather than in individual registrant disclosures). 19 Commenters were also divided on the proposal to require the disclosure in a tabular format. Some commenters generally supported the proposed tabular disclosure, 38 while others opposed the tabular format, suggesting it was overly simplistic and would require significant supplemental disclosures. 39 We received significant comment on the specific performance measures to be included in the table, as discussed in Section II.E below. With respect to the other information proposed to be provided in the tabular format, one commenter suggested dividing the table to separate the TSR disclosure from the compensation actually paid disclosure. 40 In addition, some commenters opposed requiring disclosure of the total compensation from the Summary Compensation Table, 41 with one stating that “including the SCT data would result in redundancy, would add a second figure which is not representative of compensation actually paid, and could result in possible confusion to shareholders.” 42 However, other commenters supported the inclusion of the Summary Compensation Table total compensation figures, 43 with one suggesting that including the Summary Compensation Table figures would help investors understand the 38 See letters from AllianceBernstein L.P., dated Mar. 4, 2022 (“AB”); As You Sow, dated July 2, 2015 (“As You Sow 2015”); CAP; Farient; Hermes; and OPERS. 39 See letters from Aspen Institute’s Business and Society Program, dated July 6, 2015 (“Aspen”); Celanese; Center on Executive Compensation, dated July 6, 2015 (“CEC 2015”); Corporate Governance Coalition for Investor Value, dated July 23, 2015 (“Coalition”); Honeywell International Inc., dated July 2, 2015 (“Honeywell”); International Bancshares Corp., dated June 29, 2015 (“IBC 2015”); McGuireWoods LLP and Brownstein Hyatt Farber Schreck, LLP, dated Mar. 4, 2022 (“McGuireWoods”); and National Association of Manufacturers, dated July 6, 2015 (“NAM 2015”). 40 See letter from AON Hewitt, dated July 6, 2015 (“AON”). 41 See letters from CEC 2015; Exxon Mobil Corp., dated June 23, 2015 (“Exxon”); Hall; McGuireWoods; Pay Governance LLC, dated June 30, 2015 (“PG 2015”); Pearl; Technical Compensation Advisors, dated July 6, 2015 (“TCA 2015”); and Technical Compensation Advisors, dated. Mar. 4, 2022 (“TCA 2022”). 42 Letter from PG 2015. 43 See letters from American Federation of Labor and Congress of Industrial Organizations, dated June 30, 2015 (“AFL-CIO 2015”); CalPERS 2015; and CAP. 20 pay-versus-performance disclosure alongside the Summary Compensation Table disclosure when evaluating a registrant’s annual compensation decisions, 44 and another noting that the Summary Compensation Table figures “will help to clarify potential differences between reported compensation and compensation actually paid.” 45 A number of commenters suggested that we require or allow graphical disclosures. Some commenters suggested requiring graphical disclosure, 46 while one specifically supported giving registrants the flexibility to choose whether to include graphical disclosure. 47 A few of these commenters suggested requiring inclusion of the performance graph required in Item 201(e) of Regulation S-K, or a modified version of that graph. 48 In addition, a few commenters suggested the Commission mandate formatting requirements for graphical disclosure, if graphical disclosure is permitted. 49 One commenter suggested that we replace the tabular disclosure requirement with a graphical disclosure requirement depicting TSR and 44 See letter from AFL-CIO 2015. 45 Letter from CAP. 46 See letters from AFL-CIO 2015 (stating that a graph would be especially useful if it disclosed (1) the change between executive compensation actually paid and the Summary Compensation Table figure and (2) the TSRs of both the registrant and a peer group over all five disclosure years); CalPERS 2015 (suggesting line graphs be required in addition to tabular and narrative disclosures); Council of Institutional Investors, dated June 25, 2015 (“CII 2015”) (suggesting the Commission require registrants to disclose, at a minimum, “a graph providing executive compensation actually paid and change in TSR on parallel axes and plotting compensation and TSR over the required time period”); Corning Inc., dated June 12, 2015 (“Corning”) (suggesting requiring the graph included in Item 201(e) of Regulation S-K); OPERS (suggesting requiring a line graph, showing TSR coupled with a corresponding line showing the executive compensation as a group); and Shareholder Value Advisors, dated July 6, 2015 (“SVA”) (suggesting requiring the inclusion of a scatterplot). 47 See letter from Hall. 48 See letters from Allison Transmission Holdings, Inc., dated July 6, 2015 (“Allison”); and Corning. But see letters from CAP; Center for Capital Markets Competitiveness, dated June 30, 2015 (“CCMC 2015”); Davis Polk and Wardwell LLP, dated July 2, 2015 (“Davis Polk 2015”); and McGuireWoods (each opposing the inclusion of the performance graph). 49 See letters from Hermes and PG 2015. But see letter from Hall (recommending allowing registrants to choose their own graphical disclosure). 21 compensation actually paid, 50 while another commenter stated that a prescribed graphical format would facilitate comparability. 51 One commenter generally supported the requirement to provide a clear description of the relationship between the measures disclosed in the table and executive compensation, stating that a “simple-to-understand approach would be particularly valuable to investors.” 52 Another commenter, who supported requiring disclosure only of one (or more) Company-Selected Measure(s), indicated that registrants should be required to provide a clear description of the relationship between the Company-Selected Measure(s) in the table and executive compensation. 53 Commenters were divided on the proposed XBRL tagging requirement. Of the commenters who opposed the requirement, 54 some made alternative suggestions such as only requiring block-tagging, 55 only requiring tagging of the information in the table, 56 delaying the implementation of the tagging requirement, 57 or permitting but not requiring tagging. 58 One commenter stated the Commission should proceed “cautiously” to ensure that the cost of 50 See letter from Meridian Compensation Partners, dated July 6, 2015 (“Meridian”). 51 See letter from OPERS. 52 See letter from Principles for Responsible Investment, dated Mar. 4, 2022 (“PRI”). 53 See letter from National Association of Manufacturers, dated Mar. 4, 2022 (“NAM 2022”). 54 See letters from CCMC 2015; CEC 2015; Celanese; Davis Polk 2015; Jon Faulkner, dated May 4, 2015 (“Faulkner”); FedEx Corp., dated July 6, 2015 (“FedEx 2015”); Hyster-Yale Materials Handling Inc., dated June 10, 2015 (‘Hyster-Yale”); IBC 2015; McGuireWoods; NACCO Industries, Inc., dated June 9, 2015 (“NACCO”); Pearl; Society for Corporate Governance, dated Mar. 10, 2022 (“SCG”); and Society of Corporate Secretaries and Governance Professionals, dated July 7, 2015 (“SCSGP”). 55 See letter from Pearl. 56 See letters from Hyster-Yale and NACCO. 57 See letters from Mercer, dated July 6, 2015 (“Mercer”) and NACCO. 58 See letter from CII 2015. 22 tagging does not outweigh the benefits, 59 while another suggested the Commission should provide data on how many investors use XBRL disclosures before implementing the requirement. 60 However, a number of commenters supported the XBRL requirement, 61 with one suggesting that tagging should be required for the actual metrics registrants use to determine executive compensation. 62 In response to the Reopening Release request for comment regarding Inline XBRL, a number of commenters suggested requiring all registrants to use Inline XBRL to tag their pay– versus-performance disclosure, including the tagging of specific data points within the footnote disclosures that would be block-text tagged. 63 One commenter directly opposed requiring the use of the Inline XBRL (as considered in the Reopening Release), 64 while another commenter, who generally opposed an XBRL tagging requirement, stated that, if XBRL tagging is required, Inline XBRL tagging should be permitted. 65 One commenter suggested the Commission give time for registrants to implement any XBRL requirements, due to the “stylized” nature of proxy statements, and that there may be a learning curve because registrant staff preparing the proxy 59 See letter from National Investor Relations Institute, dated July 10, 2015 (“NIRI 2015”). 60 See letter from CCMC 2015. 61 See letters from AFL-CIO 2015; CalPERS 2015; Public Citizen, dated July 6, 2015 (“Public Citizen 2015”); and State Board of Administration of Florida, dated July 6, 2015 (“SBA-FL”). See also CII 2015 (agreeing with the Commission’s rationale for requiring tagging, and not opposing the Commission requiring XBRL tagging, but suggesting that “permitting, rather than requiring, registrants to tag data when registrant-specific extensions are necessary may be more appropriate”). 