← Back to all briefings
Governance 6 min read Published Updated Credibility 92/100

Governance Briefing — August 25, 2022

SEC pay-versus-performance rules tie compensation actually paid to multi-year financial and ESG metrics, requiring valuation controls, governance ownership, and outcome analysis before the first proxy cycles in 2023.

Zeph Tech Research Lead

Research lead, Zeph Tech

Timeline plotting source publication cadence sized by credibility.
2 publication timestamps supporting this briefing. Source data (JSON)

Executive briefing: On 25 August 2022 the U.S. Securities and Exchange Commission (SEC) adopted final rules implementing the Dodd-Frank Act’s pay versus performance disclosure requirements (Release No. 34-95607). Beginning with fiscal years ending on or after 16 December 2022, registrants must include a pay versus performance table in proxy or information statements, comparing executive compensation actually paid with company financial performance metrics over five years. The rule demands new data governance, internal controls over financial reporting (ICFR), compensation committee oversight, and outcome analysis linking incentive structures to shareholder returns.

Key disclosure elements

Registrants (excluding foreign private issuers, registered investment companies, and emerging growth companies) must disclose:

  • A table covering five fiscal years (three for smaller reporting companies) showing total compensation, compensation actually paid to the principal executive officer (PEO) and average of other named executive officers (NEOs), cumulative total shareholder return (TSR) for the registrant and peer group, net income, and a company-selected financial performance measure.
  • Tabular list of three to seven financial performance measures deemed most important in linking compensation actually paid to company performance (two to five for smaller reporting companies).
  • Clear description of the relationship between compensation actually paid and TSR, net income, and the company-selected measure, plus comparison of the registrant’s TSR to that of the peer group.
  • Narrative discussion explaining how the performance measures impacted compensation decisions.

Compensation actually paid adjusts total compensation by incorporating fair value changes in equity awards, pension benefit adjustments, and certain other components, requiring new valuation processes.

Governance and control implications

To comply, registrants should:

  • Establish cross-functional governance teams involving finance, HR, legal, investor relations, and IT to coordinate data collection and disclosure drafting.
  • Update disclosure controls and procedures (DCP). Map data sources, assign owners, and institute review processes for the pay versus performance table, narrative, and graphical elements.
  • Enhance ICFR. Implement controls around fair value calculations of equity awards, including model validation, assumptions review, and change management.
  • Engage the compensation committee. Ensure the committee understands new metrics, validates selected performance measures, and documents rationale.

Audit committees should oversee coordination between internal audit and external auditors, especially where compensation data intersects with financial statements.

Data and valuation challenges

Key technical considerations include:

  • Developing processes to calculate compensation actually paid, including tracking grant date fair values, vesting adjustments, and actuarial valuations for pension plans.
  • Determining appropriate peer groups for TSR comparison, aligning with Item 201(e) disclosures or the peer group used for performance graphs.
  • Selecting the company-specific performance measure and ensuring it is derived from audited financial information or otherwise reliable metrics.
  • Establishing data governance to ensure consistency between proxy disclosures, Form 10-K, and other investor communications.

Outcome testing should validate calculations, confirm footnote accuracy, and stress-test disclosures for investor comprehension.

Outcome analysis and investor communication

The rule encourages registrants to analyse whether compensation outcomes align with shareholder returns. Companies should:

  • Perform trend analyses on compensation actually paid versus TSR and net income, identifying misalignments.
  • Evaluate incentive plan design to ensure metrics drive desired behaviours and risk management outcomes.
  • Develop narrative disclosures that transparently explain pay-for-performance alignment, addressing any gaps.
  • Engage with investors and proxy advisory firms to discuss methodologies, peer group selections, and performance measures.

Outcome testing may involve investor perception surveys, analysis of say-on-pay votes, and monitoring of shareholder proposals related to compensation.

Implementation roadmap

  1. Immediate: Form governance teams, inventory data requirements, and engage valuation experts to review fair value methodologies.
  2. Next 90 days: Develop draft tables and narratives using historical data, conduct internal reviews, and align with compensation committee expectations.
  3. Proxy season: Finalise disclosures, obtain approvals, and ensure consistency across filings. Prepare Q&A materials for investor outreach.

