(Updated)
On November 21, 2023, the staff (“Staff”) of the U.S. Securities and Exchange Commission’s Division of Corporation Finance released eight new Compliance and Disclosure Interpretations (“C&DIs”) and revised two C&DIs to clarify the pay versus performance (“PVP”) disclosure requirements in Item 402(v) of Regulation S-K. The new C&DIs include clarifications on the reporting of a peer group under Regulation S-K Item 402(v)(2)(iv) and the requirements applicable to smaller reporting companies and emerging growth companies. The key takeaways are summarized below. Companies should read the full text of the C&DIs before preparing their PVP disclosures. A link to the full text of each C&DI is provided in the header of each summary.
Summary of New C&DIs
Some stock awards entitle the holder to receive dividends or dividend equivalents paid on the underlying shares prior to the vesting date. These awards should be included in the calculation of executive compensation actually paid if the dollar value of dividends or dividend equivalents paid are not reflected in the fair value of such awards. Item 402(v)(2)(iii)(C)(1)(vi) of Regulation S-K requires the calculation of executive compensation actually paid to include dividends or dividend equivalents paid that are not already reflected in the fair value of stock awards or included in another component of total compensation.
When identifying a total shareholder return peer group under Regulation S-K Item 402(v)(2)(iv), the registrant must use either the same index or issuers used by it to comply with Item 201(e)(1)(ii) or the companies it uses as a peer group under Regulation S-K Item 402(b). If a registrant uses more than one “published industry or line-of-business” index for Item 201(e)(1)(ii) purposes, the registrant may choose which index it uses for pay versus performance disclosure purposes. To provide clarity to investors, the registrant should include a footnote disclosing the index chosen. If the registrant chooses to use a different published industry or line-of-business index from that used by it for the immediately preceding fiscal year, it is required under Item 402(v)(2)(iv) to explain in a footnote the reason(s) for this change and compare the registrant’s cumulative total return with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year.
Item 402(v)(2)(iv) does not contemplate the use of a broad-based equity index as a peer group for purposes of the pay versus performance disclosure. If the registrant discloses in its Compensation Discussion & Analysis (“CD&A”) that it determines the vesting of performance-based equity awards based on relative TSR compared to a broad-based equity index, the registrant cannot use that broad-based index as its peer group for purposes of Item 402(v)(2)(iv).
Pursuant to Regulation S-K Item 402(v)(2)(iv), if the registrant’s peer group is not a published industry or line-of-business index, the identity of the issuers comprising the group must be disclosed in a footnote. The returns of each component issuer must be weighted according to the respective issuers’ stock market capitalization at the beginning of each period for which a return is indicated. For purposes of Item 402(v)(2)(iv), the weighting requirement is applicable only if the registrant is not using a published industry or line-of-business index pursuant to Item 201(e)(1)(ii).
If a registrant that uses a peer group other than a published industry or line-of-business index as its peer group under Regulation S-K Item 402(v)(2)(iv) adds or removes any of the companies in the peer group, the registrant is required to footnote the change(s) and compare its cumulative total shareholder return with that of both the updated peer group and the peer group used in the immediately preceding fiscal year. However, consistent with Regulation S-K C&DI Question 206.05, comparison of the registrant’s cumulative total return with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year is not required if (1) an entity is omitted solely because it is no longer in the line of business or industry, or (2) the changes in the composition of the index/peer group are the result of the application of pre-established objective criteria. In these two cases, a specific description of, and the bases for, the change must be disclosed, including the names of the companies deleted from the new index/peer group.
