What is the essence behind the new ruling?
To include “information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions.”
How does the SEC define “compensation actually paid”?
As the formal value at vesting alongside interim measures of fair value between grant and vesting (as measured at each fiscal year end).
The result is a rule that shows stock returns and pay increases over a matched period.
What are the three measures of financial performance in terms of this act?
- Cumulative TSR
- Net Income
- A “Company-Selected Measure”
What is required to be presented and how?
“Clear descriptions” of the relationships between compensation actually paid and three measures of financial performance in a tabular format.
What does SCT stand for?
Summary Compensation Table
The SCT depicts the deal struck at grant without any mechanism for showing how performance-based features operate to index pay to performance.
What are the requirements of the new ruling?
- Produce a new proxy table showing interim fair value measurements on all outstanding unvested and in-period vesting awards.
- Prepare for the year-one disclosure, which must include valuations that cover the beginning and end of the last three years—for a total of four years of calculations
- Track year-over-year fair value changes, compensation amounts across potentially changing groups of named executive officers (NEOs), total shareholder returns (TSRs) across potentially changing peer groups, and more
- Provide a narrative or visual description of the relationship between a newly introduced measure of compensation and various measures of performance, including TSR, net income, and a company-selected measure