62 See letter from AFL-CIO 2015. 63 See letters from Council of Institutional Investors, dated Feb. 24, 2022 (“CII 2022”); Steven Huddart, dated Mar. 4, 2022 (“Huddart”); International Corporate Governance Network, dated Mar. 4, 2022 (“ICGN”); and XBRL US, dated Mar. 4, 2022 (“XBRL US”). 64 See letter from Davis Polk and Wardwell LLP, dated Mar. 4, 2022 (“Davis Polk 2022”) (noting that, while the use of Inline XBRL “could increase the ability of investors to compare across filers,…the initial compliance costs, the quality and the extent of use of XBRL data by investors would not justify the cost of creating XBRL data in company filings,” and therefore specifically recommending not requiring the use of Inline XBRL). 65 See letter from McGuireWoods. 23 statement may be different from the staff preparing documents that are subject to current tagging requirements. 66 iii. Final Amendments The final rules provide registrants flexibility in determining where in the proxy or information statement to provide the disclosure required, as proposed. We believe, as noted in the Proposing Release and by some commenters, that mandating registrants to include the disclosure in the CD&A may cause confusion by suggesting that the registrant considered the pay-versus-performance relationship in its compensation decisions, which may or may not be the case. We are adopting the tabular disclosure format, as proposed, with the addition of two new financial performance measures –net income and the Company-Selected Measure – as considered in the Reopening Release. Each of these financial performance measures is discussed in more detail below. 67 We are not persuaded by commenters who characterized the tabular disclosure requirement as overly simplistic. The simplicity of the tabular disclosure should allow investors to more easily understand and analyze the relationship between pay and performance. In addition, registrants can supplement the tabular disclosure, so long as any additional disclosure is clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure. We also believe the simplicity of the tabular disclosure matches the requirement in Section 14(i) that registrants provide a “clear description” of their pay-versus-performance, and, consistent with Section 14(i), will better 66 See letter from XBRL US. 67 See infra Sections II.D.1 (discussing TSR and peer group TSR); II.D.2 (discussing net income); and II.D.4 (discussing the Company-Selected Measure). 24 allow investors to compare disclosures within companies over time and across companies, making the disclosure more useful. We are adopting the requirement to include the Summary Compensation Table total compensation amounts for the PEO and the average (i.e., mean) of the remaining NEOs, as proposed. Those amounts will appear in columns (c) and (e) of the Pay Versus Performance table, respectively. We believe including these figures as proposed will provide useful information to investors, especially as the “actually paid” figures are directly related to those figures. Requiring disclosure of the Summary Compensation Table measure of total compensation together with executive compensation actually paid will provide shareholders with disclosure of two measures in one single table and, we believe, will facilitate comparisons of the two measures of a registrant’s executive compensation to the registrant’s performance. 68 For example, to the extent that some shareholders may be interested in considering the relationship of performance with a measure of pay that excludes changes in the value of equity awards, they would be able to refer to the Summary Compensation Table measure of total compensation alongside executive compensation actually paid in the tabular disclosure. As proposed, the final rules will require registrants to provide footnote disclosure of the amounts that are deducted from, and added to, the Summary Compensation Table total compensation amounts reported in columns (c) and (e) to calculate the executive compensation actually paid amounts reported in columns (d) and (f), respectively. We believe any confusion created by the inclusion of the Summary Compensation Table totals in the table will be mitigated by this required footnote disclosure. 68 For example, placing the Summary Compensation Table and actually paid figures side-by-side may make it easier for investors to follow the footnote disclosures in which the registrant explains how compensation actually paid differs from the Summary Compensation Table amounts. 25 As proposed, registrants must also provide a narrative, graphical, or combined narrative and graphical description of the relationships between executive compensation actually paid and the registrant's TSR, and between the registrant’s TSR and peer group TSR. We believe the disclosure of the relationship between executive compensation actually paid and TSR will satisfy the language of Section 14(i) that registrants disclose the “relationship” between executive compensation and registrant performance. Further, as noted in the Proposing Release, we believe disclosure about the relationship between registrant TSR and peer group TSR may provide a useful point of comparison to assess the relationship between the registrant’s executive compensation actually paid and its financial performance compared to the performance of its peers during the same time period. 69 In light of the addition of two new performance measures to the table, we are also adopting a requirement that registrants provide a clear description of the relationships between executive compensation actually paid and net income, and between executive compensation actually paid and the Company-Selected Measure. These descriptions may also be provided in narrative, graphical, or combined narrative and graphical format. Since some of these measures and relationships may be more important to some companies or investors than others, we believe including disclosure about each of these relationships will provide investors with a more complete picture of how pay relates to performance. 69 Peer comparisons are a component companies often use to assess the performance of their executives. See, e.g., John Bizjak, Swaminathan Kalpathy, Zhichuan Frank Li, & Brian Young, The Choice of Peers for Relative Performance Evaluation in Executive Compensation, 26 REV. FIN. __ (forthcoming 2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2833309 (finding that, in a sample of the largest 750 U.S. companies (by market capitalization), “over 50%” of companies in 2017 used performance awards based on performance relative to a peer group, “comprising approximately one-third of the value of total compensation”). 26 We believe permitting, but not mandating, graphical disclosure is consistent with an acknowledgement in the Senate Report that there could be many ways to disclose the relationship between executive compensation and financial performance of the registrant, 70 and the specific language of Section 14(i), which provides the pay-versus-performance disclosures “may” include graphic representations. We encourage registrants to present this disclosure in the format that most clearly provides information to investors about the relationships, based on the nature of each measure and how it is associated with executive compensation actually paid. As discussed in the Proposing Release, the required relationship disclosure could include, for example, a graph providing executive compensation actually paid and change in the financial performance measure(s) (TSR, net income, or Company-Selected Measure) on parallel axes and plotting compensation and such measure(s) over the required time period. Alternatively, the required relationship disclosure could include narrative or tabular disclosure showing the percentage change over each year of the required time period in both executive compensation actually paid and the financial performance measure(s) together with a brief discussion of how those changes are related. The required table, along with the required relationship disclosures, should provide investors with clear information from which to determine the relationship between executive compensation actually paid and some basic facets of registrant financial performance. In addition, although the presentation format used by different registrants to demonstrate the relationship between executive compensation actually paid and the financial performance measures included in the table pursuant to Item 402(v) of Regulation S-K may vary, these more variable descriptions may allow investors to understand more easily the registrant’s perspective on these required relationship disclosures. 