A smaller reporting company (“SRC”) with a December 31 fiscal year end provided scaled pay versus performance disclosure covering fiscal years 2021 and 2022 in its proxy statement filed in April 2023. It subsequently loses its SRC status based on its public float as of June 30, 2023. The registrant proposes to rely on General Instruction G(3) of Form 10-K to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into its 2023 Form 10-K from its definitive proxy or information statement to be filed not later than 120 days after its 2023 fiscal year end. The Staff will not object if a registrant that loses SRC status as of January 1, 2024, continues to include scaled disclosure under Regulation S-K Item 402(v)(8) in its definitive proxy or information statement filed not later than 120 days after its 2023 fiscal year end from which the registrant’s Form 10-K will forward incorporate the disclosure required by Part III of Form 10-K. The pay versus performance disclosure in such filing must cover fiscal years 2021, 2022, and 2023.
Unless the registrant regains SRC status in subsequent years, any other proxy or information statement in which Item 402(v) disclosure is required and that is filed after January 1, 2024, must include non-scaled pay versus performance disclosure. For example, in the registrant’s annual meeting proxy statement filed in 2025, it must include non-scaled pay versus performance disclosure for fiscal year 2024. A non-SRC is required to provide Item 402(v) disclosure covering five years; however, the Staff stated that it will not object if the registrant does not add disclosure for a year prior to the years included in the first filing in which it provided Item 402(v) disclosure. The registrant generally is not required to revise the disclosure for prior years (in this example, 2021, 2022, and 2023) to conform to non-SRC status in such filings. However, because peer group TSR is calculated on a cumulative basis, the registrant should include peer group TSR for each year included in the pay versus performance table, measured from the market close on the last trading day before the registrant’s earliest fiscal year in the table. In addition, the registrant should include its numerically quantifiable performance under the Company-Selected Measure for each fiscal year in the table. The entirety of the Item 402(v) disclosure provided for all fiscal years must be XBRL tagged in accordance with Item 402(v)(7).
A registrant that previously qualified as an emerging growth company (“EGC”) loses that status as of December 31, 2024. Such registrant is required to provide pay versus performance disclosure in any proxy or information statement filed after it loses its EGC status and may apply the transitional relief in Instruction 1 to Item 402(v).
Two (or more) individuals served as a registrant’s principal financial officer (“PFO”) during a single covered fiscal year included in the pay versus performance table and related disclosure under Regulation S-K Item 402(v). Each such individual is included in the Summary Compensation table as a named executive officer (“NEO”) pursuant to Item 402(a)(3)(ii). For purposes of the calculation of average compensation amounts for the NEOs other than the principal executive officer reported pursuant to Items 402(v)(2)(ii) and (iii), the registrant may not treat the PFOs as the equivalent of one NEO. Each NEO must be included individually in the calculation of average compensation amounts. In such cases, the registrant should consider including additional disclosure on the impact of the inclusion of such individuals on the calculation in order to provide clarity to investors.
Summary of Revised C&DIs
The Staff revised this C&DI to clarify how a registrant should present changes in its peer group across reporting years. A registrant provided the same list of companies as a peer group in its CD&A in each of 2020 and 2021, but provided a different list of companies in its CD&A for 2022. The original C&DI explained that such registrant providing initial PVP disclosure in its 2023 proxy statement for three years (as permitted by Instruction 1 to Item 402(v) of Regulation S-K) should present the peer group total shareholder return for each year in the table using the peer group disclosed in its CD&A for such year.
The Staff added the following two clarifications to this C&DI: (i) in the 2024 proxy statement, if such registrant uses the same peer group for 2023 as it used for 2022, the registrant should present its peer group total shareholder return for each of the years in the table using the 2023 peer group; and (ii) if such registrant changes the peer group in subsequent years, it must provide disclosure of the change in accordance with Regulation S-K Item 402(v)(2)(iv).
This C&DI originally stated that if retirement eligibility is the only vesting condition for accelerated vesting under a stock or option award, this condition would be considered satisfied for purposes of PVP disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible, although any additional substantive conditions would also have to be considered in determining when an award has vested.
The Staff revised this C&DI by adding a sentence to clarify that other substantive conditions would include, but not be limited to, a market condition as described in C&DI #128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.