Pay Versus Performance

Federal RegisterMay 7, 2015

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 240

[Release No. 34-74835; File No. S7-07-15]

RIN 3235-AL00

Pay Versus Performance

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing amendments to Item 402 of Regulation S-K to implement Section 14(i) of the Securities Exchange Act of 1934 (the “Exchange Act”), as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 14(i) directs the Commission to adopt rules requiring registrants to disclose in a clear manner the relationship between executive compensation actually paid and the financial performance of the registrant. The proposed disclosure would be required in proxy or information statements in which executive compensation disclosure pursuant to Item 402 of Regulation S-K is required. The proposed disclosure requirements would not apply to emerging growth companies or foreign private issuers.

DATES:

Comments should be received on or before July 6, 2015.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an Email to

rule-comments@sec.gov.

Please include File Number S7-07-15 on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-07-15. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Web site (

http://www.sec.gov/rules/proposed.shtml

). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Eduardo A. Aleman, Special Counsel, in the Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are proposing to add new paragraph (v) to Item 402 of Regulation S-K.

17 CFR 229.402.

Table of Contents

I. Introduction

II. Proposed Amendment

A. Introduction

B. New Item 402(v) of Regulation S-K

C. Executives Covered

D. Determination of “Executive Compensation Actually Paid”

E. Measure of Performance

F. Time Period Covered

G. Clear Description

H. Smaller Reporting Companies

III. General Request for Comments

IV. Economic Analysis

A. Background

B. Baseline

C. Discussion of Economic Effects

1. Benefits

2. Costs

3. Implementation Alternatives

D. Request for Comment

V. Paperwork Reduction Act

A. Background

B. Summary of Collection of Information Requirements

C. Paperwork Reduction Act Burden Estimates

D. Solicitation of Comments

VI. Initial Regulatory Flexibility Act Analysis

VII. Small Business Regulatory Enforcement Fairness Act

VIII. Statutory Authority and Text of Proposed Amendments

I. Introduction

We are proposing amendments today as required by Section 953(a) of the Dodd-Frank Act.

Section 953(a) added Section 14(i)

to the Exchange Act,

which directs the Commission to adopt rules requiring registrants

to disclose in any proxy or consent solicitation material for an annual meeting of shareholders 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 information that shows the relationship between executive compensation actually paid and the financial performance of the registrant, taking into account any change in the value of the shares of stock and dividends of the registrant and any distributions. A report by the Senate Committee on Banking, Housing and Urban Affairs indicated that the rules mandated by Section 953(a) of the Dodd-Frank Act were not intended to be overly-prescriptive and that Congress recognized that there could be many ways to disclose the relationship between executive compensation and financial performance of the registrant.

Public Law 111-203, 124 Stat. 1376 (2010).

15 U.S.C. 78n(i).

15 U.S.C. 78a

et seq.

Section 102(a)(2) of the Jumpstart Our Business Startups Act (“JOBS Act”) amended Exchange Act Section 14(i) to exclude registrants that are “emerging growth companies” from the pay-versus-performance disclosure requirements. Public Law 112-106, 126 Stat. 306 (2012). Section 3(a) of the Exchange Act [15 U.S.C. 78c(a)] defines an “emerging growth company” as an issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year.

17 CFR 229.402.

See

Report of the Senate Committee on Banking, Housing and Urban Affairs to accompany S. 3217, S. Rep. No. 111-176, at 135 (2010) (the “Senate Report”) which 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.”

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.”

Section 951 of the Dodd-Frank Act enacted new Exchange Act Section 14A

which requires that not less than every three years a proxy or consent or authorization for an annual or other meeting of the shareholders for which the proxy solicitation rules of the Commission require compensation disclosure shall include a separate resolution subject to a non-binding shareholder vote to approve the

compensation of executives. Pursuant to the mandate in Section 14A, we adopted rules requiring a shareholder advisory vote to approve the compensation of the named executive officers (“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.

Dodd-Frank Act, H.R. Rep. 111-517, at 872 (2010).

15 U.S.C. 78n-1.

See Shareholder Approval of Executive Compensation and Golden Parachute Compensation,

Release No. 33-9178 (Jan. 25, 2011) [76 FR 6010] (Feb. 2, 2011).

We believe that the pay-versus-performance disclosure mandated by Section 953(a), and the disclosure of the ratio of the median annual total compensation of employees to the annual total compensation of the chief executive officer mandated by Section 953(b),

are intended to provide shareholders with information that will help them assess a registrant's executive compensation when they are exercising their rights to cast advisory votes on executive compensation under Exchange Act Section 14A. The Senate Report accompanying the statute references shareholder interest in the relationship between executive pay and performance as well as the general benefits of transparency of executive pay practices.

We proposed rules to implement Section 953(b),

see Pay Ratio Disclosure,

Release No. 33-9452 (Sept. 18, 2013) [78 FR 60560] (Oct. 1, 2013).

The Senate Report includes the following with respect to Section 953 of the Dodd-Frank Act: “It has become apparent that a significant concern of shareholders is the relationship between executive pay and the company's financial performance . . . The Committee believes that these disclosures will add to corporate responsibility as firms will have to more clearly disclose and explain executive pay.”

See

Senate Report,

supra

note 7.

In that regard, the disclosure mandated by Section 14(i) of the Exchange Act will give shareholders a new metric for assessing a registrant's executive compensation relative to its financial performance. Currently, Item 402 of Regulation S-K specifies the information that must be included when the applicable form or schedule requires executive compensation disclosure. Information on financial performance is required by other items throughout Regulation S-K, including in Item 201(e),

Item 301,

Item 302

and Item 303.

There is currently no requirement to disclose specific information showing the relationship between executive compensation actually paid and the financial performance of the registrant. Instead, Item 402 of Regulation S-K contains detailed requirements for the disclosure of executive compensation and more principles-based disclosure requirements regarding the relationship between pay and performance. The Compensation Discussion and Analysis (“CD&A”) required by 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.”

With respect to performance, Item 402(b)(2) 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 229.201(e), Performance Graph.

17 CFR 229.301, Selected Financial Data.

17 CFR 229.302, Supplementary Financial Information.

17 CFR 229.303, Management's Discussion and Analysis of Financial Condition and Results of Operations.

17 CFR 229.402(b)(1).

17 CFR 229.402(b)(2)(v)-(vii).

The disclosure required by Exchange Act Section 14(i) can supplement the discussion in the CD&A as part of the shareholder's evaluation of the registrant's executive compensation practices and policies, including for purposes of the shareholder advisory vote on executive compensation. The proposed amendment provides a factual description of how the executive compensation actually paid related to the financial performance of the registrant.

This disclosure may provide a useful point of comparison for the analysis provided in the CD&A about a compensation committee's approach to linking pay and performance. We also believe that the proposed disclosure may provide relevant information to shareholders when voting in an election of directors. By helping to inform a shareholder's assessment of a registrant's executive compensation, the new disclosure may help shareholders evaluate the directors' oversight of this important area.

We recognize that financial performance of the registrant is a broad term and can mean different things to different registrants. Throughout this release, we use the term “financial performance” to refer to the financial performance of the registrant as required to be disclosed by new Section 14(i) of the Exchange Act, which we propose to measure by cumulative total shareholder return as defined in Item 201(e) of Regulation S-K.

See

Section II.E below.

As with other Dodd-Frank Act rulemakings, we have sought comment from the public prior to the issuance of a proposing release.

We have considered the pre-proposal comment letters received to date. Commenters were divided on whether we should provide specific rules on how the proposed disclosure must be prepared or whether we should allow registrants flexibility in determining how to disclose the relationship between pay and performance. Some commenters believed that we should propose specific requirements to encourage consistency and comparability across registrants.

Other commenters were supportive of an approach to pay-versus-performance disclosure in which our rules would not provide specific requirements, but would allow registrants to determine the substance of such disclosure and how such disclosure should be presented.

Comments related to the executive compensation provisions of the Dodd-Frank Act are available at

http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.

See

letters from Pay Governance LLC (“Pay Governance”), Farient Advisors (“Farient”), Compensia, Inc. (“Compensia”), Meridian Compensation Partners (“Meridian”), MDU Resources, Inc. (“MDU”) and Shareholder Value Advisors, Inc. (October 4, 2010) (“SVA I”).

See

letters from the Center on Executive Compensation (September 1, 2010) (“CEC I”), American Bar Association (“ABA”), Protective Life Corporation (“Protective Life”), ClearBridge Compensation Group (“ClearBridge”) and Davis Polk & Wardwell LLP (“Davis Polk”).

As discussed in more detail below, our proposed amendments would require registrants to provide disclosure that can be compared across registrants, while also continuing to allow registrants to supplement their disclosure about pay-versus-performance to reflect the specific situation of the registrant and its industry. Throughout the release we seek comment on this approach, and whether alternative approaches should be considered to accomplish the objectives of Section 14(i) of the Exchange Act.

II. Proposed Amendment

A. Introduction

We are proposing new Item 402(v) of Regulation S-K that would require a registrant to provide a clear description of (1) the relationship between executive compensation actually paid to the registrant's NEOs 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.

The proposed amendments would:

• Require that the executive compensation used in calculating the executive compensation actually paid be total compensation as disclosed in the Summary Compensation Table,

modified to exclude changes in actuarial present value of benefits under defined benefit and actuarial pension plans that are not attributable to the applicable year of service, and to include the value of equity awards at vesting rather than when granted, which adjustments are intended to capture the Section 953(a) required measure of “executive compensation actually paid”;

Item 402(c) of Regulation S-K [17 CFR 229.402(c)].

The terms “stock,” “option,” “stock appreciation right,” “equity,” “plan” and “incentive plan” used in this release are generally as defined in Item 402(a)(6) of Regulation S-K [17 CFR 229.402(a)(6)]. Similarly, while we do not define the term “defined benefit and actuarial pension plans,” the term has the same meaning as in Item 402 of Regulation S-K.

• Require registrants to measure financial performance using TSR, as defined in Item 201(e) of Regulation S-K, and TSR of a registrant peer group;

• Require registrants to provide the executive compensation actually paid, total compensation as disclosed in the Summary Compensation Table, TSR, and peer group TSR in a prescribed table;

• Require the executive compensation disclosure to be presented separately for the principal executive officer, and as an average for the remaining NEOs identified in the Summary Compensation Table;

• Require the disclosure of the relationship between (1) executive compensation actually paid and registrant TSR (for the same executives identified in the registrant's Summary Compensation Table), and (2) registrant TSR and peer group TSR, in each case over the registrant's five most recently completed fiscal years;

• For smaller reporting companies, require the disclosure of the relationship between executive compensation actually paid and TSR over the registrant's three most recently completed fiscal years, without requiring these companies to provide disclosure of peer group TSR;

• Require that the disclosure be provided in tagged data format using eXtensible Business Reporting Language (XBRL); and

• Provide a phase-in of the requirement.

We discuss each of these aspects of our proposal in detail below.

Foreign private issuers, as defined in Exchange Act Rule 3b-4 [17 CFR 240.3b-4], would not be subject to the proposed amendment. Because securities registered by a foreign private issuer are not subject to the proxy statement requirements of Exchange Act Section 14,

foreign private issuers would not be required to provide Item 402(v) disclosure. As proposed, registered investment companies would not be required to provide Item 402(v) disclosure. We believe that the management structure of, and the regulatory regime governing, registered investment companies differentiate them from issuers that are operating companies. Registered investment companies, unlike other issuers, are generally externally managed and often have few, if any, employees that are compensated by the registered investment company. Rather, such employees are generally compensated by the registered investment company's investment adviser. Furthermore, registered investment companies do not have named executive officers within the meaning of Item 402, and, therefore, are not required to conduct the shareholder advisory votes required by Exchange Act Section 14A.

Business development companies are a category of closed-end investment company that are not registered under the Investment Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64]. As proposed, business development companies would be treated in the same manner as issuers other than registered investment companies and, therefore, would be subject to the disclosure requirement of Item 402(v).

Exchange Act Rule 3a12-3(b) [17 CFR 240.3a12-3(b)] specifically exempts securities registered by a foreign private issuer from Exchange Act Sections 14(a) and 14(c).

As noted earlier, we believe that the pay-versus-performance disclosure mandated by Section 953(a), together with the disclosure of the ratio of the median annual total compensation of employees to the annual total compensation of the chief executive officer mandated by Section 953(b), are intended to provide shareholders with information that will help them assess a registrant's executive compensation when they are exercising their rights to cast advisory votes on executive compensation under Exchange Act Section 14A. Further, as noted earlier, the Senate Report indicated that “a significant concern of shareholders is the relationship between executive pay and a company's financial performance,” and that the pay-versus-performance disclosure would “add to corporate responsibility as firms will have to more clearly disclose and explain executive pay.”

See

Senate Report,

supra

note 7.

B. New Item 402(v) of Regulation S-K

1. Application and Operation of Proposed Item 402(v)

Section 14(i) of the Exchange Act requires disclosure of the relationship of executive compensation actually paid and the financial performance of the registrant. 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. Because the disclosure mandated by Section 14(i) relates specifically to executive compensation, we are proposing to require this new disclosure in a new Item 402(v) of Regulation S-K.

We are also proposing that the disclosure called for under new Item 402(v) of Regulation S-K be included in any proxy or information statement for which disclosure under Item 402 of Regulation S-K is required. Currently, Item 8 of Schedule 14A

and Item 1 of Schedule 14C

require registrants to furnish Item 402 information if action is to be taken with regard to: The election of directors; any bonus, profit sharing or other contract or arrangement in which any director, nominee or executive officer of the registrant will participate; any pension or retirement plan in which they will participate; or the granting or extension to them of options, warrants or rights to purchase securities on a pro rata basis.