70 See supra note 4 and accompanying text. 27 The final rules require registrants to separately tag each value disclosed in the table, block-text tag the footnote and relationship disclosure, and tag specific data points (such as quantitative amounts) within the footnote disclosures, all in Inline XBRL. We recognize that, as noted by commenters, 71 the requirement that registrants use Inline XBRL will increase costs for registrants. However, we believe these costs will be incremental, as registrants are subject to Inline XBRL tagging requirements for other Commission disclosures. 72 In addition, we believe that requiring the data to be structured will lower the cost to investors of collecting this information, permit data to be analyzed more quickly, and facilitate comparisons among public companies, all of which justify the incremental cost to registrants. We also believe that the registrants who will be subject to the pay-versus-performance rule are familiar with Inline XBRL, 73 and for that reason do not believe additional data about the complexity of Inline XBRL, or a phase-in period for the application of the requirement (other than as proposed for SRCs, as discussed below 74), are necessary. With respect to comments questioning the utility of a structured data language, we note that investors and market participants have gained experience with XBRL and Inline XBRL filings since the time of the Proposing Release, and that there is increased evidence that data in these formats is useful to investors. 75 71 See, e.g., letter from Davis Polk 2022. 72 See supra note 35 (noting that subsequent to issuing the Proposing Release, the Commission adopted rules replacing XBRL tagging requirements for registrant financial statements with Inline XBRL tagging requirements). See also Inline XBRL Filing of Tagged Data, Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]. 73 See infra Section V.C.4.ii. 74 See infra Section II.G.iii. 75 See infra Section V.C.4.ii. 28 B. 1. Executives Covered Proposed Amendments Under the approach included in the Proposing Release, registrants other than SRCs would have been required to provide disclosure about “named executive officers,” as defined in 17 CFR 229.402(a)(3); 76 and SRCs would have been required to provide disclosure about “named executive officers,” as defined in 17 CFR 229.402(m). 77 These are the executive officers for whom, under our current rules, compensation disclosure is required under Item 402 of Regulation S-K, including in the Summary Compensation Table and the other executive compensation disclosure requirements. Specifically, we proposed requiring registrants to separately disclose compensation information for the PEO, and as an average for the remaining NEOs. We also proposed that, if more than one person served as the PEO of the registrant in any year, the disclosure for those multiple PEOs would be aggregated for that year, because this reflects the total amount that was paid by the registrant for the services of a PEO. 76 17 CFR 229.402(a)(3) defines the NEOs for whom Item 402 of Regulation S-K executive compensation is required as (1) all individuals serving as the registrant’s PEO during the last completed fiscal year, regardless of compensation level, (2) all individuals serving as the registrant’s principal financial officer or acting in a similar capacity during the last completed fiscal year (“PFO”), regardless of compensation level, (3) the registrant’s three most highly compensated executive officers other than the PEO and PFO who were serving as executive officers at the end of the last completed fiscal year, and (4) up to two additional individuals for whom Item 402 of Regulation S-K disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the registrant at the end of the last completed fiscal year. Because the pay-versus-performance disclosure was proposed as new paragraph (v) to Item 402 of Regulation S-K, the disclosure also would be required for the NEOs. 77 For SRCs, 17 CFR 229.402(m)(2) defines the NEOs for whom Item 402 of Regulation S-K executive compensation is required as (1) all individuals serving as the smaller reporting company’s PEO during the last completed fiscal year, regardless of compensation level, (2) the smaller reporting company’s two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year, and (3) up to two additional individuals for whom Item 402 of Regulation S-K disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the smaller reporting company at the end of the last completed fiscal year. 29 2. Comments A number of commenters supported requiring Item 402(v) of Regulation S-K to cover both PEOs and NEOs. 78 These commenters noted that requiring Item 402(v) of Regulation S-K to cover PEOs and NEOs would be consistent with the disclosure in the Summary Compensation Table, 79 and what Congress intended; 80 and would provide investors with useful information about the registrant’s compensation practices more broadly. 81 However, a number of other commenters suggested we limit the disclosure to PEOs. 82 Such commenters raised concerns about the inclusion of non-PEO NEOs, including that: NEO groups may vary considerably from year to year; 83 NEOs are more likely to have business-segment-based compensation, the performance of which might not be reflective of the registrant’s overall performance; 84 and not all NEOs are in positions to affect overall company performance. 85 Commenters also stated that PEOs are under the most scrutiny from investors 86 and are the only 78 See letters from CalPERS 2015; CII 2015; CFA; Hay Group, Inc., dated July 6, 2015 (“Hay”); David Hook, dated May 3, 2015 (“Hook”); OPERS; National Association of Corporate Directors, dated July 10, 2015 (“NACD 2015”); National Association of Corporate Directors, dated Mar. 10, 2022 (“NACD 2022”); and TIAA. 79 See letters from CalPERS 2015; CFA; and Hay. 80 See letter from CII 2015. 81 See letter from CII 2015; CFA; OPERS; and TIAA. 82 See letters from AON; BorgWarner Inc., dated Aug. 20, 2015 (“BorgWarner”); CAP; CEC 2015; CCMC 2015; Celanese; Coalition; Corning; Davis Polk 2015; Exxon; FedEx 2015; FSR; Hall; Hodak Value Investors, dated July 2, 2015 (“Hodak”); Honeywell; Hyster-Yale; McGuireWoods; Mercer; NACCO; NIRI 2015; National Investor Relations Institute, dated Mar. 4, 2022 (“NIRI 2022”); Pearl; PNC Financial Services Group, dated July 6, 2015 (“PNC”); TCA 2015; TCA 2022; and WorldatWork, July 6, 2015 (“WorldatWork”). 83 See letters from CCMC 2015; CEC 2015; Exxon; FSR; Meridian; Pearl; and PNC. 84 See letters from Celanese; FSR; and PNC. 85 See letters from CCMC 2015 and Coalition. 86 See letters from CCMC 2015; CEC 2015; Corning; Davis Polk 2015; FSR; NIRI 2015; NIRI 2022; Pearl; PNC; TCA 2015; and WorldatWork. 30 executives comparable across companies; 87 and that requiring disclosure of non-PEO NEOs would create an increased reporting burden. 88 In addition, one commenter expressed belief that Section 14(i) did not require the pay-versus-performance disclosures to include non-PEO NEOs. 89 Commenters were generally opposed to the proposal’s approach of aggregating multiple PEOs for years when a registrant had more than one individual serve as PEO. 90 These commenters proposed a number of alternatives to aggregation, including: allowing separate disclosure for each PEO; 91 only requiring aggregation for external successors; 92 only disclosing the compensation of the PEO serving at the end of the year (either annualized 93 or not 94); requiring disclosure of the outgoing PEO only; 95 only aggregating payments for services rendered as PEO; 96 requiring aggregated and disaggregated disclosures; 97 or excluding any disclosures in years where the registrant has multiple PEOs. 98 Additionally, a number of 87 See letter from TCA 2015. 88 See letters from Davis Polk 2015 and WorldatWork. 89 See letter from Coalition. 90 See letters from AFL-CIO 2015; BorgWarner; Business Roundtable, dated July 6, 2015 (“BRT”); CCMC 2015; Coalition; Celanese; FedEx 2015; FSR; Hall; Honeywell; IBC 2015; McGuireWoods; Mercer; PG 2015; Pearl; TCA 2015; and TCA 2022. 91 See letters from AFL-CIO 2015; BorgWarner; CCMC 2015; FedEx 2015; Honeywell; SCSGP; TCA 2015; and TIAA. 92 See letters from Cook and Pearl. 93 See letters from FSR and Mercer. 94 See letters from Mercer. 95 See letters from Hodak and PG 2015. 96 See letters from AON and SCSGP. 97 See letters from As You Sow 2015 and Hermes. 98 See letter from McGuireWoods. 31 commenters opposed including signing and severance bonuses, either generally, 99 or if the compensation of multiple PEOs were to be aggregated, 100 while some other commenters more specifically stated that these bonuses were reasons not to aggregate PEO compensation. 101 A few commenters also opposed using the average NEO compensation in the table, 102 while others supported average NEO compensation. 103 A number of other commenters did not expressly oppose the use of average NEO compensation, but stated that this type of disclosure would provide little investor insight, 104 could confuse investors, 105 or would limit comparability. 