Governance Briefing — August 25, 2022
The U.S. Securities and Exchange Commission adopted final pay-versus-performance disclosure rules on August 25, 2022, requiring registrants to compare executive compensation actually paid with financial and shareholder return metrics over five years.
Executive briefing: On 25 August 2022 the U.S. Securities and Exchange Commission (SEC) finalised rules implementing Item 402(v) of Regulation S-K, obliging registrants to disclose the relationship between executive compensation actually paid and company performance. The rule, mandated by Dodd-Frank Section 953(a), adds a tabular and narrative analysis comparing total shareholder return (TSR), net income, and a company-selected performance metric with pay outcomes for the CEO and other named executive officers.
What changed
- New pay-versus-performance table. Registrants must present up to five years of data showing compensation actually paid versus TSR for the company and a peer group, as well as net income and a company-selected metric.
- Board narrative discussion. Companies must describe how the metrics relate to the compensation actually paid, highlighting alignment or misalignment in pay decisions overseen by compensation committees.
- Inline XBRL tagging. Disclosures must be tagged in Inline XBRL, requiring governance over data quality, controls, and audit committee oversight of structured reporting.
Implications for operators
- Public sector-linked issuers. Government-sponsored enterprises and state-controlled registrants must ensure compensation committees can evidence pay alignment with mandated metrics.
- Financial institutions. Banks subject to clawback and incentive compensation guidance must reconcile pay-versus-performance metrics with risk-adjusted compensation frameworks.
- Technology and growth companies. High-growth issuers need controls to reconcile equity award valuations and TSR calculations with the new disclosure, avoiding inconsistencies across filings and investor decks.
Action checklist
- Update compensation committee calendars to oversee data collection, valuation methodologies, and narrative drafting.
- Coordinate finance, HR, and legal teams on Inline XBRL tagging processes and internal control testing.
- Benchmark peer group TSR methodologies and company-selected metrics to ensure consistency and comparability.
Sources
- SEC press release on pay-versus-performance disclosure adoption
- Final rule: Pay Versus Performance (Release No. 34-95607)
Zeph Tech advises compensation committees on valuation governance, narrative analytics, and Inline XBRL controls for the SEC’s pay-versus-performance rule.