By including the requirement in Item 402 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 called for by Item 402, in circumstances in which shareholder action is to be taken with regard to an election of directors or executive compensation. Because the proposed pay-versus-performance disclosure would be provided pursuant to Item 402 of Regulation S-K, it would be subject to the say-on-pay advisory vote under Exchange Act Rule 14a-21(a).

17 CFR 240.14a-101.

Schedule 14C [17 CFR 240.14c-101] works in conjunction with 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)] 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.

The executive compensation disclosure called for under Item 402 of Regulation S-K is also required in certain registration statements under the Securities Act and the Exchange Act, as well as in annual reports on Form 10-K. Most registrants satisfy the Form 10-K disclosure requirement by incorporating by reference the information contained in their annual proxy or information statement.

Even though Section 14(i) does not expressly include information statements provided for under Section 14(c), we believe that the purpose of information statements under Section 14(c), which established disclosure obligations for registrants that do not solicit proxies, does not support excluding the disclosure from information statements. Although Section 14(c) and Schedule 14C concern the provision of certain information when no solicitation is involved, Section 14(c) provides an obligation relating to information statements to transmit to holders “such security information substantially equivalent to the information which would be required to be transmitted if a solicitation were made . . . .” 15 U.S.C. 78n(c).

17 CFR 240.14a-21.

We note that the language of Section 14(i) requires that the pay-versus-performance disclosure be provided “in any proxy or consent solicitation material for an annual meeting of the shareholders.” Shareholder annual meetings are typically the venue in which directors are elected.

This statutory language, if construed narrowly, would require the pay-versus-performance disclosure in different instances than our rules currently require for other executive compensation disclosure.

In particular, under our current rules if a registrant solicits proxies

with respect to the election of directors or executive compensation matters, its proxy statement must include specified information required by Item 402 of Regulation S-K, whether the election takes place at an annual or special meeting.

We believe Item 402 disclosure, including the disclosure that would be required under proposed Item 402(v), is equally useful to shareholders without regard to the venue of the corporate action.

The Commission has previously recognized that directors ordinarily are elected at annual meetings.

See, e.g.,

Exchange Act Rule 14a-6(a) [17 CFR 240.14a-6(a)] (acknowledging that registrants soliciting proxies in the context of an election of directors at an annual meeting may be eligible to rely on the exclusion from the requirement to file a proxy statement in preliminary form).

See also

Charles R.T. O'Kelley & Robert B. Thompson, Corporations and Other Business Associations 167 (7th ed.) (explaining that the “paramount shareholder function is the election of directors” and that “[m]ost corporation codes protect this right by specifying immutably that directors shall be elected at an annually held meeting of shareholders.”), California Corporations Code, Section 600(b), and 1969 Model Business Corporation Act (as amended through 1981), Section 7.01(a) (each requiring an annual meeting of shareholders for the election of directors).

The language of Section 14(i) calls for the disclosure to be provided in connection with annual meetings, the meeting at which registrants generally provide for the election of directors. Depending on the circumstances, this construction could be narrower or broader than the scope of Item 8 of Schedule 14A, which requires executive compensation disclosure in circumstances where action is to be taken with regard to an election of directors or executive compensation. For example, a registrant could solicit proxies to approve a management contract or arrangement or other compensation plan at a special meeting instead of an annual meeting and, in this instance, Item 8 would require Item 402 executive compensation disclosure. By contrast, although an annual meeting ordinarily involves an election of directors, in the unlikely event that an annual meeting did not include an election of directors or other executive compensation actions, the proposed amendment would not require any Item 402 executive compensation disclosure.

Rule 14a-1(f) [17 CFR 240.14a-1(f)] defines the term “proxy” to include every proxy, consent or authorization within the meaning of Section 14(a) of the Exchange Act. A solicitation of consents therefore constitutes a solicitation of proxies subject to Section 14(a) and Regulation 14A.

See

Item 8 of Schedule 14A.

Consistent with our approach to other Item 402 disclosures, we are proposing to require pay-versus-performance disclosure in these instances because we believe that the proposed disclosure would be most useful to shareholders when they are deciding whether to approve the compensation of the NEOs through the say-on-pay advisory vote, as well as when making voting decisions on a compensation plan in which NEOs participate, and making decisions pertaining to the election of directors. The Senate Report accompanying the statute references shareholder interest in the relationship between executive pay and performance as well as the general benefits of transparency of executive pay practices.

Several commenters also noted that the mandate may help inform shareholders.

For example, one commenter stated a belief that the requirements of Section 953(a), if implemented appropriately, “will help investors better understand the executive pay decisions of the company, and make more informed `Say-on-Pay' votes.”

The Senate Report includes the following with respect to Section 953(a) of the Dodd-Frank Act: “It has become apparent that a significant concern of shareholders is the relationship between executive pay and the company's financial performance . . . The Committee believes that these disclosures will add to corporate responsibility as firms will have to more clearly disclose and explain executive pay.”

See

Senate Report

supra

note 7.

See

letters from American Federation of Labor and Congress of Industrial Organizations (Aug. 8, 2014) (“AFL-CIO”), PublicCitizen, ClearBridge and Pay Governance.

See

letter from Pay Governance.

By proposing to require the disclosure as a new Item 402 requirement, however, the pay-versus-performance disclosure, unless otherwise limited, also would be required in a registrant's Form 10-K and in Securities Act registration statements that require Item 402 disclosure. 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, and we believe that the disclosure would be most useful in this context. Therefore, we are proposing that Item 402(v) specify that the disclosure would only be required in a registrant's proxy or information statement. In addition, as proposed, the information will 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.

See

Instruction 6 to proposed Item 402(v) of Regulation S-K. As proposed, the information would therefore not be subject to forward incorporation by reference under Item 12(b) of Form S-3 [17 CFR 239.13].

2. Format and Location of Proposed Disclosure

Section 14(i) of the Exchange Act 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 are not proposing a specific location within the proxy statement or information statement for this new disclosure. We note that the proposed disclosure item is related to the CD&A because it 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. However, including this disclosure as part of CD&A might suggest that the registrant considered the pay-versus-performance relationship, as disclosed, in its compensation decisions, which may not be the case. Consequently, we believe it is appropriate to provide flexibility for registrants in determining where in the proxy or information statement to provide the disclosure required by proposed Item 402(v), although we

generally expect registrants would disclose it with the Item 402 executive compensation disclosure.

As proposed, Item 402(v) would require registrants to provide a table containing the values of the prescribed measures of executive compensation actually paid, TSR for the registrant and TSR for the selected peer group (see table below). For each amount disclosed as executive compensation actually paid in columns (c) and (e) of the prescribed table, proposed Item 402(v) would require footnote disclosure for both principal executive officer compensation and average NEO compensation of each amount deducted from, and added to the total compensation amount as provided in the Summary Compensation Table. As proposed, Item 402(v) also would require registrants to include in the table the total PEO compensation reported in the Summary Compensation Table (column (b), and, for NEOs, the average total compensation reported in the Summary Compensation Table (column (d)). Requiring disclosure of the Summary Compensation Table measure of total compensation together with our proposed measure of executive compensation actually paid would provide shareholders with disclosure of two measures in one single table and, we believe, would facilitate comparisons of the two measures of a registrant's executive compensation to the registrant's performance. 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 required alongside executive compensation actually paid in the tabular disclosure. Among other things, the Summary Compensation Table measure of total compensation reflects the grant date values of equity awards.

We are proposing that the disclosure provided in each column of the proposed table, including any footnote disclosure, be provided in interactive data format using XBRL.

The proposal would require registrants to tag separately the values disclosed in the required table, and to separately block-text tag the disclosure of the relationship among the measures, the footnote disclosure of deductions and additions used to determine executive compensation actually paid, and the footnote disclosure regarding vesting date valuation assumptions. The interactive data would have to be provided 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 (

e.g.,

in ASCII or HTML). Registrants would be required 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.

We believe requiring the data to be tagged would lower the cost to investors of collecting this information, would permit data to be analyzed more quickly by investors and other end-users than if the data was provided in a non-machine readable format, and would facilitate comparisons among public companies. In addition, requiring the data to be tagged would facilitate analysis of how information related to a single issuer changes over time.

Data becomes interactive when it is labeled or “tagged” using a computer markup language such as XBRL that software can process for analysis.

The EDGAR Filer Manual is available at:

http://www.sec.gov/info/edgar/edmanuals.htm.

Pay Versus Performance

Year

Summary

compensation table total for PEO

Compensation

actually paid to PEO

Average summary

compensation table total for

non-PEO named

executive officers

Average

compensation

actually paid to

non-PEO named

executive officers

Total shareholder return

Peer group total

shareholder return

(a)

(b)

(c)

(d)

(e)

(f)

(g)

Because the statute requires disclosure of the

relationship

between executive compensation and registrant performance, we do not believe that simply disclosing the amount of executive compensation actually paid and the financial performance measure would satisfy this statutory requirement. Thus, using the values presented in the table, proposed Item 402(v) would require the registrant 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. We believe disclosure about the relationship between registrant TSR and peer group TSR would provide information that investors can use to compare a registrant's performance with that of its peers, and 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.

The disclosure about the relationship would follow the table and could be described as a narrative, graphically, or a combination of the two, and, as proposed, would be required to be provided in interactive data format using XBRL. Disclosure of the relationship could include, for example, a graph providing executive compensation actually paid and change in TSR on parallel axes and plotting compensation and TSR over the required time period. Alternatively, disclosure of the relationship could include showing the percentage change over each year of the required time period in both executive compensation actually paid and TSR together with a brief discussion of that relationship. Under our proposed amendments, while the presentation format used by different registrants to demonstrate the relationship between executive compensation actually paid and TSR may vary, the table required by Item 402(v) together with existing disclosures would provide shareholders with clear information from which to determine the relationship between executive compensation actually paid and registrant performance so that shareholders could, if desired, compare the disclosure across registrants.

Exchange Act Section 14(i) provides that the disclosure about the relationship may include a graphic

representation of the information. Commenters provided varying views on whether to require a graphic presentation. Some commenters indicated that a graphic representation would help provide meaningful disclosure,

while other commenters supported a principles-based approach that would not include a specific requirement for a graphic representation.

Consistent with the language of Exchange Act Section 14(i), we are proposing to permit, rather than require, a registrant to comply with the new requirement to disclose the relationship between executive compensation actually paid and registrant performance by including a graphic presentation of the pay-versus-performance disclosure, in addition to the required table presenting the values of prescribed measures of executive compensation and TSR.

See

letters from Farient, Meridian and Shareholder Value Advisors, Inc. (Apr. 27, 2012) (“SVA II”).

See

letters from ABA, CEC I, and Davis Polk.

Request for Comment

1. Exchange Act Section 14(i) specifies that the pay-versus-performance disclosure must be provided in any proxy or consent solicitation materials that relate to annual shareholder meetings. For the reasons discussed above, we are proposing to require the disclosure in a registrant's proxy or information statement where Item 402 disclosure is required. Should we instead, or in addition, require the disclosure in any proxy or information statements relating to an annual shareholder meeting (or special meeting or written consent in lieu of a meeting)? Why or why not?

2. To retain consistency in the executive compensation disclosure provided in proxy statements and information statements, we propose that the Item 402(v) disclosure be included in information statements on Schedule 14C as well as proxy statements on Schedule 14A for which Item 402 disclosure is required. Is there any reason that the proposed disclosure mandated by Section 14(i) should be limited to registrants that are soliciting proxies or consents on Schedule 14A?

3. Should we also require the proposed disclosure in all other forms and schedules in which executive compensation disclosure is required? Would it be useful to shareholders to include the proposed disclosure in registration statements or annual reports as well? Why or why not?

4. Should the disclosure required by Exchange Act Section 14(i) be a separate requirement under Item 402 of Regulation S-K, as proposed? Alternatively, should we require the disclosure as part of the CD&A? If so, please explain why.

5. Should we require registrants to provide, as proposed, a table that includes the Summary Compensation Table total compensation, in addition to the values of the prescribed measures of executive compensation actually paid and registrant financial performance used for the pay-versus-performance disclosure? Why or why not?

6. Should we further prescribe the format of the proposed disclosure to promote comparability across registrants? For example, should we require that registrants present the percentage change in executive compensation actually paid and registrant/peer group financial performance over each year of the required time period graphically or in writing? Are there other format requirements we should consider? Should we provide further guidance on how to present the information in a way that promotes comparability? Are there ways our proposed table can be improved?

7. If we were to require a graphic presentation of the disclosure, should we specify requirements for this presentation so that each registrant provides comparable disclosure? Or should we allow registrants to determine the appropriate graphic presentation, if any? How should such a graph describe the relationship between executive compensation actually paid and registrant performance?

8. Should we provide sample charts or other examples of graphic presentations that would comply with proposed Item 402(v)? If so, please provide examples.

9. Would requiring disclosure of the values of the prescribed measures of executive compensation actually paid and registrant financial performance, without additional information about the “relationship” of those data points, satisfy Section 14(i) of the Exchange Act?

10. Would the stock performance graph required by Item 201(e) of Regulation S-K modified to add a line representing executive compensation actually paid provide meaningful disclosure about the relationship between executive pay and registrant performance? Why or why not? If so, should we require the stock performance graph, as so modified to be included in the proxy or information statement as well as, or instead of, in the annual report to security holders required by Exchange Act Rules 14a-3 and 14c-3

? Would such disclosure satisfy Exchange Act Section 14(i)?