106 Two commenters suggested requiring separate disclosure for each NEO. 107 3. Final Amendments We are adopting requirements for registrants to disclose information pertaining to both NEOs and PEOs in their Item 402(v) of Regulation S-K disclosure, as proposed. As noted in the Proposing Release, Section 14(i) does not specify which executives must be included in the pay-versus-performance disclosure. While we are mindful of concerns raised by commenters that individual NEOs may be in positions less likely to affect overall company performance than the PEO, may have more varied performance measures driving their compensation (including because NEOs within a company have different roles), can vary from year to year, and are less 99 See letters from FedEx 2015 and SCSGP. 100 See letters from CCMC 2015; Celanese; and Davis Polk 2015. 101 See letters from FSR and Honeywell. 102 See letters from CEC 2015; Coalition; and Meridian. 103 See letters from NACD 2015 and Pearl (generally opposing the disclosure of NEO compensation, but stating that it should be aggregated if required to be disclosed). 104 See letter from Honeywell. 105 See letter from IBC 2015. 106 See letter from Meridian. 107 See letters from Loring, Wolcott & Coolidge, dated Mar. 4, 2022 (“LWC”) and OPERS. 32 comparable across registrants (with respect to compensation), we believe that Congress intended for the rules to provide disclosure about both PEOs and the remaining NEOs because Section 14(i) specifically refers to “compensation required to be disclosed by the issuer under [Item 402 of Regulation S-K],” and Item 402 requires disclosure of NEO compensation. Further, while we agree that investors are typically most interested in the compensation of the PEO, as indicated by commenters, 108 investors also are interested in how the incentives of NEOs relate to company performance, and our rationale of simplifying and reducing costs for investors who monitor executive performance therefore extends to NEOs. We are also adopting, as proposed, the requirement that registrants provide separate disclosure of the PEO’s compensation. We believe this is appropriate because, as noted by commenters, investors frequently have more interest in PEO compensation, PEOs are generally more comparable across companies, and PEOs are frequently in a position to impact performance more than any other NEO. Similarly, we are adopting as proposed a requirement to include an average of compensation for the remaining NEOs. We disagree with commenters that suggested that average NEO compensation would provide little investor insight, could confuse investors, or would limit comparability. Rather, we believe disclosure of the relationship of performance to average NEO compensation will be more meaningful to shareholders than individual or aggregate NEO compensation. Because a registrant’s individual NEOs may change from year to year, we believe that the disclosure of the average NEO compensation will make it easier for investors to compare the registrant’s pay-versus-performance disclosure over time. Further, we believe disclosure of compensation for all NEOs (consisting of the PEO, and the remaining 108 See supra note 86 and accompanying text. 33 NEOs in the aggregate) aligns with our understanding of the intent of Congress that all NEOs be included in the pay-versus-performance disclosure. In addition, we are adopting a requirement that registrants identify in footnote disclosure the individual NEOs whose compensation amounts are included in the average for each year, so that investors can consider whether changes in the average compensation reported from year to year were due to compositional changes in the included NEOs. We believe this will alleviate concerns raised by commenters that the aggregation of NEOs could confuse investors. Although some commenters opposed our proposal to require an average of NEO compensation and suggested that we instead require the disclosure of compensation for each of the NEOs as separate columns in the table, we believe that approach could result in a lengthy and potentially confusing table, due to the fact that in any year there are multiple NEOs and, as noted by several commenters, 109 there can be frequent turnover in a registrant’s NEOs from year to year. In addition, we are not permitting registrants to remove signing bonuses, severance bonuses, and other one-time payments from the amount of executive compensation actually paid, because, although those figures may not represent the executive’s compensation in a ‘typical’ year where no such payment is made, they do reflect amounts that are “actually paid” to the executives. Even if such payments are not ordinarily recurring with respect to a particular executive, shareholders voting on executive compensation or directors may wish to take into account the company resources devoted to such payments in light of the company’s performance. In a change from the proposal, in response to comments, the final rules do not require aggregating the compensation of PEOs in years when a registrant had multiple PEOs. Instead, 109 See supra note 83. 34 the final rules require that, in those years, registrants include separate Summary Compensation Table total compensation and executive compensation actually paid columns for each PEO. For example, the below table shows the disclosure that would be required when there were two PEOs in “Year 2”: Value of Initial Fixed $100 Average Summary Average Compensation Compensation Compensation Summary Investment Based On: Summary Compensation Compensation Table Total Compensation Actually Paid Table Total Actually Paid Total Total Table Total for Second Actually Paid to Second for non-PEO to non-PEO Shareholder Shareholder Net Selected Year for First PEO PEO to First PEO PEO NEOs NEOs Return Return Income Measure] (a) (b) (b) (c) (c) (d) (e) (f) (g) (h) (i)) Peer Group [Company- Y1 N/A $ N/A $ $ $ $ $ $ $ Y2 $ $ $ $ $ $ $ $ $ $ Y3 $ N/A $ N/A $ $ $ $ $ $ Y4 $ N/A $ N/A $ $ $ $ $ $ Y5 $ N/A $ N/A $ $ $ $ $ $ We believe including separate disclosure for each PEO, as recommended by some commenters, 110 would address commenters’ concerns that aggregating PEO disclosure could lead to confusing or misleading disclosure. 111 In the case of multiple PEOs in a single year, this approach would make the table itself slightly longer, but it would have the added benefit of distinguishing the compensation paid to separate PEOs both visually and in the structured data, instead of presenting a potentially confusing aggregated figure in the table and only having discussion of the separate PEOs in footnote and narrative disclosure. 110 See supra note 91. 111 We note that a registrant may elect to provide additional information about its PEO or PEOs, such as the amount of time during the year each individual served as PEO, if the registrant believes that information would provide relevant context to investors. 35 C. Determination of Executive Compensation Actually Paid We proposed that “executive compensation actually paid” under Item 402(v) of Regulation S-K would be total compensation as reported in the Summary Compensation Table, modified to adjust the amounts included for pension benefits and equity awards. In both the Proposing and Reopening Releases, we requested comment on the proposed approaches to calculating these amounts, and whether the proposed definition appropriately captures the concept of “executive compensation actually paid,” and in the Proposing Release we offered an economic analysis of an alternative approach to calculating equity awards. We received significant comment, as discussed below, on the proposed approaches to calculating the amounts of pension benefits and equity awards to be included as “actually paid.” In addition, several commenters to the Proposing Release noted that the definition of compensation actually paid as proposed may result in some misalignment between the time period to which pay is attributed and the time period in which the associated performance is reported. 112 After considering the statutory language and the comments received, we are adopting final rules for calculating the amounts reported for pension benefits and equity awards that are modifications of our proposed approach, including, as discussed further below, requiring equity awards to be revalued more frequently than as proposed. We believe that these approaches will more accurately reflect executive compensation actually paid, as required by Section 14(i), and mitigate commenter concerns about timing mismatches by more closely associating compensation with the period of the corresponding performance. 112 See, e.g., letters from Allison; Celanese; CEC 2015; Cook; Coalition; Farient; Faulkner; FSR; Honeywell; NACCO; NACD 2015; NAM 2015; Pearl; Ross Stores, Inc. dated June 26, 2015 (“Ross”); SVA; SBA-FL; TIAA; TCA 2015; and WorldatWork. 