Last year, the US Securities and Exchange Commission (SEC) adopted long-considered pay-versus-performance (PVP) proxy disclosure rules mandated by Congress.1 In support of better shareholder decision-making, the amendment creates more transparency regarding the key performance measures that a public company used to determine executive pay.

Companies must now disclose the relationship between executive pay and actual performance, which organizations should complete in tandem with a review of the self-selected peer group. As part of the mandate, companies will use a completely new way to calculate compensation.

Critical to the 2023 proxy statement, the compensation committee must prepare a clear and thoughtful Compensation and Discussion Analysis (CD&A) disclosure to explain the relationship between compensation and financial/market performance. While this new pay-versus-performance rule applies to the 2023 proxy season, it also requires gathering information on grants made in 2022 and years prior.

Companies will make mandatory disclosures and may choose from among a cornucopia of alternative disclosures to illuminate the relationship between pay and performance.

Plan for a smooth transition to the new SEC Pay vs Performance rules

The reporting change comes 12 years after the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), in which Congress required the SEC to craft such rules, and seven years after the SEC first proposed rules for this PVP disclosure. While the new rule applies to all publicly traded companies, smaller companies2 enjoy some leeway in complying.

Compensation Actually Paid drives a new way of calculating compensation

The final rules unveil a new way of calculating compensation. The PVP disclosure must include Compensation Actually Paid (CAP) to the principal executive officer and as an average to the other named executive officers. CAP is a new concept and isn't the same as compensation realized or received, or compensation reported in the Summary Compensation Table. CAP is calculated using a prescribed formula designed to capture the expected compensation the executive will receive based on a variety of factors.

The SEC bases the formula loosely on the "total compensation" measure included in the Summary Compensation Table. The process includes adjustments according to the amounts disclosed for equity awards and pension benefits. Organizations must disclose these adjustments in footnotes to the columns showing CAP. The new rule also requires companies to disclose in footnotes any valuation assumptions that are materially different from those disclosed at the time of grant of such equity awards. Smaller reporting companies are not required to disclose amounts related to pension benefits for purposes of calculating CAP.

Learn more about strategies to navigate the SEC's new PVP proxy disclosure rules. Contact Gallagher to assist you with calculating executive compensation and complying with the new reporting requirements — to help your organization face the future with confidence.

Complete the form to read more about navigating the SEC's new PVP proxy disclosure rules



1"SEC Adopts Pay Versus Performance Disclosure Rules," US Securities and Exchange Commission, 25 Aug 2022.

2"Smaller Reporting Companies," US Securities and Exchange Commission, 28 Apr 2022.