17 CFR 240.14a-3 and 17 CFR 240.14c-3.

11. Under our current rules, unless specifically incorporated by reference, the disclosure required by Item 201(e) of Regulation S-K is not deemed to be “soliciting material” or to be “filed” with the Commission or subject to the liabilities of Exchange Act Section 18.

That same treatment is not afforded to the CD&A disclosure. Under the proposal, the pay-versus-performance disclosure, which would require disclosure of TSR as defined in Item 201(e) for the registrant and for a peer group used by the registrant for purposes of the CD&A or Item 201(e), would be filed in certain proxy or information statements. Should the disclosure about TSR be deemed to be filed, as proposed? Why or why not? Alternatively, should the TSR disclosure be deemed to be “furnished”? If the disclosure was treated as “furnished”, should such treatment only apply to peer group TSR? Why or why not?

15 U.S.C. 78r;

see

Instruction 8 to Item 201(e) of Regulation S-K.

12. Would the proposed tabular disclosure of the values of the executive compensation and registrant financial performance enhance comparability across registrants? Are there other formats that would be more useful in that regard?

13. Should we require that the data be tagged in XBRL format, as proposed? Should we require a different format, such as, for example, eXtensible Markup Language (XML)?

Should the proposed tabular disclosure be changed in any way to facilitate accurate and consistent tagging? If so, how? Should we require that, as proposed, disclosure about the relationship between executive compensation and registrant performance be tagged? Why or why not? Would tagging the relationship of executive compensation to financial performance enhance comparability among different registrants? Alternatively, instead of requiring that the disclosure about the relationship be tagged, should tagging this disclosure be optional? If a registrant chooses to add more information to the prescribed

table, should we require this additional information to be tagged as well, even if registrant-specific extensions are necessary?

Another possible alternative for providing the information in interactive data format would be Inline XBRL, which would allow registrants to file the required information and data tags in one document rather than requiring a separate exhibit for the interactive data. Commission rules and the EDGAR system do not currently allow for the use of Inline XBRL. To the extent that a determination is made in the future to accept Inline XBRL submissions, we expect to revisit the format in which this disclosure requirement is provided.

14. Should we require that the data be tagged in preliminary proxy statements and information statements, as well as in definitive proxy statements and information statements? Why or why not?

15. Should we exempt smaller reporting companies from the XBRL requirement, rather than require them to provide such data? Why or why not? Would the costs be different for smaller reporting companies to comply with the proposed requirement to provide the data in XBRL format as compared to other companies? What would be the impact of not requiring tagging for smaller reporting companies? Should we, as proposed, provide a phase-in for smaller reporting companies to tag the disclosure? Why or why not? Should the period be longer or shorter than three years?

16. Instruction 1 to Item 402(c)(2)(iii) and (iv) of Regulation S-K permits a registrant to omit disclosure in the Summary Compensation Table of the salary or bonus of an NEO if it is not calculable as of the latest practicable date.

Item 5.02(f) of Form 8-K

sets forth the requirements for the filing of information that was omitted from Item 402 disclosure in accordance with Instruction 1 to Item 402(c)(2)(iii) and (iv), including the requirement to include a new total compensation figure for the NEO. Should we consider permitting registrants to omit pay-versus-performance disclosure until those elements of the NEO's total compensation are determined and to provide the pay-versus-performance disclosure in the same filing under Item 5.02(f) of Form 8-K in which the salary or bonus is disclosed? Is such relief necessary given that, as proposed, registrants will not be required to incorporate the disclosure into the Form 10-K? If we were to provide the relief, should we require any additional or supplemental disclosure in connection with an amendment to Item 5.02(f)? If so, what would that disclosure entail?

For smaller reporting companies, Instruction 1 to Item 402(n)(2)(iii) and (iv) is the corresponding instruction.

17 CFR 249.308.

C. Executives Covered

Exchange Act Section 14(i) does not specify which executives must be included in the disclosure of “executive compensation actually paid.” For registrants other than smaller reporting companies, we are proposing that the executives covered by the proposed Item 402(v) disclosure be the “named executive officers” as defined in Item 402(a)(3) of Regulation S-K.

For smaller reporting companies, we are proposing that the executives covered by the proposed Item 402(v) disclosure be the same as the “named executive officers” required to be disclosed under Item 402(m).

These are the executive officers for whom, under our current rules, compensation disclosure is required in the Summary Compensation Table and the other executive compensation disclosure requirements. In addition, we are proposing that, for each year, the compensation information be presented separately for the principal executive officer

and as an average for the remaining NEOs identified in the Summary Compensation Table.

Item 402(a)(3) [17 CFR 229.402(a)(3)] defines the NEOs for whom Item 402 executive compensation is required as 1) all individuals serving as the registrant's principal executive officer or acting in a similar capacity during the last completed fiscal year (“PEO”), 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 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 is being proposed as new paragraph (v) to Item 402, the disclosure also would be required for the NEOs.

For smaller reporting companies, Item 402(m)(2) [17 CFR 229.402(m)(2)] defines the NEOs for whom Item 402 executive compensation is required as 1) all individuals serving as the smaller reporting company's principal executive officer or acting in a similar capacity during the last completed fiscal year (PEO), 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 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.

The term “principal executive officer” used in this release has the same meaning as in Items 402(a)(3) and 402(m)(2) of Regulation S-K and would include an individual acting in a similar capacity.

We note that Section 14(i) specifically refers to compensation required to be disclosed under Item 402 of Regulation S-K. Because Item 402 of Regulation S-K requires disclosure of NEO compensation, we believe that Congress intended for the rules to provide disclosure about that group. We also believe that covering only the NEOs should help to mitigate some of the costs associated with the proposed disclosure because registrants are already required to make the determination of who is an NEO and to track information about their compensation. Commenters that addressed this issue were generally supportive of requiring that the pay-versus-performance disclosure cover the NEOs.

See

letters from ABA, Baker, Donelson, Bearman, Caldwell & Berkowitz (“Baker Donelson”), ClearBridge, Compensia, Brian Foley & Company (“Foley”) and MDU.

We are proposing to require that the disclosure be provided separately for the PEO and as an average for the remaining NEOs identified in the Summary Compensation Table. Several commenters noted that shareholders have a particular interest in the compensation of the PEO.

We are further proposing that if more than one person served as the PEO of the registrant, then the disclosure for the persons who served as PEO of the registrant shall be aggregated for the years in which more than one person served as the PEO because this reflects the total amount that was paid by the registrant for the services of a PEO.

See

letters from Farient, Johnson & Johnson (“J&J”), Meridian and Pay Governance. One such commenter recommended that we limit the disclosure solely to the PEO.

See

letter from Meridian. As discussed above, however, because Section 14(i) specifically refers to compensation required to be disclosed under Item 402, and Item 402 applies to a broader group of NEOs than the PEO, we believe the disclosure should be required about that group.

Finally, we are proposing to require disclosure of the average compensation actually paid for the remaining NEOs. We believe disclosure of the relationship of performance to average NEO compensation would be more meaningful to shareholders than individual or aggregate NEO compensation. There can be significant variability in the identity of the registrant's other NEOs over a five-year period. Moreover, the number of NEOs for whom Item 402 disclosure is required may fluctuate from year-to-year, which would make an aggregate total not comparable year over year.

We believe requiring disclosure of the average compensation would help make the information about these NEOs more comparable from year to year in spite of the variability in the composition and number of NEOs who are not the PEO

over the years for which disclosure is required.

For example, in any year, up to two additional individuals who were not serving as executive officers at the end of the year must be included if they otherwise would have been among the most highly compensated. Additionally, for registrants other than smaller reporting companies, if more than one person serves as principal financial officer during the year, each of them must be included in the Summary Compensation Table.

Request for Comment

17. Should we require that the proposed disclosure cover the NEOs as defined in Item 402(a)(3) of Regulation S-K, or Item 402(m) for smaller reporting companies, as proposed? Alternatively, should we require disclosure for a different group of executives than the NEOs and, if so, how should such a group be defined? For example, would the appropriate group be all executive officers as defined in Rule 3b-7 under the Exchange Act?

What additional costs would registrants incur if they were required to provide information for executives not currently defined as NEOs?

17 CFR 240.3b-7.

18. Should we require registrants to provide the pay-versus-performance disclosure for NEOs other than the PEO as an average, as proposed, or should we specify that the disclosure must be made either in the aggregate (

i.e.,

the sum of all other NEOs' compensation) or on an individual basis for each NEO? How would these approaches affect, either positively or negatively, the comparability across registrants? Alternatively, should registrants provide tabular disclosure of the executive compensation actually paid on an individual basis for each NEO but only be required to demonstrate the relationship to financial performance for the PEO's individual compensation and the average compensation of the other NEOs? Are there ways other than using an average for the other NEOs to appropriately account for the possibility that the size and identity of the group of other NEOs could change each year? What impact would changes to the group of other NEOs have on the comparability and usefulness of pay-versus-performance disclosure?

19. Should we require separate disclosure for the PEO, as proposed? Should we require, in instances where a registrant had more than one PEO in a given year, that the amounts for each PEO be added together, as proposed? Under our executive compensation disclosure rules, if an individual served in the capacity of PEO during

any

part of a fiscal year for which executive compensation disclosure is required, information about the individual's compensation for the full fiscal year is required to be disclosed. Should the compensation amount for the pay-versus-performance disclosure include only compensation received as the PEO? Should we require separate disclosure for each individual who served as a PEO during the required time period of disclosure? Are there alternative approaches we should consider? For example, where a registrant had more than one PEO in a given year, should we permit registrants the flexibility to choose instead to annualize the compensation of the PEO serving at the end of the fiscal year?

20. Should we require disclosure for only the PEO? Would information about the non-PEO NEOs be meaningful or useful for investors? Would information about the PEO's compensation provide adequate information to investors about the pay-versus-performance alignment of other NEOs? Would limiting the scope of disclosure to the PEO result in meaningful cost savings to registrants, for example by limiting the extent to which they must perform recalculations of compensation actually paid (see Section II.D below) or average calculations? Would limiting the disclosure to the PEO affect the usefulness of the information for investors?

D. Determination of “Executive Compensation Actually Paid”

Exchange Act Section 14(i) does not define the phrase “executive compensation actually paid,” but it does require a “clear description of any compensation required to be disclosed by the registrant” under Item 402 of Regulation S-K.

We are proposing that “executive compensation actually paid” under proposed 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. 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 those figures reduces burdens to registrants and also may enhance comparability of the proposed disclosure across registrants.

15 U.S.C. 78n(i).

Item 402(c) of Regulation S-K. Smaller reporting companies provide the scaled Summary Compensation Table disclosure specified in Item 402(n) of Regulation S-K.

We note that the pay ratio disclosure required by Section 953(b) of the Dodd-Frank Act is required to be based on total compensation as provided in the Summary Compensation Table. In light of the different language in Section 953(a), which references compensation that is “actually paid,” we believe it is appropriate to adjust the treatment of certain components of total compensation for the disclosure required by Section 953(a) of the Dodd-Frank Act.

Although Exchange Act 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.

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 that adjustments to some of the elements in the Summary Compensation Table are appropriate to reflect executive compensation that is “actually paid” within the meaning of Section 14(i). Total compensation as reported in the Summary Compensation Table is the appropriate starting point and, as proposed, would be included in the table as discussed above, but registrants would need to adjust some elements of compensation determined according to the Summary Compensation Table reporting requirements to reflect amounts “actually paid” to the NEOs.

See

17 CFR 229.402(a)(2).

Some commenters were of the view that we should not prescribe the specific compensation elements to be covered

or the method of determination of when equity awards are “actually paid.”

Instead, these commenters suggested that registrants be permitted flexibility to determine which compensation elements should be included in pay-versus-performance disclosure.

While such an approach could benefit registrants by permitting them to determine the disclosure they believe best reflects the relationship between executive pay and the registrant's performance, we believe that such flexibility would limit comparability across registrants, making the disclosure less useful to shareholders.

See

letters from ABA, CEC I, ClearBridge and Davis Polk.

See

letters from ABA, CEC I, Davis Polk, Protective Life and Society of Corporate Secretaries and Governance Professionals (“SCSGP”).

See

letters from ABA, CEC I and Davis Polk. One commenter stated that “[a]n issuer should be able to determine which compensation elements are based on performance and explain the rationale for why it included those elements in this analysis, and excluded others.”

See

letter from Davis Polk.

See, e.g.,

letters from AFL-CIO and Council of Institutional Investors (“CII”).

Other commenters recommended that we limit the compensation required to be disclosed for purposes of the pay-versus-performance disclosure to the amounts that are based on the financial performance of the company.

Some commenters supported particular

definitions of “actually paid” covering specific compensation elements,

such as a measure including only the grant date fair value for all equity awards that are subject to performance-based vesting conditions and cash amounts awarded based on the financial performance of the registrant.

Some commenters suggested that change in pension value should be excluded from the Summary Compensation Table calculation in computing the new measure.

Other commenters, by contrast, recommended that the Commission define “executive compensation actually paid” as broadly as possible, regardless of whether a particular component of compensation is awarded based on performance.

See

letters from Compensia and Center for Executive Compensation (Oct. 17, 2014) (“CEC II”).

See

letters from ClearBridge and Pay Governance. ClearBridge and Pay Governance recommended using particular definitions of realizable pay.

See

letter from Compensia.