36 Although Section 14(i) refers to compensation required to be disclosed under Item 402 of Regulation S-K, it also uses the phrase “actually paid,” which differs from disclosure required under Item 402 of “compensation awarded to, earned by or paid to” the NEOs. Because Congress was aware of the language of Item 402 at the time of the Dodd-Frank Act, and adopted text that did not mirror the language of that provision, we believe that Congress intended executive compensation “actually paid” to be an amount distinct from the total compensation as reported under Item 402 because it used a term not otherwise referenced in Item 402. As such, we believe using as a starting point the total compensation that registrants already are required to report in the Summary Compensation Table and making adjustments to some of those figures is appropriate to give effect to the statutory language and reflect executive compensation that is “actually paid.” 113 Commenters generally agreed that adjustments to the Summary Compensation Table total were appropriate to determine “executive compensation actually paid,” 114 noting that there are some items reportable in the Summary Compensation Table total that are not reflective of compensation “actually paid”; 115 or more generally 113 A few commenters on the proposed rules sought clarity on the disclosure required in circumstances where a registrant recovers (or “claws back”) any portion of an executive officer’s compensation. See letters from Hyster-Yale; IBC 2015; and NACCO. See also letters from BRT and NACD 2015 (noting that the proposed rules did not account for claw-backs). Consistent with the approach currently taken by registrants when reporting claw-backs in the Summary Compensation Table, when any portion of an executive officer’s compensation for a fiscal year that is included in the table is clawed back, the amounts of executive compensation disclosed in response to Item 402(v) as the Summary Compensation Table Total and as the Compensation Actually Paid initially reported for such year should be adjusted to reflect the effects of the claw-back, with footnote disclosure of the amount(s) recovered, when applicable. 114 See, e.g., letters from AON; CAP; CEC 2015; Exxon; FedEx 2015; FSR; Hall; Honeywell; Hyster-Yale; KPMG LLP, dated July 1, 2015 (“KPMG”); Meridian; NACCO; NACD 2015; PG 2015; Public Citizen 2015; SCSGP; SVA; TCA 2015; TCA 2022; TIAA; Towers Watson, dated July 6, 2015 (“Towers”); and WorldatWork. But see letter from IBC 2015 (stating that “the Summary Compensation Table already required by Regulation S-K is sufficient”). 115 See letters from AON; CAP; CEC 2015; FedEx 2015; Hall; Honeywell; KPMG; Meridian; NACD 2015; Public Citizen 2015; SCSGP; SVA; TIAA; Towers; and WorldatWork. 37 suggesting that the Summary Compensation Table total is not reflective of “executive compensation actually paid.” 116 1. Deduction of Change in Actuarial Present Value and Addition of Actuarially Determined Service Cost and Prior Service Cost i. Proposed Amendments We proposed requiring registrants to deduct the change in actuarial present value of all defined benefit and actuarial pension plans 117 from the Summary Compensation Table total compensation figure, and to add back the actuarially determined service cost for services rendered by the executive during the applicable year, 118 when calculating executive compensation actually paid. We proposed removing the change in actuarial present value of these plans in order to avoid potential volatility associated with revaluing previously accumulated benefits with changes in actuarial inputs and assumptions. However, as discussed in the Proposing Release, we believed that including the service cost from the applicable year was appropriate because it more closely reflected compensation “actually paid” during that year, in that it could be seen as an estimate of the value that would be set aside by the registrant to fund the benefits payable in retirement for the service provided during the applicable year. We also stated that we believed that using the actuarially determined service cost, instead of the 116 See letters from CEC 2015; Exxon; FSR (stating that “Congress did not intend that compensation [actually paid] would be determined by reference to the Summary Compensation Table”); Hall; Hyster-Yale (suggesting an approach where companies are permitted to define “actually paid” independently, and then reconcile those amounts with the Summary Compensation Table totals); NACCO (same); PG 2015; SVA; TCA 2015; and TCA 2022. 117 The change in actuarial present value, generally, reflects the difference between the actuarial present value of accumulated benefits at the end of the fiscal year and at the end of the prior fiscal year. 118 Service cost is defined in FASB ASC Topic 715 as the actuarial present value of benefits attributed by the pension plan’s benefit formula to services rendered by the employee during the period. The measurement of service cost reflects certain assumptions, including future compensation levels to the extent provided by the pension plan’s benefit formula. 38 Summary Compensation Table pension measure, may increase comparability across registrants of the amounts “actually paid” under both defined benefit and defined contribution plans. For defined contribution plans, the Summary Compensation Table requires disclosure of registrant contributions or other allocations to vested and unvested defined contribution plans for the applicable fiscal year, 119 which will also be included in computing compensation actually paid for purposes of the new disclosure. In the Reopening Release, we stated that some commenters had noticed challenges with using the pension service cost approach to determining the value of pension benefits “actually paid,” and requested comment on whether there is an alternative measure of the change in pension value attributable to the applicable fiscal year that is better representative of the amount of pension benefits “actually paid.” ii. Comments Some commenters generally supported limiting the pension benefits included in executive compensation actually paid to service cost. 120 In addition, some commenters supported the proposed deduction of the change in actuarial present value of defined benefit and pension plans not attributable to the applicable year of service, 121 or generally supported the Commission’s choice to exclude the value associated with actuarial assumptions. 122 119 17 CFR 229.402(c)(2)(ix)(E). 120 See letters from Chris Barnard, dated June 24, 2015 (“Barnard 2015”); Chris Barnard, dated Mar. 2, 2022 (“Barnard 2022”); CAP; Hall; Exxon; and WorldatWork. 121 See letters from CAP; CEC 2015; Exxon; TIAA; and Towers. 122 See letter from NACD 2015. 39 There were also a number of commenters who opposed the inclusion of pension service cost in executive compensation actually paid, 123 noting it may remain subject to vesting conditions and may not ever actually be paid; 124 has assumptions built in that would prevent comparability across registrants or distort the figure; 125 is not presently calculated on a per participant basis, so would add cost; 126 or generally that it does not equal compensation “actually paid.” 127 However, a number of commenters who opposed the inclusion of service cost noted their view that it would be a better representation of compensation “actually paid” than the current Summary Compensation Table figure. 128 A few commenters suggested excluding changes in pension values entirely, 129 while some others suggested that the registrant should have the option to exclude service cost, if the executive is not vested in the pension benefits. 130 A number of commenters suggested other ways to include pension amounts in executive compensation actually paid. Some commenters recommended an approach requiring registrants to calculate the change in pension value to equal the actuarial present value of the benefit earned during the year, 131 noting that it tracks the actual pattern of benefit increases resulting from pay 123 See letters from AON; CCMC 2015; CEC 2015; Honeywell; IBC 2015; and NACCO. 124 See letters from Honeywell and Towers 125 See letters CCMC 2015; IBC 2015; and Towers. 126 See letters NACCO. 127 See letters CEC 2015. 128 See letters from AON; Honeywell; Pearl; and Towers. 129 See letters from Coalition; Honeywell; and Pearl (advocating a realized pay approach that would exclude all pension associated values). 130 See letters from AON (generally supporting the exclusion of all non-vested pension benefits); Hyster-Yale; and NACCO. 131 See letters from Mercer and Towers; see also letter from AON (suggesting the same, if pensions must be included in compensation actually paid). Other commenters recommended approaches similar to this approach. See letters from Barnard 2022 (recommending that we include the change in the actuarial present value of 40 increases and plan amendments, 132 and links directly to the existing approach and assumptions used for the Summary Compensation Table. 