Internal audit should evaluate the effectiveness of new controls post-filing and recommend improvements.

Sources

Zeph Tech supports SEC registrants in building pay versus performance disclosure workflows, integrating valuation controls, governance reporting, and outcome analytics that withstand investor and regulator scrutiny.

Assurance and audit coordination

Because pay versus performance disclosures rely on complex calculations, registrants should engage internal audit and external advisors early. Internal audit can assess design and operating effectiveness of new controls over fair value adjustments, data aggregation, and disclosure review. Coordination with compensation consultants and valuation specialists ensures consistency between proxy disclosures and compensation committee materials. Registrants should document management review controls, including sign-offs from finance, HR, legal, and investor relations.

Outcome testing should include re-performance of calculations, tie-outs to general ledger accounts, and reconciliation of TSR figures with shareholder services data. Maintaining workpapers that show variance analyses and management responses strengthens defensibility during SEC comment reviews.

Investor engagement playbook

Companies should prepare an engagement strategy that anticipates investor questions about methodology, peer group selection, and performance measures. This includes developing FAQs, investor presentations, and scripts for earnings calls or shareholder meetings. Monitoring proxy advisor guidelines (ISS, Glass Lewis) helps anticipate areas of scrutiny. Registrants may conduct sensitivity analyses showing how alternative peer groups or performance measures would impact disclosed alignment, providing transparency to investors.

Integration with ESG and human capital reporting

As investors increasingly assess holistic performance, registrants should evaluate how pay versus performance metrics interact with ESG and human capital disclosures. For example, companies linking incentive pay to emissions reductions or diversity goals should ensure those metrics are consistently defined across disclosures. Cross-functional working groups can coordinate messaging, ensuring that sustainability-linked metrics are auditable and tied to strategic outcomes.

Companies should capture stakeholder feedback after the first filing cycle to refine disclosures. Tracking analyst reactions, investor questions, and media coverage helps management evaluate whether narratives resonate. Incorporating feedback loops into the disclosure committee agenda supports continuous improvement.

Boards should schedule post-season retrospectives comparing disclosed outcomes with strategic objectives, capturing insights for future compensation design.

Continuous improvement cycles should be documented within the compensation committee calendar.

Dry runs and board reporting

Companies should run at least two dry-run calculations before filing the first proxy statement that includes the new Pay Versus Performance (PVP) table. Use historical TSR, net income, and company-selected measures to rehearse the math, then reconcile every column back to payroll systems, equity award sub-ledgers, and valuation memos under ASC Topic 718. Internal Audit should observe the exercise and confirm management retains workpapers that describe each equity valuation technique (Monte Carlo, lattice, Black-Scholes) alongside sensitivity analysis that demonstrates how different assumptions would change compensation actually paid.

Boards—particularly compensation committees—need dashboard views that aggregate the five-year narrative disclosures, cross-reference incentive plan goals, and highlight anomalies such as one-off adjustments or discretion. Build a data mart that ingests HR, finance, and ESG data so the committee can evaluate whether incentive metrics align with stated corporate strategy, human-capital disclosures, and climate commitments.

Given the SEC’s focus on comparability, document how your peer group aligns with Regulation S-K Item 402(v)(2)(iv). If the peer set differs from that used for TSR or CD&A benchmarking, the proxy should explain why. Keep evidence of compensation consultant independence reviews, conflict-of-interest questionnaires, and management certification of disclosure controls. These records will prove critical when the Division of Corporation Finance issues comment letters or when investors challenge incentive design through say-on-pay votes.

Timeline plotting source publication cadence sized by credibility.
2 publication timestamps supporting this briefing. Source data (JSON)
Horizontal bar chart of credibility scores per cited source.
Credibility scores for every source cited in this briefing. Source data (JSON)

Related briefings

Curated signals from the same pillar or overlapping topics.

Continue in the Governance pillar

Return to the hub for curated research and deep-dive guides.

Visit pillar hub

Latest guides

  • SEC pay versus performance
  • Executive compensation governance
  • Disclosure controls
  • Outcome analytics
  • Valuation assurance
Back to curated briefings