See

letters from Baker Donelson, Frederic W. Cook & Co., Inc. (“Cook”), and Meridian.

See

letter from CII.

See also

letter AFL-CIO (recommending that the Commission require disclosure of all forms of compensation as disclosed in the Summary Compensation Table).

We are aware that a number of registrants have used the concepts of “realizable pay” and “realized pay” in their proxy statements as a means of comparing pay and performance.

While there continues to be work among various compensation constituencies to agree upon a consistent methodology for calculating “realizable pay” or “realized pay,” we are not aware that there has yet been broad agreement upon any particular formula. Registrants may choose to supplement the disclosure required by proposed Item 402(v) by providing pay-versus-performance disclosure based on a measure of “realized pay,” “realizable pay,” or another appropriate measure if they believe it provides useful information about the relationship between compensation and registrant performance, provided that the supplemental disclosure is not misleading and not presented more prominently than the required disclosure.

The concepts of “realized pay” and “realizable pay” are designed to provide different measures of alignment between a named executive officer's pay and performance, though there are no standard definitions of either term. Registrants can tailor the concepts resulting in amounts which generally differ from the amounts disclosed in the Summary Compensation Table because they exclude various types of compensation such as the value of unvested or unexercised equity awards. We note that some proxy advisory services have also begun to take into account some version of “realizable pay” or “realized pay” when making say-on-pay voting recommendations.

See, e.g.,

Institutional Shareholder Services, Inc., U.S. Corporate Governance Policy 2014 updates (Nov. 21, 2013).

Because the statute does not define “executive compensation actually paid,” we are using our discretion to define that term for the purpose of proposed Item 402(v) disclosure.

As indicated above, while we believe the Summary Compensation Table is the appropriate starting point, we believe some adjustments are appropriate to give effect to the statutory language and reflect executive compensation that is “actually paid.” Specifically, as discussed below, we propose to modify the amounts included for pension benefits and equity awards.

Moreover, we believe that the phrase “executive compensation actually paid” should include all compensation actually paid, regardless of whether the compensation is awarded based on the registrant's financial performance. In considering the relationship between executive compensation actually paid and the registrant's financial performance, we believe shareholders should be able to take into account components of compensation regardless of whether or not they are awarded based on the registrant's performance.

Proposed Item 402(v)(2).

These terms have the same definitions as in Item 402 of Regulation S-K.

1. Changes in Actuarial Pension Value

We propose to deduct the change in the actuarial present value of all defined benefit and pension plans from the Summary Compensation Table total for purposes of proposed Item 402(v).

This Summary Compensation Table measure includes the change in actuarial present value of pension benefits previously accrued based on changes in interest rates, executive age, and other actuarial inputs and assumptions, which may introduce significant volatility into this measure, as well as the actuarial present value of accrued pension benefits earned by the executive based on an additional year of service.

Item 402(v) would require, however, that the actuarially determined service cost for services rendered by the executive during the applicable year be added back.

Thus, the portion of the total change in actuarial pension value that results solely from changes in interest rates, executive's age and other actuarial inputs and assumptions regarding benefits accrued in previous years would be excluded.

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. This amount 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 reported only in a footnote to column (h), it should not be reflected for purposes of proposed Item 402(v).

See

Instruction 3 to Item 402(c)(2)(viii). Smaller reporting companies would not need to deduct this amount because the Summary Compensation Table requirements for smaller reporting companies do not require disclosure of the change in actuarial present value.

While commenters were divided on which elements of compensation should be included, some commenters supported calculating compensation by excluding changes in pension value and above-market earnings on deferred compensation from the compensation in the Summary Compensation Table.

See

letters from Meridian, Baker Donelson, and Cook.

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.

We believe that including only the service cost for services rendered by the executive during the applicable year is a more appropriate measure for purposes of determining compensation “actually paid” during the applicable year because it is limited to pension costs for benefits earned during that year. The amount we proposed to include may be viewed to approximate the value that would be set aside currently by the registrant to fund the pension benefits payable upon retirement for the service provided during the applicable year. We recognize that registrants may differ as to whether they use defined benefit or defined contribution retirement plans, and this proposed change to the amount disclosed in the Summary Compensation Table is intended to provide a more meaningful comparison across registrants of the amounts “actually paid” under both types of plan. 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,

which will also be included in computing compensation actually paid for purposes of the new disclosure.

Item 402(c)(2)(ix)(E).

We do not expect that the proposed adjustments will require the collection of significant new data by registrants, or reveal significant new information to shareholders relative to the compensation disclosure that is currently required. The pension's annual service cost is not required to be reported separately, but can be calculated based on information reported in, and in footnotes to, the Pension Benefits Table. We believe that, for purposes of proposed Item 402(v), using the actuarially determined service

cost rather than the Summary Compensation Table pension measure may increase comparability of compensation provided through defined benefit and defined contribution plans because of the variability of the actuarial inputs and assumptions among different registrants.

2. Earnings on Non-Qualified Deferred Compensation

Consistent with the current disclosure requirements of the Summary Compensation Table, the compensation calculation under proposed Item 402(v) would include above-market or preferential earnings on deferred compensation that is not tax-qualified because these amounts represent compensation accrued during the relevant year.

Above-market or preferential earnings on deferred compensation represent amounts accrued during the year based on the registrant's compensatory decision to pay an above-market return. Excluding this element from disclosure of compensation “actually paid” until its eventual payout would make disclosure contingent on an NEO's decision to withdraw or take a distribution from his or her account, rather than the registrant's compensatory decision to pay the above-market return. Such an approach would be inconsistent with the Summary Compensation Table disclosure of the underlying deferred amounts when earned,

which we would carry forward to proposed Item 402(v), and could result in the relationship of this amount to company performance never being disclosed.

These earnings are reported pursuant to Item 402(c)(2)(vii), or, for smaller reporting companies, Item 402(n)(2)(viii). These earnings, like the aggregate change in defined benefit plan actuarial present value also reported pursuant to Item 402(c)(2)(viii), or Item 402(n)(2)(viii), are excluded for purposes of a registrant's NEO determination pursuant to Instruction 1 to Item 402(a)(3), or, for smaller reporting companies, Instruction 1 to Item 402(n)(2)(viii). In adopting this Instruction, the Commission stated it was appropriate to exclude these items because their amounts generally are not determined by the Compensation Committee. Rather, they are “compensation elements that principally reflect executives' decisions to defer compensation and wealth accumulation in pension plans, or are unduly influenced by age or years of service.”

See Executive Compensation and Related Person Disclosure,

Release 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 8, 2006)], at Section II.C.6 (“Executive Compensation Release”). These reasons, however, do not seem relevant to a determination of whether such compensation is “actually paid” for purposes of the disclosure mandated by Section 14(i).

Instruction 4 to Item 402(c), or, for small reporting companies, Instruction 4 to Item 402(n).

3. Equity Awards

We are proposing 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.

Before vesting, an executive does not have an unconditional right to an equity award. For example, the terms of both options and restricted stock awards typically provide for forfeiture of the award if the executive leaves the registrant's employment before the vesting date or if specified performance criteria are not met. Accordingly, we do not believe that an option or other equity award should be considered “actually paid” for purposes of this disclosure before the applicable vesting conditions are satisfied. Satisfaction of these conditions, which are determined by the registrant, can be viewed as representing payment by the registrant. Moreover, using vesting-date valuations will result in a compensation measure that includes, upon the vesting date, the grant-date value of equity awards plus or minus any change in the value of equity awards between the grant and vesting date. Such changes in the value of equity grants after the grant date represent a direct channel, and one of the primary means, through which pay is linked to registrant performance.

Grant date fair value disclosure reflects compensation committee decisions during the relevant fiscal year relating to equity awards.

See Proxy Disclosure Enhancements,

Release No. 33-9089 (Dec. 16, 2009) at Section II.A.2 [74 FR 68334] (Dec. 23, 2009).

We do not believe that an award requiring exercise should be considered actually paid only upon its exercise, because once the award is vested the executive can control how and when the award is monetized, and thus could influence pay-versus-performance disclosure by controlling the fiscal year in which the executive receives the compensation. Changes in the fair value of the award after vesting generally reflect investment decisions made by the executive rather than compensation decisions made by the registrant.

The value of stock awards upon vesting is disclosed in the Option Exercises and Stock Vested Table.

Registrants are not currently required to report the value of option awards upon vesting if they are not exercised. However, registrants can apply existing models and methodologies to compute these values. Also, it is possible for shareholders to make reasonable estimates of these vesting-date fair values of options based on current disclosures.

See

Item 402(g)(2)(v). Smaller reporting companies are not required to provide this table.

In particular, the terms of unexercised option awards in a given year, including their exercise prices and expiration dates, are required to be disclosed (together with information about other outstanding awards) in the Outstanding Equity Awards at Fiscal Year-End Table.

Information about the valuation assumptions used by the registrant to calculate the grant-date value of option awards can be found in footnotes to the Summary Compensation Table (which may refer to disclosures made on Form 10-K) for the year corresponding to the grant date.

Disclosures about the vesting conditions that applied to the awards can be used to determine which of the option awards are newly vested.

The translation of the reported terms of these options into their fair values at vesting requires the choice of a valuation methodology and the use of public data and reasonable assumptions (potentially with reference to the registrant's disclosed grant-date valuation assumptions) to obtain the additional inputs required for option valuation at vesting date. Estimates thus computed by shareholders could differ from estimates computed by the registrant and, as mentioned above, current disclosure rules do not require registrants to compute and disclose their own estimates of these values.

See

Item 402(f)(2)(v) and (vi). For smaller reporting companies, see Item 402(p)(2)(v) and (vi). Some options may be exercised in the same year as vesting. Whether an option award that was exercised had vested in the same year can be determined by comparing the Outstanding Equity Awards at Fiscal Year-End Table per Item 402(f) or, for smaller reporting companies, Item 402(p), to the same table for the prior year, and identifying as exercised options those that are no longer reported as outstanding. In such cases, the terms of these awards can be determined from the Outstanding Equity Awards at Fiscal Year-End Table and related footnotes for the prior year or, for options granted in the same year as exercise (which will not appear in disclosures for the prior year) in footnotes to the Summary Compensation Table for the same year.

See

Instruction 1 to Item 402(c)(2)(v) and (vi). For smaller reporting companies,

see

Instruction 1 to Item 402(n)(2)(v) and (vi).

Registrants are required to describe the material conditions of awards, including a general description of the formula or criteria to be applied in determining the amounts payable, and the vesting schedule, in the narrative disclosure to the Summary Compensation Table and Grants of Plan-Based Awards table per Item 402(e) in the year in which an option award is granted. Smaller reporting companies are required to describe the material conditions of awards in the narrative disclosure to the Summary Compensation Table per Item 402(o) in the year in which an option award is granted. The vesting date of options held at fiscal-year end must be disclosed by footnote to the Outstanding Equity Awards at Fiscal-Year End table required by Item 402(f), or, for smaller reporting companies, Item 402(p), of Regulation S-K.

Accordingly, for purposes of proposed Item 402(v), the amounts reported pursuant to Items 402(c)(2)(v) and (vi) would be subtracted from total compensation reported in the Summary

Compensation Table, and the following would be added in their place:

Proposed Item 402(v)(3) would require registrants to disclose in a footnote to the table required under paragraph (v)(1), the total compensation amount reported in the Summary Compensation Table for the covered fiscal year for each NEO as provided in paragraph (c)(2)(x), or, for smaller reporting companies, paragraph (n)(2)(x), and the individual amounts deducted from, and modifications to, the amounts reported in the Summary Compensation Table in generating the amounts disclosed pursuant to Item 402(v) for the PEO(s). For NEOs other than the PEO, proposed Item 402(v)(3) would require disclosure of these amounts as averages.

• For awards of stock, that vested in the applicable year, the fair value at vesting date, computed in accordance with the fair value guidance in FASB ASC Topic 718; and

• For awards of options with or without tandem stock appreciation rights (“SARs”) that vested in the applicable year, the fair value at vesting date, computed in accordance with the fair value guidance in FASB ASC Topic 718. 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.

We believe shareholders may be interested in vesting date valuation assumptions to the extent they believe that changes in the value of equity grants after the grant date are a primary channel through which pay is linked to performance. We believe that requiring disclosure of vesting date valuation assumptions would make these computations readily accessible to shareholders, which may be useful to shareholders to the extent they are interested in computing slightly different measures or using parts of the computations for other purposes. Further, if during the last completed fiscal year the registrant adjusted or amended the exercise price of previously vested options or SARs held by an NEO, whether through amendment, cancellation or replacement grants, or any other means, or otherwise has materially modified such awards, proposed Item 402(v) would require the registrant to include the incremental fair value, computed as the excess fair value of the modified award over the fair value of the original award upon vesting of the modified award. If the modified award is subject to multiple vesting dates, the pro rata incremental fair value would be determined and included in compensation actually paid at each vesting date.

For example, a registrant grants an option (“original award”) for 1,000 shares of common stock with an exercise price of $20 per share. By its terms, the original award vests upon completion of a two-year service period. Upon vesting, the then fair value of the original award is included in compensation actually paid. After the original award vests, assume the registrant modifies its terms to reduce the exercise price to $15 per share with 50% vesting immediately and 50% vesting upon completion of another two-year service period (“modified award”). The incremental fair value that is included in compensation actually paid will be computed at each of the modified award's two vesting dates based on the then excess fair value of the ratable 500 shares using the modified award terms compared with the original award terms. In this example, compensation actually paid would be determined three times, as the full fair value of the original award at its vesting and the pro rata incremental fair value amounts at each of the two vesting dates of the modified award.