133 Another suggested multiplying the value of the pension increase during the year, net of any inflationary increase and contribution by the employee, by twenty. 134 Some commenters requested clarification regarding the calculation of the service cost amount. Two commenters suggested alternatives to the application of FASB ASC Topic 715, 135 with one suggesting that the Commission instead clarify that the intended measurement is the change in pension values attributable to an additional year of service, 136 and the other suggesting the Commission use the accumulated benefit obligation service cost or the change in present value of accrued benefits, using the same assumptions at the beginning and end of each year. 137 Two commenters suggested the Commission eliminate the reference to the required use of future salary increases to estimate service cost, because it would require significant new data and reveal new information to investors, 138 with one also suggesting the Commission clarify pension benefits over the applicable fiscal year using the same economic assumptions as used in the calculation at the start of the applicable fiscal year); Exxon (recommending that we include the portion of the currently-reported change in pension values that is attributable to an additional year of service); and WorldatWork (same). 132 See letter from Mercer. 133 See letters from Mercer and Towers; see also letter from AON (suggesting the same, if pensions must be included in compensation actually paid). 134 See letter from Hermes (specifically suggesting the Commission follow the United Kingdom’s method of multiplying the value of the increase in annual pension benefit, net of any inflationary increase and contribution by the employee, by twenty). 135 See letters from AON and Exxon. 136 See letter from Exxon. 137 See letter from AON (alternatively suggesting a third alternative of disclosing the present value, using year end assumptions, of the increase in accrued benefit during the year). 138 See letters from Towers and WorldatWork. 41 that the intended measurement is the change in pension values attributable to an additional year of service. 139 Three commenters responded to our request for comment in the Reopening Release asking if there is an alternative measure of the change in pension value attributable to the applicable fiscal year that is better representative of the amount of pension benefits “actually paid.” One suggested that the “value of dollars set aside to provide a pension benefit to an executive” be disclosed. 140 Another suggested that registrants should be required to disclose the “change in (increase) the actuarial present value of pension benefits over the applicable fiscal year using the same economic assumptions as used in the calculation at the start of the applicable fiscal year.” 141 The third stated that pension benefits should be fully excluded from the “actually paid” amount, but also stated that service cost was “far more representative of the compensation received” than the change in actual present value amount included in the Summary Compensation Table total. 142 iii. Final Amendments With respect to pension compensation, we are adopting final rules largely as proposed with a modification in response to commenters’ suggestion to also include the value of plan amendments in the calculation of compensation actually paid. The final rules will require registrants to deduct from the Summary Compensation Table total the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans, 143 and add back the 139 See letter from WorldatWork. 140 Letter from ICGN. 141 Letter from Barnard 2022. 142 Letter from Aon Human Capital Solutions, dated Mar. 4, 2022 (“Aon HCS”). 143 As discussed below, smaller reporting companies would not need to deduct this amount or add the service cost because the Summary Compensation Table requirements for smaller reporting companies do not require disclosure of the change in actuarial present value. See infra Section II.G.3. 42 aggregate of two components: (1) actuarially determined service cost for services rendered by the executive during the applicable year, as proposed (the “service cost”); and (2) the entire cost of benefits granted in a plan amendment (or initiation) during the covered fiscal year that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or initiation (the “prior service cost”), in each case, calculated in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). 144 As noted above, the change in actuarial present value, generally, reflects the difference between the actuarial present value of accumulated benefits at the end of the fiscal year and at the end of the prior fiscal year. The change in actuarial present value would be deducted only if the value is positive, and therefore included in the sum reported in column (h) of the Summary Compensation Table. Where such amount is negative (and therefore not reflected in the Summary Compensation Table and reported only in a footnote to column (h)), no amounts should be deducted for purposes of Item 402(v) of Regulation S-K. The below table shows the changes from the proposed rules to the final rules with respect to pension compensation (specific changes are bolded and italicized): Proposed Rules Final Rules Deduct (from The aggregate change in the actuarial The aggregate change in the actuarial Summary present value of all defined benefit and present value of all defined benefit and Compensation actuarial pension plans. actuarial pension plans. Service cost. The aggregate of: Table total): Add back: (1) Service cost; and (2) Prior service cost. 144 See FASB ASC Topic 715. 43 We believe that it is appropriate to include pension compensation in the calculation of compensation “actually paid.” The adopted approach in particular provides an appropriate measure for purposes of determining compensation “actually paid” during the applicable year because it reflects the benefits an executive may expect to receive based on additional service the executive provided during the year (or service cost), and it incorporates additional benefits attributable to changes in the pension contract between the executive and the company (or prior service cost). In many cases, this measure will approximate the value that would be set aside currently by the registrant to fund the pension benefits payable upon retirement for the service provided, and any plan amendments made, during the applicable year. In addition, the inclusion of pension compensation is consistent with other compensation disclosure requirements, such as Item 402(c) of Regulation S-K. These same rationales apply whether or not the pension amounts are vested. Consistent with the equity compensation adjustment, the pension adjustment will be included even when unvested until an officer leaves the company. Another advantage to the approach we are adopting is that it is more closely associated with underlying information from the GAAP financial statements. In particular, the pension’s service cost and prior service cost, while not required to be reported separately and for a subset of employees, is computed in the process of calculating the aggregate service cost and prior service cost at the plan level. As a result, a registrant would not be required to collect significant new data or prepare a new calculation of the actuarial present value of the benefit earned during the year, but would rather calculate service cost and prior service cost for a subset of employees for which the underlying information is already available and subject to internal control over financial reporting. The direct relationship of this information to the amounts recognized in the audited financial statements may also provide an additional level of comfort to investors as to 44 its accuracy and reliability. In addition, because this approach excludes changes that derive only from differences in the actuarial assumptions used to estimate the value of benefits already earned in prior periods, it will provide for a more meaningful comparison across registrants of the amounts “actually paid” under both defined benefit and defined contribution plans. Further, as noted above, commenters were generally more supportive of a service cost approach rather than an approach that would include the amount required to be disclosed in the Summary Compensation Table. 