See

proposed Instruction 1 to Item 402(v). Note that if the original award had been modified before it vested, the compensation actually paid would be determined only twice, as the pro rata fair value of the modified award at each of its two vesting dates.

Request for Comment

21. Does our proposed definition appropriately capture the concept of “executive compensation actually paid?” Why or why not? Are there elements of compensation excluded by our proposed definition that should not be? Alternatively, does the proposed definition include any items that should be excluded? If so, which ones and why?

22. Our proposal is designed, in part, to enhance comparability across registrants. Is comparability across registrants relevant or necessary in determining which compensation elements should be covered by the pay-versus-performance disclosure? Why or why not?

23. Under our proposed approach, the disclosure may not necessarily align a particular executive's compensation with the time period during which the registrant's performance may be attributed to the executive. For example, this may be the case where a turn-around specialist is hired and provided a substantial incentive payment up front in order to assume the task of improving the company's performance. Should our approach account for this? If so, should we require this to be addressed in supplemental disclosure? Are there other approaches we should consider?

24. Instead of our proposal, should we permit a principles-based approach that would allow registrants to determine which elements of compensation to include, so long as they clearly disclosed how the amount was calculated? Why or why not? How should such a provision be structured? What requirements should we include?

25. Are there alternative methods of determining which compensation is relevant to pay-versus-performance disclosure that we should consider?

26. Instead of our proposal, should we require only the use of the total compensation reported in the Summary Compensation Table and permit registrants to supplement this disclosure as they determine best reflects how their compensation relates to company performance? How would this approach affect the usefulness, comparability and cost of the pay-versus-performance disclosure?

27. Does our proposal to require only the actuarial present value of benefits attributable to services rendered during the applicable fiscal year, rather than the change in actuarial present value of pension benefits that is required by the Summary Compensation Table, appropriately reflect compensation “actually paid” to NEOs during that year for purposes of the pay-versus-performance disclosure mandated by Section 14(i)?

28. Is our proposal to include in the Item 402(v) calculation only above-market or preferential earnings on deferred compensation that is not tax-qualified appropriate? Should the calculation instead include all earnings on deferred compensation that are not tax-qualified rather than just the above-market portion? Should the calculation only include the above-market portion once any vesting conditions applicable to those earnings have been satisfied?

29. Should we value equity awards at vesting date fair value as proposed? Should we instead value equity awards at grant date fair value as currently required by Item 402(c)(2)(v) and (vi) or fair value at some other point in time? If so, why? Should we require disclosure of vesting date valuation assumptions if they are materially different from those disclosed in a registrant's financial statements as of the grant date, as proposed? Would the disclosure of these assumptions provide meaningful information to shareholders?

30. What concerns, if any, are presented if we require equity awards to be valued at vesting date fair value as opposed to grant date fair value? Would any concerns be mitigated by the inclusion in the table of the total compensation amount as provided in the Summary Compensation Table?

31. Should any other components of compensation, such as registrant contributions to defined contribution plans, also be included only after any applicable vesting conditions have been satisfied?

32. For equity awards that require exercise, is our proposal to consider them “actually paid” when vested the appropriate point in time for purposes of Item 402(v) disclosure? If not, please explain. Should we instead require that for an award that requires exercise to be considered “actually paid,” it must also be exercisable, making the valuation date the date on which the award is both vested and exercisable? Is there an alternative approach we should consider?

33. Are there other specific elements of compensation in the Summary Compensation Table that we should exclude or modify for purposes of the pay-versus-performance disclosure called for under proposed Item 402(v)?

E. Measure of Performance

We are proposing to require that registrants use TSR (as defined in Item 201(e) of Regulation S-K) as the measure of financial performance of the registrant for purposes of pay-versus-performance disclosure.

Exchange Act Section 14(i) does not specify how registrant financial performance is to be measured, although the language in the statute requires financial performance to take into account any change in the value of the shares of stock and dividends of the registrant and any distributions of the registrant. We believe using TSR as the measure of financial performance is consistent with this requirement and we received several comments that supported this approach.

Item 201(e) of Regulation S-K, which prescribes disclosure for the stock performance graph included in the annual report to security holders required by Rules 14a-3 and 14c-3, provides that cumulative total shareholder return is calculated by “dividing the (i) sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the registrant's share price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period.” 17 CFR 229.201(e).

See

letters from ClearBridge, Compensia, Farient, Meridian and MDU.

Several commenters in the pre-proposal stage indicated that absolute company performance may not be a sufficient basis for comparison and advocated disclosure of registrant performance relative to that of a peer group.

Consistent with these suggestions, we also are proposing to require registrants, other than smaller reporting companies, to disclose peer group total shareholder return, using either the same peer group used for purposes of Item 201(e) of Regulation S-K,

or, a peer group used in the CD&A for purposes of disclosing registrants' compensation benchmarking practices.

If the peer group is not a published industry or line-of-business index, the registrant would be required to disclose the identity of the issuers. A registrant that has previously disclosed the composition of issuers in its peer group in prior filings with the Commission would be permitted to comply with the proposed requirement by incorporation by reference to those filings. We believe this would avoid the potential for duplicative disclosure.

See

letters from Farient, J&J, MDU, Pay Governance, Shareholder Value Advisors.

17 CFR 229.201(e)(1)(ii).

See

Item 402(b)(xiv) of Regulation S-K (17 CFR 229.402(b)(xiv)). We note that smaller reporting companies are not subject to Item 201(e) and that requiring disclosure of peer group total shareholder return would require smaller reporting companies to collect and disclose information that they are not currently required to disclose.

Requiring registrants to use a consistently calculated measure, such as TSR, should increase the comparability of pay-versus-performance disclosure across registrants. Using TSR also would provide a measure of financial performance that is objectively determinable from the share price of the registrant and not open to subjective determinations of performance. In addition, using a measure that registrants are already required to determine and disclose, and with which shareholders already are familiar, would reduce the burden of providing and analyzing pay-versus-performance disclosure as compared to requiring registrants to calculate and shareholders to review a new measure of financial performance.

Some commenters suggested permitting registrants to choose the performance measure best-suited for their company.

One commenter suggested that registrants should be required to present additional performance measures.

We note that, as with other mandated disclosures, registrants would be permitted to provide supplemental measures of financial performance so long as any additional disclosure is clearly identified, not misleading and not presented with greater prominence than the required disclosure.

See

letters from ABA, CEC I, Davis Polk, Protective Life and SCSGP.

See

letter from Public Citizen (recommending that registrants be required to present the relationship of compensation with four performance measures: Total shareholder return, return on assets, return on equity, and the growth in earnings per share).

Request for Comment

34. Should we require registrants to use TSR as the performance measure? Would the comparability across registrants resulting from this proposal benefit shareholders? Would prescribing the use of TSR hinder registrants from providing meaningful disclosure about the relationship between executive pay and financial performance? Would requiring the use of TSR result in shareholders or management focusing too much on this single measure of performance or emphasizing short-term stock price improvement over the creation of long-term shareholder value? If so, are there ways we could mitigate that risk?

35. Should we allow registrants flexibility in choosing the relevant measure of performance they are required to disclose? Besides TSR, what other measures of financial performance take into account any change in the value of the shares of stock and dividends and distributions of the registrant, as required by the statute? Are there metrics other than TSR that measure a company's performance and meet the requirements of the statute? If so, would they result in disclosures that are more or less meaningful than TSR? How is corporate performance measured today? How is this information incorporated into investment decisions?

36. If companies do not currently use TSR as a factor in determining executive compensation, could requiring disclosure of this relationship cause companies to change their compensation strategy to focus on this factor? If so, what would be the effect?

37. Does TSR, standing alone, provide sufficient information about a registrant's performance such that a registrant would provide only the information that would be mandated by this rule? Will registrants opt to provide additional information based on their own calculations or metrics to provide additional context for investors to consider the alignment of pay versus performance?

38. Should we permit voluntary use of other measures of performance in addition to TSR, as proposed? Should we instead include specific requirements relating to the use of alternative performance measures in the proposed rules?

39. Should we require disclosure of TSR on an absolute basis, as well as disclosure of peer group TSR, as proposed? Why or why not? Are there other parameters we should consider

requiring registrants to implement for the selection of peer groups?

40. Should we require disclosure about the registrant's selection of the peer group? For example, if a registrant using a peer group changes its peer group from one used in the previous fiscal year, should we require a brief narrative explaining the reasons for the change?

See, e.g.,

Item 201(e)(4) of Regulation S-K, which provides that if a registrant chooses a different index for the stock performance graph than the one used in the previous fiscal year, then the registrant is required to explain the reason for the change and is also required to compare total return with both the old and the new index.

41. Our proposal requires a registrant to use the same peer group used for purposes of Item 201(e) or the CD&A. Should a registrant be permitted to choose between these two options, or should we prescribe which peer group should be used? Why or why not? Should a registrant be permitted to choose a peer group different from that used for purposes of Item 201(e) or its CD&A? Please explain. Should there be any restrictions on how registrants select their peer groups?

F. Time Period Covered

Section 14(i) does not specify the time period that the pay-versus-performance disclosure must cover. Several commenters expressed concern that meaningful pay-versus-performance disclosure would need to address the time periods over which pay and performance are evaluated.

Commenters recommended a variety of solutions to provide meaningful disclosure, recommending varying types of disclosure over varying time periods.

See, e.g.,

letters from ClearBridge, Pay Governance and SCSGP.

See

letters from Brian Foley & Company, ClearBridge and Pay Governance (supporting a one-year and a three-year aggregate disclosure to capture annual and long-term compensation); J&J (including a copy of their proxy materials in which they disclosed their PEO's annual compensation over five years in relation to total shareholder return and provided a separate table showing aggregate compensation over a three-year period relative to a peer group); and from Baker Donelson, Cook, Meridian, and MDU (supporting a five-year time period).

For registrants other than smaller reporting companies, we are proposing to require registrants to provide the pay-versus-performance disclosure for the five most recently completed fiscal years.

As noted above, several commenters supported a disclosure period of five years.

While the Summary Compensation Table required by Item 402(c) of Regulation S-K requires compensation disclosure for each of the last three completed fiscal years, we note that the stock performance graph required by Item 201(e) of Regulation S-K requires disclosure for the previous five fiscal years, although it does not include any compensation information. We believe that requiring disclosure of the relationship between executive compensation and registrant performance over the five most recently completed fiscal years is appropriate because it provides a meaningful period over which a relationship between annual measures of pay and performance over time can be evaluated.

See

proposed Item 402(v)(2) of Regulation S-K.

See

letters from Baker Donelson, Frederic Cook, MDU (noting that a five-year measurement period moderates annual volatility and leads to more balanced comparisons), and Meridian.

We are proposing to require smaller reporting companies to provide the disclosure over three years because they are not subject to Item 201(e) and provide Summary Compensation Table disclosure for two completed fiscal years. See Item 402(n) of Regulation S-K.

Smaller reporting companies would be required to provide the disclosure for the three most recently completed fiscal years.

Our executive compensation rules require smaller reporting companies to provide disclosure for only the last two completed fiscal years,

but we believe that requiring pay-versus-performance disclosure for three fiscal years, instead of two, provides more useful information from which investors can evaluate the relationship between a registrant's executive compensation actually paid and its financial performance, and provides a longer time horizon over which to observe any potential trends. We also are proposing to provide a transition period for registrants to provide the disclosure. Existing smaller reporting companies would be required to provide the disclosure for only the last two fiscal years in the first applicable filing after the rules become effective. In subsequent years such companies would be required to provide disclosure for the last three fiscal years.

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Any other registrants would be required to provide the proposed Item 402(v) disclosure for three fiscal years, instead of five, in the first applicable filing after the rules become effective, and provide disclosure for an additional year in each of the two subsequent annual proxy filings where disclosure is required.

See

proposed Instruction 8 to Item 402(v)(2) of Regulation S-K.

See

Item 402(n) of Regulation S-K.

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See

proposed Instruction 1 to Item 402(v).

We are also proposing that a registrant provide pay-versus-performance disclosure only for years that it was a reporting company pursuant to Section 13(a) or Section 15(d) of the Exchange Act. Thus, a newly-reporting registrant would be required to provide pay-versus-performance disclosure for only the most recently ended fiscal year in any proxy statement or information statement in which executive compensation disclosure pursuant to Item 402 of Regulation S-K is required in its first year as a reporting company, and in the two most recently completed fiscal years in any proxy statement or information statement in which executive compensation disclosure pursuant to Item 402 of Regulation S-K is required in its second year as a reporting company. This treatment is consistent with the phase-in period for new reporting companies in their Summary Compensation Table disclosure.

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See

Instruction 1 to Item 402(c) of Regulation S-K. Similarly, Item 201(e)(2) provides that if the registrant has been registered under Section 12 for a shorter period of time than the prescribed measurement period, the period covered by the performance graph may correspond to that time period.

Request for Comment

42. Does a five-year disclosure period (for registrants other than smaller reporting companies) and a three-year disclosure period (for smaller reporting companies), as proposed, provide meaningful pay-versus-performance disclosure? Should the timeframes be shorter or longer? For example, should we require only three years of disclosure for all registrants consistent with the time period required by the Summary Compensation Table for registrants other than smaller reporting companies? What impact would a different time period have on the disclosure and its usefulness to shareholders?

43. Should we provide the proposed transition period for existing registrants? Why or why not? Should the transition period be shorter or longer? Does it depend on the type of registrant?

44. Should we permit registrants voluntarily to include fiscal years beyond the five-year period, as proposed? Please explain why or why not. Is there a risk that some registrants may choose the time period which is most favorable for performance? How could we mitigate this risk?

45. Is the proposed phase-in for new reporting companies appropriate? Is sufficient information readily available for these companies to provide adequate pay-versus-performance disclosure in any proxy statements or information statements requiring Item 402 disclosure in their first two years as a reporting company? If not, what are the costs of

developing this information? Would pay-versus-performance disclosure for only the most recently completed fiscal year in the first proxy statement filed by a newly-reporting company, as proposed, provide sufficient and meaningful information for shareholders to evaluate the executive compensation actually paid as compared to the registrant's financial performance, given the limited time period covered? Does the importance of the information to shareholders justify the costs of preparing the disclosure without a phase-in period?

46. Should the pay-versus-performance disclosure be required to use annual data from the five most recently completed fiscal years, as proposed, or aggregated data for the five most recently completed fiscal years? If the years are aggregated, should the relationship between pay and performance be demonstrated across peers because it can no longer be demonstrated over time? Alternatively, should the pay-versus-performance comparison be presented for both the last completed fiscal year and in aggregate for the five most recently completed fiscal years? If so, please explain why a different period and different level of aggregation than proposed would be more informative to shareholders or otherwise more appropriate.

47. Are there other transition issues or accommodations that we should consider? For example, should emerging growth companies

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that are statutorily excluded from the requirements of Section 14(i) be provided the same phase-in period of pay-versus-performance disclosure applicable to other registrants when they first become subject to the proposed requirement to provide five fiscal years of pay-versus-performance disclosure?

102

Section 102(a)(2) of the JOBS Act excludes “emerging growth companies” from the requirements of Section 14(i). In accordance with this provision, we are not proposing to require an emerging growth company to provide pay-versus-performance disclosure.

G. Clear Description

Exchange Act Section 14(i) requires a “clear description” of the compensation disclosure required by Item 402 of Regulation S-K. We believe the requirement in Item 402(a)(2) of Regulation S-K

103

for “clear, concise and understandable disclosure” and the Plain English principles in Exchange Act Rules 13a-20

104

and 15d-20

105

give effect to the requirement in new Section 14(i) of the Exchange Act for clear compensation disclosure. When the current compensation disclosure requirements were adopted, we also amended Exchange Act Rules 13a-20 and 15d-20 so that the Plain English principles would apply to the amended compensation disclosure.

106

In adopting the Plain English requirement for compensation disclosure, we stated, “clearer, more concise presentation of executive and director compensation . . . can facilitate more informed investing and voting decisions in the face of complex information about these important areas.”

107

We think this statement applies equally to pay-versus-performance disclosure. In addition, we noted that the Plain English principles applicable to compensation disclosure would permit registrants to “include tables or other design elements, so long as the design is not misleading and the required information is clear, understandable, consistent with applicable disclosure requirements, consistent with any other included information, and not misleading.”

108

As a result, registrants are permitted to provide additional information beyond what is specifically required by our rules so long as the information is not misleading and does not obscure the required information.

103

17 CFR 229.402(a)(2).

104

17 CFR 240.13a-20.

105

17 CFR 240.15d-20.

106

See Executive Compensation Release, supra

note 76.

107

Id.

108

Id.

Request for Comment

48. Are there changes to our rules that are necessary or appropriate in order to give effect to the requirement in Section 14(i) of the Exchange Act for a clear description of the Item 402(v) compensation disclosure?

49. Is it appropriate to apply the Plain English principles to the pay-versus-performance disclosure? If not, please explain why.

H. Smaller Reporting Companies

As proposed, smaller reporting companies as defined in Item 10(f)(1) of Regulation S-K

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would be required to provide Item 402(v) disclosure. In an effort to minimize the reporting costs for these registrants, consistent with the Commission's treatment of smaller reporting companies in other areas (

e.g.,

executive compensation), these companies would be permitted to provide scaled disclosure, as follows:

109

17 CFR 229.10(f)(1).

• First, smaller reporting companies would be required to present Item 402(v) disclosure for the three most recently completed fiscal years, as opposed to the five most recently completed fiscal years required for other registrants. This is consistent with our general approach to scaling the requirements for executive compensation disclosure provided by smaller reporting companies.

• Second, smaller reporting companies would not be required to disclose amounts related to pensions for purposes of disclosing executive compensation actually paid because they are subject to scaled compensation disclosure that does not include pension plans.

• Finally, smaller reporting companies would not be required to present a peer group TSR. Smaller reporting companies are not subject to Item 201(e) and therefore are not otherwise required to present the TSR of a peer group, and they are not required to present a CD&A.

In addition, as proposed, the rule includes a transition period that would permit an existing smaller reporting company to provide two years of data, instead of three, in the first applicable filing after the rules become effective, and three years of data in subsequent proxy filings.

Smaller reporting companies are only required to provide Summary Compensation Table disclosure for the two most recently completed fiscal years. While the time period applicable for the proposed disclosure is longer than what smaller reporting companies currently are required to disclose in the Summary Compensation Table, we note that the information required to make the pay-versus-performance calculations for these additional years would be available in disclosures from prior years.

As proposed, smaller reporting companies would be required to provide the disclosure in the prescribed table in XBRL format, but we are proposing a phase-in under which smaller reporting companies would be required to provide the data in XBRL beginning with the third filing in which it provides pay-versus-performance disclosure.

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This phase-in is intended to permit smaller reporting companies to plan and implement their data tagging with the benefit of the experience of other registrants that do not have a phase-in.

It also will give them a longer period of time over which to spread first-year data tagging costs. While we recognize that requiring this disclosure to be provided in interactive data format would impose additional costs and burdens on these companies, beyond what they currently incur in producing interactive data for other purposes in other filings, we anticipate that these expenses would be relatively lower than what they currently incur in producing interactive data for other purposes given the limited disclosures that would be required to be tagged.

110

Providing a phase-in for smaller reporting companies is consistent with how we have previously implemented certain new disclosure requirements applicable to these companies.

See, e.g., Interactive Data to Improve Financial Reporting,

Release No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)];

Shareholder Approval of Executive Compensation and Golden Parachute Compensation,

Release No. 33-9178 (Jan. 25, 2011) [76 FR 6010 (Feb. 2, 2011)].

We do not expect the compliance burden associated with providing this disclosure to be substantial given that much of the information required by the proposed rule is derived from information currently required under existing Regulation S-K. We also note that smaller reporting companies are subject to the say-on-pay advisory votes required under Exchange Act Rule 14a-21,

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which the pay-versus-performance disclosure required under proposed Item 402(v) is intended to facilitate. We believe that shareholders of smaller reporting companies may benefit from having the proposed pay-versus-performance disclosure when casting their say-on-pay advisory votes and that such disclosure can be provided without imposing undue costs on smaller registrants.

111

See

Release No. 33-9178,

supra

note 10 (“We do not believe that smaller reporting companies should be permanently exempt from the say-on-pay vote, frequency of say-on-pay votes and golden parachute and vote because we believe investors have the same interest in voting on the compensation of smaller reporting companies and in clear and simple disclosure of golden parachute compensation in connection with mergers and similar transactions as they have for other issuers.”).

Request for Comment

50. Would the proposed scaled disclosure requirements for smaller reporting companies provide meaningful disclosure to investors without imposing undue costs and burdens on these companies? Are there ways we could modify the proposed disclosure requirements to reduce the costs and still provide useful information for shareholders? For example, should we require only a two-year disclosure period for smaller reporting companies (similar to the timeframe for which they are required to provide disclosure in the Summary Compensation Table)?

51. Should we exempt smaller reporting companies from the proposed pay-versus-performance disclosure requirements? Why or why not? What impact, if any, would the absence of the proposed disclosure have on the ability of shareholders of smaller reporting companies to effectively exercise of their say-on-pay voting rights? Would shareholders be able to assess the relationship between the company's financial performance and the compensation paid absent the disclosure required under proposed Item 402(v)? Would the proposed disclosure be more or less meaningful to shareholders in the absence of CD&A and Item 201(e) performance graph disclosure? What are the burdens on smaller reporting companies of requiring pay-versus-performance disclosure and would the benefits of requiring this disclosure for smaller reporting companies justify the burdens? If not, please explain why not. Should registrants that exit smaller reporting company status be provided the same phase-in period applicable to other registrants when they first become subject to the proposed requirement to provide five fiscal years of pay-versus-performance disclosure?

III. General Request for Comments

We request and encourage any interested person to submit comments on any aspect of our proposals, other matters that might have an impact on the amendments, and any suggestions for additional changes. With respect to any comments, we note that they are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments and by alternatives to our proposals where appropriate.

In addition, we request data to quantify the costs and the value of the benefits described in this release. We seek estimates of these costs and benefits, as well as any costs and benefits not already defined, that may result from the adoption of these proposed amendments. We also request qualitative feedback on the nature of the benefits and costs we have identified and any benefits and costs we may have overlooked.

To assist in our consideration of these costs and benefits, we specifically request comment on the following:

52. Would there be any significant transition costs imposed on registrants as a result of the proposal, if adopted? Please be detailed and provide quantitative data or support, as practicable.

53. Have we struck the appropriate balance between prescribing rules to satisfy the requirements of Exchange Act Section 14(i) and allowing registrants to disclose pay-versus-performance information most relevant to shareholders?

54. Are there alternatives to the proposals we should consider that would satisfy the requirements of Section 14(i) of the Exchange Act?

IV. Economic Analysis

A. Background

As discussed above, Section 953(a) of the Dodd-Frank Act added Section 14(i) to the Exchange Act, directing the Commission to require registrants to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders the relationship between executive compensation actually paid and the financial performance of the registrant. Section 14(i) of the Exchange Act does not define key terms, such as “executive compensation actually paid” or issuer “financial performance,” or prescribe a specific format for this disclosure. As a result, we apply discretion in our proposed implementation of the provision.

New Item 402(v) proposed by the Commission to satisfy the mandate of Section 14(i) requires the disclosure of information that is largely already required to be reported under current disclosure rules, but that is currently not computed or presented in the way the proposal would require. The proposal requires registrants to present the values of prescribed measures of executive compensation and performance for each of their five most recently completed fiscal years (three years for smaller reporting companies) in a standardized table. Registrants would be required to provide a clear description of the relationship between these measures, but would be allowed to choose the format used to present the relationship, such as a graph or narrative description. The proposal would also allow registrants to supplement the required elements of the disclosure with additional measures or additional years of data. The disclosure would be required to be provided in tagged data format using XBRL.

The proposed amendments would require that the compensation covered by the disclosure be “executive compensation actually paid.” Registrants would also be required to include the Summary Compensation Table measure of total compensation in the tabular disclosure for purposes of comparison. The proposal defines executive compensation actually paid as total compensation, as currently disclosed in the Summary Compensation Table, with modifications to the amounts disclosed

for pension benefits (under all defined benefit and actuarial pension plans) and equity awards in order to better reflect amounts “actually paid.”

Specifically, we propose that, instead of the total change in actuarial pension value, executive compensation actually paid include only the actuarial present value of benefits attributable to services rendered during the applicable fiscal year. That is, the measure would exclude that part of the change in actuarial pension value that results from any change in the actuarial value of benefits accrued in previous years, and should thus increase the comparability between compensation provided through defined benefit and defined contribution plans. This adjustment is also expected to reduce the volatility in measured pension compensation caused by changes in interest rates and other actuarial assumptions, and should thus make it easier to evaluate the relationship of pay-versus-performance. Because the scaled compensation disclosure that applies to smaller reporting companies does not include pension plans, this adjustment would not be required of smaller reporting companies. We also propose that executive compensation actually paid include the values of equity awards at the time of vesting rather than the date they are granted. Using vesting-date valuations would result in a compensation measure that includes, upon the vesting date, the grant date value of equity awards plus or minus any change in the value of equity awards between the grant and vesting date. As discussed below, such changes in the value of equity awards after the grant date represent a direct channel, and one of the primary means, though which pay is linked to registrant performance. We therefore believe that it is important that such changes in the value of equity awards be reflected in the pay-versus-performance disclosure.

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To the extent that some shareholders may be interested in considering the relationship of performance with a measure of pay that excludes such changes in the value of equity awards, they would be able to refer to the Summary Compensation Table measure of total compensation required alongside executive compensation actually paid in the tabular disclosure. The Summary Compensation Table measure of total compensation reflects the grant date values of equity awards.

All of the individual components needed to calculate executive compensation actually paid must already be reported under current disclosure rules, with the exception of the values to be included with respect to pension benefits and option awards. The actuarial present value of pension benefits of an individual NEO attributable to services rendered during the applicable fiscal year is not currently required to be reported but can be estimated by shareholders based on existing disclosures with respect to pension benefits and pension valuation assumptions. The vesting-date values of option awards can similarly be estimated by shareholders using existing disclosures regarding the terms of option awards, their grant-date values and grant-date valuation assumptions, but arriving at such estimates could require shareholders to make vesting-date valuation assumptions that could differ from the grant-date valuation assumptions. The disclosure of executive compensation actually paid may therefore provide shareholders with marginal new information about the particular assumptions made by registrants in estimating vesting-date valuations.

The proposed amendments would require TSR to be the measure of financial performance used for the pay-versus-performance disclosure. Registrants other than smaller reporting companies would be required to include the TSR for a peer group as well as the registrants' own TSR in the required table. Registrants would also be required to provide a description of the relationship of their own TSR with executive compensation actually paid and, for registrants other than smaller reporting companies, of their own TSR with the reported peer group TSR. For this purpose, registrants may use the peer group used for their Item 201(e) performance graph in their annual report or the peer group used in their CD&A, if any.