145 One weakness in the proposed approach, identified by commenters, 146 was that the service cost approach would not fully account for changes in the value of an executive’s expected benefit arising from plan amendments or initiations. Our modified approach as adopted addresses this concern by requiring that the registrant include, as a component of this item of compensation actually paid, the entire cost of benefits granted in a plan amendment (or initiation) that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or initiation. Such prior service cost information is part of the underlying information required to account for a defined-benefit plan under U.S. GAAP. 147 For purposes of the final rules, “prior service cost” also refers to any credit arising from a reduction in benefits related to services rendered in prior periods as a result of a negative plan amendment. We acknowledge that including the prior service credit associated with such a negative plan amendment would result in a reduction of compensation actually paid. We believe that such an outcome would be consistent with the statutory objective of capturing compensation actually paid, because the reduction in the accrued benefit reflects a reduction in 145 See supra notes 120 and 128. 146 See letters from AON and Mercer; see also letters from AON; Towers; and WorldatWork. 147 See FASB ASC Topic 715. 45 compensation in the same manner that an increase in the accrued benefit reflects an increase in compensation. Although one commenter also noted that service cost would exclude the costs related to unexpected compensation changes, 148 we are not adopting a modification in this regard. Under U.S. GAAP, 149 the effects on the projected benefit obligation of unexpected compensation changes (i.e., changes from the estimated future compensation levels used in measuring service cost) are recorded in actuarial gain or loss. In considering whether to add another component to the tabular pension measure related to actuarial gain or loss due to unexpected compensation changes, we determined that the benefits of isolating these items from other actuarial gains and losses did not merit the costs and complexities associated with calculating the additional adjustment. However, we note that information about compensation changes should still generally be discernible by investors, as such compensation amounts would be included as other components of the compensation disclosed in the Item 402(v) of Regulation S-K table. We are not persuaded that the other alternative approaches recommended by commenters 150 would more accurately reflect compensation “actually paid.” Although some of the suggested alternatives could more fully account for changes in compensation levels by reflecting unexpected increases in pay as well as plan amendments, 151 we believe that the benefits discussed above with respect to the adopted approach, including its direct relationship to the values already calculated for the purpose of financial statement reporting, outweigh the 148 See letter from Mercer. 149 See FASB ASC Topic 715. 150 See supra notes 131–134 and accompanying text. 151 See infra Section V.C.4.iii. 46 potential benefits of the alternatives. Further, while we acknowledge there may be an additional cost to obtain the service cost and prior service cost information on a per participant basis, the other calculations suggested by commenters also would include additional costs since registrants are not currently performing those calculations in the manner suggested. 152 In the case of commenters who suggested that we omit all pension cost amounts, we disagree that their suggested approach would be a reasonable interpretation of compensation “actually paid.” Although the approach we are adopting may not always perfectly reflect all potential changes in pension value, the resulting measure is considerably more accurate than a measure that treats the value of promised pension awards as zero when they may ultimately cost the registrant millions of dollars. We are also requiring that the calculation of “service cost” and “prior service cost” be consistent with the definitions provided under U.S. GAAP. 153 As discussed above, 154 we acknowledge that some commenters suggested alternatives to the U.S. GAAP definition; however, we believe that this definition is appropriate because it reflects the service cost amount included in the financial statements, and therefore is familiar to registrants. The final rules require the entire amount of prior service cost related to a plan amendment to be included in the pension measure rather than the amortized portion of prior service cost recognized as part of periodic pension cost under U.S. GAAP for the year. 152 See letters from AON; Barnard; Exxon; Hermes (suggesting multiplying the value of the pension increase during the year, net of any inflationary increase and contribution by the employee, by twenty); Mercer; Towers; and WorldatWork. 153 See FASB ASC Topic 715. 154 See supra notes 131–134 and accompanying text. 47 2. Inclusion of Above-Market or Preferential Earnings on Deferred Compensation That Is Not Tax Qualified i. Proposed Amendments Consistent with Summary Compensation Table disclosure requirements, we proposed that the executive compensation actually paid would include above-market or preferential earnings on deferred compensation that is not tax qualified. 155 ii. Comments Two commenters generally agreed with the proposed rules on disclosure of deferred compensation that is not tax qualified. 156 Two other commenters recommended permitting registrants to exclude unvested amounts of deferred compensation that is not tax qualified. 157 iii. Final Amendments We are adopting, as proposed, the requirement that executive compensation actually paid include above-market or preferential earnings on deferred compensation that is not tax qualified. We believe, as discussed in the Proposing Release, that excluding those amounts until their eventual payout would make the amount “actually paid” contingent on an NEO’s choice to withdraw or take a distribution from their account, rather than the registrant’s compensatory decision to pay the above-market return, which we do not believe would be an accurate representation of compensation “actually paid.” As with pension awards, these amounts may be viewed to approximate the value that would be set aside currently by the registrant to satisfy its obligations in the future. In addition, excluding those amounts would be inconsistent with the 155 These earnings are reported pursuant to 17 CFR 229.402(c)(2)(vii), or, for smaller reporting companies, 17 CFR 229.402(n)(2)(viii). 156 See letters from NACCO and TIAA. 157 See letters from Hyster-Yale and NACCO. 48 approach in the Summary Compensation Table, which requires disclosure of the underlying deferred amounts when earned. 158 We believe that, to the extent the Summary Compensation Table approach aligns with the statutory “actually paid” language and purpose of the disclosure, we should minimize adjustments to the Summary Compensation Table figures, in order to make disclosures easier to understand for investors and easier to produce for registrants. 159 To that end, we are also not permitting registrants to voluntarily exclude unvested amounts of deferred compensation that is not tax qualified, as we believe that could complicate investors’ understanding of the disclosure, and would limit the comparability of the “actually paid” amounts across different registrants. 160 3. Equity Awards i. Proposed Amendments We proposed that equity awards be considered “actually paid” on the date of vesting, and valued at fair value on that date, rather than fair value on the date of grant as required in the Summary Compensation Table. In proposing this approach, we noted that an executive does not have an unconditional right to an equity award before vesting, and therefore unvested options or other equity awards may not be “actually paid” prior to the vesting conditions being satisfied, which can be viewed as representing payment by the registrant. In addition, we noted that using the vesting date fair value would incorporate changes in the value of the equity awards from the 158 See Instruction 1 to 17 CFR 229.402(c) and Instruction 1 to 17 CFR 229.402(n) (each providing that “[a]ny amounts deferred, whether pursuant to a plan established under section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), or otherwise, shall be included in the appropriate column for the fiscal year in which earned”). 159 See letters from Hyster-Yale and NACCO (both stating that “[t]he fewer adjustments that are made to the SCT earnings, the easier the new proxy table will be for investors to understand and for companies to produce.”). 160 See infra Section II.C.3.iii (discussing the general approach taken in the final rules with respect to unvested amounts of compensation). 