The proposed amendments would permit registrants to present supplemental measures of both performance and compensation. Also, the proposed amendments would not prescribe the format in which the relationship between executive compensation actually paid and TSR is presented, though the amendment would require that the disclosure present this relationship over the five prior fiscal years (three years for smaller reporting companies). The proposal would also require footnote disclosure of the adjustments made to compute executive compensation actually paid and disclosure of the vesting date valuation assumptions, if materially different from the grant date assumptions.

We are proposing these amendments to satisfy the statutory mandate of Section 14(i) of the Exchange Act. The Senate Report that accompanied the statute references shareholder interest in the relationship between executive pay and performance as well as the general benefits of transparency of executive pay practices.

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As discussed above, we believe that the statute is intended to provide further disclosures for shareholders to consider when making say-on-pay voting decisions, as well as when making other voting decisions on the compensation plans in which NEOs participate, and making decisions pertaining to the election of directors.

113

The Senate Report includes the following with respect to Section 953(a) of the Dodd-Frank Act: “It has become apparent that a significant concern of shareholders is the relationship between executive pay and the company's financial performance of the issuers . . . The Committee believes that these disclosures will add to corporate responsibility as firms will have to more clearly disclose and explain executive pay.”

See

the Senate Report

supra

note 7.

Exchange Act Section 3(f) requires us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of shareholders, whether the action will promote efficiency, competition and capital formation. Exchange Act Section 23(a)(2) requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition and not to adopt any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.

The discussion below addresses the economic effects of the proposed amendments, including its anticipated costs and benefits, as well as the likely effects of the proposed amendment on efficiency, competition, and capital formation. The proposed amendments reflect the statutory mandate in Section 14(i) as well as the discretion we exercise in implementing that mandate. For purposes of this economic analysis, we address the costs and benefits resulting from the statutory mandate and from our exercise of discretion together, recognizing that it is difficult to separate the costs and benefits arising from these two sources. We also analyze the potential costs and benefits of significant alternatives to what is proposed. We request comment throughout this release on alternative means of meeting the statutory mandate of Section 14(i) of the Exchange Act and on all aspects of the costs and benefits of the proposed approach and of possible alternatives. We also request comment on any effect the proposed disclosure requirements may have on efficiency, competition and capital formation.

B. Baseline

To assess the economic impact of the proposed amendments, we are using as our baseline the current state of the market without a requirement for registrants to disclose the relationship between executive compensation actually paid and the financial performance of the registrant. We consider the impact of the proposed amendment on shareholders, registrants, and their NEOs. The proposed amendments would apply to all companies that are registered under Section 12 of the Exchange Act and are therefore subject to the federal proxy rules, except emerging growth companies. The proposed amendments would also not apply to foreign private issuers or companies with reporting obligations only under Section 15(d) of the Exchange Act, which are not subject to the proxy rules. In addition, for some Section 12(g) registrants, such as limited partnerships, the disclosure requirement might not apply in some or all years because these registrants might not file either proxy or information statements every year.

114

Registrants subject to the proposed amendments would be required to make pay-versus-performance disclosure under proposed Item 402(v) when they file proxy statements or information statements in which executive compensation disclosure pursuant to Item 402 of Regulation S-K is required. Proxy statement disclosure obligations only arise under Section 14(a) when a registrant with a class of securities registered under Section 12 chooses to solicit proxies. Whether or not a registrant has to solicit proxies is dependent upon any requirement under its charter and/or bylaws, or otherwise imposed by law in the state of incorporation and/or stock-exchange (if listed), not the federal securities laws. For example, NYSE, NYSE Market, and NASDAQ require the solicitation of proxies for annual meetings of shareholders. A Section 12(b) registrant is listed on a national securities exchange, and therefore likely would solicit proxies and be compelled to provide the disclosure identified in proposed Item 402(v) annually. Registrants with reporting obligations under Section 12(g), but not Section 12(b), would not be subject to any obligation to solicit proxies under the listing standards of an exchange, but may nevertheless solicit proxies as a result of an obligation under their charters, bylaws, or law of the jurisdiction in which they are incorporated. When Section 12 registrants that do not solicit proxies from any or all security holders are nevertheless authorized by security holders to take a corporate action at or in connection with an annual meeting or by written consent in lieu of such meeting, disclosure obligations also would arise under proposed Item 402(v) due to the requirement to file and disseminate an information statement under Section 14(c).

We estimate that approximately 6,075 registrants would be subject to the proposed amendments, including approximately 2,430 smaller reporting companies.

115

Among all registrants subject to the federal proxy rules, we estimate that there are approximately 360 emerging growth companies, of which approximately 230 are also smaller reporting companies, all of which would not be subject to the proposed amendments.

116

115

These estimates are based on a review of calendar year 2013 EDGAR filings.

116

Id.

The economic effects of pay-versus-performance disclosure will depend, in part, on whether new information that could not be derived from existing disclosures would be made available to shareholders. The proposed amendments are not expected to result in the provision of significant new information to shareholders, or to require registrants to collect significant new data, relative to disclosure requirements under the baseline. The registrants that would be subject to the proposed amendments must currently comply with Item 402 of Regulation S-K and, except in the case of smaller reporting companies, with Item 201(e). The underlying information required to provide the proposed pay-versus-performance disclosure is, with the exception of vesting-date valuation assumptions for options, already encompassed by these existing disclosure requirements and, for smaller reporting companies and for registrants that use a peer group from their CD&A, in the public availability of stock return data.

Specifically, Item 201(e) requires the disclosure of the TSR for the registrant as well as a peer group (a published industry or line-of-business index, peer issuers selected by the registrant, or issuers with similar market capitalizations), for the past five years, in annual reports.

117

The proposed amendments mandate that TSR of the registrant and a peer group be the primary measures of performance used in the pay-versus-performance disclosure. While registrants may instead choose to use the peer group disclosed in their CD&A, if they use a peer group in benchmarking their compensation, the components of such a peer group would be disclosed in the CD&A and the shareholder returns of these companies would be publicly available from many sources, if not already reported in the CD&A. Similarly, while smaller reporting companies are not required to comply with Item 201(e) or CD&A disclosure requirements and yet would still have to report their own TSR under the proposed rules, data about their returns is publicly available. The proposal does not require smaller reporting companies to present the performance of a peer group.

117

Item 201(e) disclosure is only required in an annual report that precedes or accompanies a registrant's proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). As discussed above, an annual meeting could theoretically not include an election of directors, such that Item 201(e) disclosure would not be required, although pay-versus-performance disclosure would still be required in such years if action is to be taken with regard to executive compensation.

Further, Item 402 currently requires the affected registrants to disclose extensive information about the compensation of NEOs. For example, registrants subject to Item 402 are required to report the value of total compensation and each of its components,

118

including, for the affected registrants other than smaller reporting companies, the total change (if positive) in actuarial present value of pension benefits and, for all of the affected registrants, the grant-date value of equity awards, for all NEOs in the Summary Compensation Table. Item 402 requires further disclosure in additional related tables, footnotes, and/or the accompanying textual narrative. Based on this information, it would be possible in the absence of the proposed disclosure for shareholders to estimate the proposed measure of executive compensation actually paid by deducting the current values reported with respect to pension and equity awards from total compensation and then estimating and adding to this value the proposed revised values with respect to these two components where applicable.

118

For registrants that are not smaller reporting companies, total compensation consists of the dollar value of the executive's base salary and bonus, plus the fair market value at the grant date of any new stock and option awards, the value of any non-equity incentive plan awards, the change (if positive) in actuarial value of the accumulated benefit under all defined benefit and pension plans, any above-market interest or preferential earnings on deferred compensation and all other compensation. The all other compensation component includes, among other things, the value of perquisites and other personal benefits (unless less than $10,000 in aggregate) and registrant contributions to defined contribution plans.

Specifically, the proposed definition of executive compensation actually paid for a fiscal year is total compensation as reported in the Summary Compensation Table for that year (i) less the change in the actuarial present value of pension benefits,

119

(ii) less the grant-date value of any stock and option awards granted during that year that are subject to vesting, (iii) plus the actuarial present value of benefits attributable to services rendered during the applicable year,

and (iv) plus the value at vesting of stock and option awards that vested during that year. Adjustments (i) and (iii) with respect to pension plans would not apply to smaller reporting companies as they are not otherwise required to disclose executive compensation related to pension plans. As discussed above, the amounts to be subtracted in this computation, as well as the value of stock awards at vesting (which must be added back), must be reported under existing Item 402 requirements. The other amounts that must be added back in this computation are not required to be directly reported under existing disclosure requirements but can be estimated based on existing disclosures. While the time period applicable for Item 402 disclosures (two years for smaller reporting companies and three years for other affected registrants) is shorter than would be required for the pay-versus-performance disclosure (three years for smaller reporting companies and five years for other affected registrants), the information required to make these computations for the additional years would be available in disclosures from previous years.

119

If the change in actuarial value of pension plans is not positive, it is not currently included in total compensation and therefore need not be deducted for the purpose of this adjustment.

Thus, under the baseline, shareholders already have the required data to compute a reasonable estimate of the proposed measure of executive compensation actually paid, even though registrants are not required to compute or disclose this measure. In particular, as discussed above, the actuarial present value of benefits attributable to services rendered during the applicable fiscal year can be computed using the detailed existing disclosures of pension plan terms and valuation assumptions. It is also possible for shareholders to make reasonable estimates of the vesting-date fair values of options based on existing compensation disclosures and public data. However, as discussed above, estimates of vesting-date valuations computed by shareholders could differ from estimates computed by the registrant. Under the baseline, because registrants are not currently required to disclose vesting-date valuation assumptions (which may differ from grant-date assumptions), shareholders may not know how the registrant would apply its discretion in choosing from a range of reasonable assumptions to compute vesting-date valuations.

For the affected registrants other than smaller reporting companies, Item 402 also requires a description in the CD&A of how the registrant's compensation policy relates pay to performance, if material to the registrant's compensation policies and decisions. However, registrants are not currently required to report the actual historical relationship between any measures of compensation and financial performance. Some registrants voluntarily provide such disclosures, which are generally limited to analyses of the compensation of the PEO and which vary with regard to the compensation and performance measures used.

120

The comparability of these voluntary disclosures is therefore limited, and observers have raised concerns that registrants have selected measures that make the alignment of pay and performance appear more favorable.

121

120

A compensation consulting firm found that, of 250 large public companies examined, 27% provided tabular or graphical information on the relationship between pay and performance in the CD&A of their 2013 proxy statements, and the majority of these provided such information only with respect to the PEO's compensation.

See 2013 Corporate Governance & Incentive Design Survey,

Meridian Compensation Partners, Fall 2013,

available at http://www.meridiancp.com/images/uploads/Meridian_2013_Governance_and_Design_Survey.pdf.

In a study of the 300 largest companies filing proxy statements in the year ended April 2013, another consulting firm found over half a dozen different approaches to realizable pay-versus-performance disclosures.

See Executive Compensation 2013,

Hay Group, Feb. 2014,

available at http://www.haygroup.com/downloads/us/exec_comp_2013.pdf.

121

See, e.g.,

Dave Michaels,

Misleading CEO Pay-for-Performance Numbers Target of SEC,

Bloomberg, Dec. 17, 2013,

available at http://www.bloomberg.com/news/2013-12-17/misleading-ceo-pay-for-performance-numbers-target-of-sec.html.

Certain shareholders also may have access to analyses of historical pay-versus-performance data produced by third parties, such as proxy advisory firms and compensation consultants. These analyses are based on compensation and performance information disclosed by registrants, and they may apply more consistent methodologies across registrants, but the computations and analytical approaches used vary across the third-party information providers.

122

Some other shareholders may generate their own pay-versus-performance analyses, but we do not have access to information about the computations or approaches that they find to be useful.

122

See, e.g., http://www.issgovernance.com/file/publications/evaluatingpayforperformance.pdf,

and

http://www.glasslewis.com/issuer/pay-for-performance

for detail on quantitative analyses of pay for performance used by Institutional Shareholder Services Inc. and Glass Lewis & Co., LLC, respectively.

An important factor to consider when analyzing the effects of the proposed pay-versus-performance disclosure requirements is the variation in compensation structures that is likely to exist among the affected registrants. In particular, because the proposed amendments require that equity awards and compensation related to pension plans be valued differently, and (in the case of equity awards) in different years than as valued in the Summary Compensation Table, the variation in usage and design of these items in executive compensation packages may affect the comparability of the disclosures and the burden involved in making the required calculations to provide the disclosures.

The proposed amendments require that executive compensation actually paid include the vesting-date values of stock grants, which are provided in the Option Exercises and Stock Vested Table but likely differ from the grant date values included in total compensation in the Summary Compensation Table. The use of stock grants, and the frequency of such grants to the CEO, by some of the potentially affected registrants is reported in the table below.

123

These statistics are based on staff analyses of compensation data from the Standard & Poor's Execucomp database, which in turn is sourced from company proxy statements. Execucomp covers firms in the S&P Composite 1500 Index (which includes the S&P 500, S&P MidCap 400, and S&P SmallCap 600) as well as some firms that were previously removed from the index but are still trading and some client requests. Years mentioned refer to fiscal years, under the convention that companies with fiscal closings after May 31 in a given year are assigned to that fiscal year while companies with fiscal closings on or before May 31 in a given year are assigned to the previous fiscal year. Use of the term “CEO” is based on the use of this term in the Execucomp database, and is believed to be equivalent to the term “principal executive officer” used in this release.