49 grant date to the vesting date, with that change being one of the key ways that pay is linked to registrant performance. With respect to the calculation of the vesting date fair value, we noted that the vesting date fair value of stock awards is already disclosed (by registrants other than SRCs) in the Option Exercises and Stock Vested Table, 161 and that the vesting date fair value of option awards can be calculated using existing models and methodologies. Specifically, the proposed approach would require (i) the amounts reported pursuant to 17 CFR 229.402(c)(2)(v) and (vi) to be deducted from Summary Compensation Table total, and (ii) the vesting date fair value of stock awards and options (with or without stock appreciation rights), each computed in accordance with the fair value guidance under U.S. GAAP, 162 to be added. As proposed, a registrant would be required to disclose vesting date valuation assumptions if they are materially different from those disclosed in its financial statements as of the grant date. In response to comments received on the Proposing Release (discussed below), we included a request for comment in the Reopening Release, noting commenters’ concerns that there was a potential misalignment between the time period to which pay is attributed and the time period in which the associated performance is reported, and asking if there were other approaches that would alleviate this misalignment, or if the inclusion of the additional measures considered in the Reopening Release would affect this misalignment. 161 See 17 CFR 229.402(g)(2)(v). 162 See FASB ASC Topic 718. 50 ii. Comments We received a number of comments on both the proposal to use fair value methodology to value equity awards in the calculation of executive compensation actually paid, and on the proposal to value such awards as of the vesting date. Some commenters supported the proposed fair value methodology. 163 However, a number of commenters opposed the approach, 164 noting that the calculation of fair value is time consuming and expensive, particularly when many separate fair value calculations would be required, as in the case of awards that are on a pro-rata vesting schedule or with multiple tranches in a given year; 165 few companies have familiarity with valuing options that have been outstanding for several years; 166 the assumptions that are included in fair value calculations are company-specific and therefore would reduce comparability; 167 and that the fact that assumptions and projections are included in fair value calculations is inconsistent with the concept of “actually paid.” 168 As an alternative to fair value, a number of commenters suggested the Commission require options to be valued at their intrinsic value, 169 or permit registrants to 163 See letters from AFL-CIO 2015; CII 2015; The Predistribution Initiative and Responsible Asset Allocator Initiative, dated Mar. 4, 2022 (“PDI”); and TIAA. 164 See letters from BRT; CEC 2015; Celanese; Cook; FSR; Honeywell; Meridian; and PG 2015. 165 See letters from CAP; Cook; KPMG; and WorldatWork. 166 See letter from CAP. 167 See letter from IBC 2015. 168 See letters from CEC 2015; Meridian; and SCSGP. 169 See letters from CEC 2015 (supporting the use of intrinsic value if the Commission requires vesting date reporting); Celanese (supporting the use of intrinsic value if the Commission requires vesting date valuation); Coalition (supporting the use of intrinsic value if the commenter’s preferred principles-based approach to the pay-versus-performance disclosure was not adopted); Corning; Hall; Honeywell (supporting the use of intrinsic value if the commenter’s preferred principles-based approach to the pay-versus-performance disclosure was not adopted); Mercer; Meridian; Pearl (supporting the use of intrinsic value if the Commission does not adopt a realizable pay methodology) PG 2015; SCG; SCSGP; TCA 2015 (supporting the use of intrinsic value if the commenter’s preferred principles-based approach to the pay-versus-performance disclosure was not adopted); and WorldatWork. Many of these commenters had slightly different concepts of 51 choose between disclosure of fair value and intrinsic value (with the non-chosen value being provided in footnote disclosure). 170 These commenters argued that intrinsic value is easier and cheaper to calculate; 171 aligns with the value that the executives would receive upon immediate exercise; 172 and does not include the valuation assumptions that accompany the fair value methodology. 173 Some commenters suggested that if the final rules did not use intrinsic value, they should instead use fair value with certain safe harbors or simplified assumptions that would reduce the effort required to compute the valuation. 174 Some commenters supported valuing equity at the vesting date, 175 stating that valuing equity at the vesting date will incorporate the grant date fair value and changes until vesting (which “represent a direct channel, and one of the primary means, through which pay is linked to registrant performance”), but will not include post-vesting changes (which “generally reflect investment decisions made by the executive rather than compensation decisions made by the registrant”); 176 will avoid “underestimating the actual compensation received by executives,” which could occur if grant date reporting was required; 177 and “better reflect[s] the value ultimately delivered to executives.” 178 Some commenters specifically opposed exercise date how options should be valued, but they all generally supported using intrinsic value, or the difference between the exercise price and the market price. 170 See letter from Hall. 171 See letters from Corning and Davis Polk 2015. 172 See letter from Corning. 173 See letter from Davis Polk 2015. 174 See letters from Mercer; TCA 2015 and TCA 2022. See also letter from Infinite Equity, dated Mar. 3, 2022 (“Infinite”) (suggesting that certain existing safe harbors should be acceptable for the new disclosures). 175 See letters from AFL-CIO 2015; CII 2015; Honeywell; PDI; and TIAA. 176 See letter from CII 2015. 177 See letter from PDI. 178 See letter from TIAA. 52 valuation, 179 while others supported requiring the vesting date valuation of stock awards, but the exercise date valuation of options 180 or requiring the vesting date valuation of performancebased awards, but the grant date valuation of time-based awards. 181 Some commenters opposed vesting date valuation, 182 with one arguing that valuing options at vesting date would be misleading because executives do not generally include the option value in their income at the time of vesting. 183 As alternatives, commenters suggested: valuing awards at the end of a multiyear period, such as a three-year period; 184 valuing equity at grant date but reversing the value at the vesting date for awards that fail to vest; 185 revaluing outstanding equity awards annually; 186 or revaluing all equity granted during a period at the end of the most recent completed fiscal year. 187 A number of commenters opposed the reporting of equity as of the vesting date. 188 Some of these commenters noted that vesting date reporting of equity would lead to a timing misalignment between actual performance and executive compensation actually paid, as the performance that “earned” the equity would have occurred between the grant date and the 179 See letters from AFL-CIO 2015; CII 2015; and Honeywell. 180 See letters from Coalition (specifically recommending that compensation be deemed “actually paid” when reported on Form W-2 for income tax purposes, which they state would include vested stock awards and amounts received in connection with exercised options); Hall; and Mercer. 181 See letter from McGuireWoods. 182 See letters from Celanese; CCMC 2015; Cook; and NACD 2015. 183 See letter from Cook. 184 See letter from Farient. 185 See letter from SVA. 186 See letters from Hodak; Farient; Infinite; TCA 2015; and TCA 2022. 187 See letter from CAP; PG 2015; and PG 2022. 188 See letters from CAP; Celanese; CCMC 2015; Cook; FSR; McGuireWoods; NACCO; NACD 2015; NAM 2022; Ross; SVA; and TIAA. But see Hermes (expressly supporting vesting date reporting of equity). 53 vesting date, but only the total amounts of equity would be reported on the vesting date. 189 However, two commenters, who acknowledged the misalignment, indicated that there was no other approach that would eliminate all misalignment. 190 Several commenters requested clarifications about the proposed approach. A few commenters expressed that reporting equity on the vesting date creates uncertainty in application, and either sought clarification regarding the vesting date or the meaning of when “all applicable vesting conditions were satisfied.” 191 One commenter suggested that an award should be considered vested on the date the executive is able to monetize the award, 192 while another suggested that awards should only be considered “actually paid” when restrictions on equity lapse, even if already vested. 193 Two commenters also made suggestions that awards should be considered vested when the associated performance period is completed, e [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A69ccf1ccb40fa253. Public record. Not legal advice.