Table 1—Use of Executive Stock Grants by Registrants Covered by Execucomp

All firms in

database

Firms in

S&P 500

Firms in S&P

MidCap 400

Firms in S&P

SmallCap 600

Firms in Sample

1,812

496

396

598

Stock Grants to 2012 CEO:

% of CEOs Granted Stock in 2012

80.2

88.9

87.4

76.8

Among firms for which 2012 CEO was also CEO in 2011 and 2010:

% of CEOs Granted Stock 1 out of Past 3 Years (2010-2012)

124

7.8

3.6

6.0

10.6

% of CEOs Granted Stock 2 out of Past 3 Years (2010-2012)

125

10.3

7.0

7.9

11.6

% of CEOs Granted Stock 3 out of Past 3 Years (2010-2012)

126

70.1

81.1

79.6

62.2

Stock Grants to Other 2012 NEOs:

% of Firms that Granted Stock to Any NEO other than CEO in 2012

86.9

94.4

93.9

83.4

Among Firms that Made Such Grants, Average Number of Other NEOs Granted Stock in 2012

4.1

4.3

4.2

3.9

The proposed amendments require that executive compensation actually paid include the vesting-date values of option grants, values that are not currently reported and likely differ from the grant date values included in total compensation in the Summary Compensation Table. The use of option grants, and the frequency of such grants to the CEO, by some of the potentially affected registrants is reported in the table below.

127

124

This percentage is only taken among those firms for which the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, and represents the percentage of such firms that issued this individual stock in only one fiscal year from 2010 through 2012.

125

126

127

See supra

note 123.

Table 2—Use of Executive Stock Option Grants by Registrants Covered by Execucomp

All firms in

database

Firms in

S&P 500

Firms in S&P

MidCap 400

Firms in S&P

SmallCap 600

Firms in Sample

1,812

496

396

598

Option Grants to 2012 CEO:

% of CEOs Granted Options in 2012

50.3

64.1

49.0

43.1

Among firms for which 2012 CEO was also CEO in 2011 and 2010:

% of CEOs Granted Options 1 out of Past 3 Years (2010-2012)

128

10.6

6.5

11.0

12.2

% of CEOs Granted Options 2 out of Past 3 Years (2010-2012)

129

12.3

9.8

11.6

12.2

% of CEOs Granted Options 3 out of Past 3 Years (2010-2012)

130

42.4

59.8

40.9

34.3

Option Grants to Other 2012 NEOs:

% of Firms that Granted Options to Any NEO other than CEO in 2012

57.8

68.5

55.8

51.3

Among Firms that Made Such Grants, Average Number of Other NEOs Granted Options in 2012

3.9

4.2

4.0

3.6

In addition,

because the proposed amendments require the valuation of equity awards as of their vesting dates, it is also important to consider the variation in time-based vesting schedules. In particular, the proposed measure of executive compensation actually paid includes the vesting-date value of equity awards that vested during the applicable year. The measure as of vesting reflects the grant-date valuation as well as changes in value of the award between the grant and vesting date, such as those related to gains and losses of the underlying stock since the award was granted. The proposed measure of executive compensation actually paid may thus increase sharply in any year during which significant equity awards vest. The degree of volatility in the executive compensation actually paid measure that may result is likely to be higher when grants vest all at once or when vesting dates are less frequent.

128

This percentage is only taken among those firms for which the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, and represents the percentage of such firms that issued these individual options in only one fiscal year from 2010 through 2012.

129

This percentage is only taken among those firms for which the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, and represents the percentage of such firms that issued these individual options in two fiscal years from 2010 through 2012.

130

This percentage is only taken among those firms for which the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, and represents the percentage of such firms that issued these individual options every fiscal year from 2010 through 2012.

A compensation research and services firm estimates that 34% of stock grants and 6.8% of option grants awarded by S&P 1500 firms in 2012 are scheduled to vest in full at the end of their vesting period (“cliff vesting”) while the remaining are scheduled to vest in increments over the period of vesting (“graded vesting”).

131

Considering grants awarded over a longer horizon, an academic study that explored the vesting of option grants of some of the potentially affected registrants from 1997 to 2008 found that 32% of the grants studied cliff vested, 55% vested in equal installments over the period of vesting, and 13% had an alternative, irregular vesting pattern.

132

Some equity

awards may also be subject to performance-based vesting conditions, where the performance conditions may be based on the registrants' stock prices, their accounting performance, one or more nonfinancial measures, or some combination of these. A preliminary academic study finds that performance-based vesting conditions have become more prevalent in recent years, such that in 2012 just under 70% of large U.S. firms utilized such a provision in a grant to one or more executives, compared to approximately 20% of such firms in the year 2000.

133

131

See

Equity Vesting Schedules for S&P 1500 CEOs, a 2013 report by Equilar,

available at http://www.equilar.com/corporate-governance/2013-reports/equity-vesting-schedules-for-s-p-1500-ceos.

132

See

B. Cadman, T. Rusticus, and J. Sunder,

Stock option grant vesting terms: Economic and financial reporting determinants,

Review of

Accounting Studies, Vol. 18, No. 4, (Dec. 2013), at 1159-1190. Because this paper uses data from 1997 to 2008, it might not accurately reflect current practices.

133

See

J. C. Bettis, J. Bizjak, J. Coles, and S. Kalpathy,

Performance-Vesting Provisions in Executive Compensation,

working paper (Dec. 2013),

available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2289566.

Another component of compensation that is measured differently in the proposed definition of executive compensation actually paid as compared to total compensation in the Summary Compensation Table is, for the affected registrants other than smaller reporting companies, compensation related to pension plans. The use of pension plans and the years of credited service at some of the potentially affected registrants are reported in the table below.

134

See supra

note 122.

Table 3—Use of Pension Plans by Registrants Covered by Execucomp

All firms in database

Firms in

S&P 500

Firms in S&P

MidCap 400

Firms in S&P

SmallCap 600

Firms in Sample

1,812

496

396

598

2012 Pension Plans

% of CEOs with Pension Plans

33.7

54.0

37.6

21.9

Among Firms with CEO Plans, Median Years of Credited Service in Pension Plan

% Firms with Pension Plans for any NEO other than CEO

38.9

59.9

41.2

26.4

Among Firms with Other NEO Plans, Average Number of Other NEOs with Pension Plans

3.3

3.6

3.2

3.0

For the affected registrants other than smaller reporting companies, the proposed amendments require that executive compensation actually paid include only the actuarial present value of benefits attributable to services rendered during the applicable fiscal year, a value which is not currently required to be reported and will usually differ from the total change in actuarial value of pension benefits included, if positive, in total compensation reported in the Summary Compensation Table. In particular, the value currently included in total compensation reflects the change in actuarial pension value related to changes in the value of benefits accrued in prior years as well as the value of benefits attributable to services rendered during the applicable fiscal year. As such, the value currently included with respect to pensions in total compensation reported in the Summary Compensation Table will generally be more volatile (because of changes in interest rates and other actuarial assumptions) than the value to be included with respect to pensions in the proposed executive compensation actually paid measure. The degree of difference between these two computations will generally increase with an executive's total number of years of credited service (and thus the extent of benefits already accumulated) under the pension plan.

C. Discussion of Economic Effects

Compensating executive officers with pay that varies with registrant performance is widely considered to be a tool that can be used to encourage executive officers, through the financial incentives provided by such compensation plans, to exert effort and make decisions that create value. However, there are also downsides of such compensation plans. For example, some such plans may cause executives to focus overly on short-term performance to the detriment of long-term performance, or may make some executives less likely to take on risky but (from a typical shareholder's perspective) valuable investments if they are unwilling to take the chance that the investment could fail and result in lower compensation than would result from less risky projects.

An optimal compensation policy is generally considered to be one that maximizes shareholder value in the long term by balancing the need to provide executives with the incentive to perform well against the monetary costs and potential detrimental effects of the compensation policy. What constitutes an optimal compensation policy, including which performance metrics should be considered and how much compensation should vary with these metrics, is difficult to ascertain and will vary with a registrant's individual circumstances. Academic research has been mixed as to whether prevailing compensation structures are optimal, are too closely linked to company performance, or should be more sensitive to performance.

135

Thus, it is unclear whether changes that would more closely link executive pay with registrant performance than current compensation structures would have a positive, negative, or no impact on firm value creation.

135

See, e.g.,

Alex Edmans and Xavier Gabaix,

Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories.

Eur. Fin. Mgmt, Vol. 15, No. 3, (June 2009), at 486-496, Michael Jensen and Kevin Murphy,

Performance Pay and Top-Management Incentives.

98 J. Pol. Econ., No. 2, 225 (Apr. 1990), and Lucian Bebchuk and Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation, Harvard University Press, Oct. 2006.

In addition to uncertainties about the optimality of pay-versus-performance alignment, there are challenges in measuring such alignment. For example, the available performance statistics may not adequately measure a given executive's contribution to a registrant's performance, such as when registrant performance is strongly related to market moves, sector opportunities, commodity prices, or other factors unrelated to managerial effort or skill.

136

Even if the performance measure were not subject to such concerns, it could be

difficult to match performance with associated compensation because of timing differences. For example, an executive may be rewarded with extra compensation for an accomplishment in the year it is made, even though expected profits related to this performance (such as an investment or restructuring decision) might not follow until several years later. Similarly, a registrant's stock price may rise at the announcement of a new PEO who is expected to add significant value to the firm, even though he or she may not commence employment and begin receiving compensation until the following year. Pay-versus-performance alignment can also be difficult to evaluate without also considering holdings of vested equity which link an executive's wealth to the performance of the company even if they were not obtained as compensation or, if they were provided as compensation, even after they have been “actually paid.”

137

Such issues may lead to concerns with any standardized approach to evaluating pay-versus-performance alignment.

136

See, e.g.,

Marianne Bertrand and Sendhil Mullainathan,

Are CEOS Rewarded for Luck? The Ones without Principals Are,

116 Q. J. of Econ., No. 3, 901 (2001). Other situations in which registrant performance statistics may differ from an executive's performance include cases in which the statistics measure managerial effort but not of the particular manager in question (which may be particularly likely in the case of NEOs other than the PEO) and situations in which other factors such as registrant size affect the translation of a given level of managerial effort into the measured statistics.

137

See, e.g.,

Kevin J. Murphy,

Executive Compensation: Where We Are, and How We Got There,

August 12, 2012, forthcoming in George Constantinides, Milton Harris, and René Stulz (eds.), Handbook Econ. Fin., at 24-25,

available at

SSRN:

http://ssrn.com/abstract=2041679

(stating that incentive compensation is negatively correlated with manager's vested equity interests, reflecting the redundancy of granting further equity awards to executives whose wealth is already substantially tied to the company's equity).

Despite these challenges, shareholders may evaluate executive compensation packages and consider the optimality of pay-versus-performance alignment when making voting decisions relating to the compensation of the NEOs and the election of directors, as well as when making investment decisions.

138

As discussed above, shareholders currently have access to detailed information disclosed by registrants with respect to executive compensation and financial performance. For example, substantial detail on compensation packages is currently required in proxy statements where action is to be taken with regard to the election of directors, including the specific terms of performance-related awards as well as information in the CD&A (for affected registrants other than smaller reporting companies) regarding how the compensation policy relates pay to performance, to the extent it is considered material. However, data from the required, standardized tables and accompanying information may require further computation and analysis before shareholders can evaluate actual historical pay-versus-performance alignment. Also, CD&A disclosures that may, on a voluntary basis, provide more direct measures of the historical pay-versus-performance relationship lack standardization and comparability, as discussed above. In this vein, the introduction of quantitative analyses of pay-versus-performance alignment by the major proxy advisory firms in recent years may be a sign of shareholder demand for additional computations regarding this relationship, beyond existing disclosures.

139

138

See, e.g., 2015 Investor Survey: Deconstructing Proxy Statements—What Matters to Investors,

February 2015, Stanford University, RR Donnelley, and Equilar, February 2015,

available at http://www.sec.gov/comments/4-681/4681-3.pdf

(providing survey evidence that 64% of institutional investors surveyed indicated that their firms used pay-for-performance alignment information from proxy statements to make voting decisions; 34% of those surveyed indicated that this information was used to make investment decisions).

139

See, e.g., supra

note 122.

The proposed amendments mainly require registrants to repackage in one location information that is disclosed in various other locations under existing rules. The anticipated benefits and costs of the proposed amendments are therefore driven by the impact that this additional format for presenting information may have on shareholders. The economic benefits and costs of the proposed amendments, including impacts on efficiency, competition and capital formation, are discussed below. We also discuss the relative benefits and costs of significant, reasonable implementation alternatives to the amendments as proposed.

1. Benefits

As discussed above, for the most part, the proposed amendments require a different presentation of certain existing information rather than the disclosure of new information. The primary benefits of the proposed amendments relative to the baseline will therefore depend on the extent to which the computations provided or the format used for the proposed disclosure is useful to shareholders.

Shareholders may benefit from the proposed amendments to the extent that the new presentation of data required by these amendments lowers their burden of analysis in evaluating the executive compensation policies of the affected registrants. Shareholders may evaluate executive compensation when making decisions relating to the say-on-pay vote and other votes relating to the compensation of the NEOs and the election of directors, as well as when making investment decisions. As part of this process, shareholders likely spend time and other resources to analyze current disclosures, including maki

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