On September 27, 2023, the staff of the U.S. Securities and Exchange Commission’s Division of Corporation Finance released nine new Compliance and Disclosure Interpretations (“C&DIs”) to clarify the pay versus performance (“PVP”) disclosure requirements in Item 402(v) of Regulation S-K and revised one C&DI to update guidance on non-GAAP financial measures that are presented in pay-related circumstances in the proxy statement.

The key takeaways from the new and revised C&DIs are summarized below.  Companies should read the full text of the C&DIs before preparing their PVP disclosures.

Summary of New and Revised C&DIs

C&DI #128D.14

The PVP table must include all stock awards and option awards that are outstanding and unvested at the beginning of the covered fiscal year or are granted during the covered fiscal year, including awards modified in connection with an equity restructuring or retained following such a transaction, and for which compensation cost will be recognized should be included in the PVP table.

C&DI #128D.15

For outstanding stock and option awards, the required calculations should be determined based on the change in fair value from the end of the prior fiscal year (and not based on other dates, such as the date of the  initial public offering date).  

C&DI #128D.16

The effect of a market condition under U.S. GAAP should be reflected in the fair value of share-based awards containing such a condition, as well as in determining whether the vesting conditions of share-based awards have been met.

C&DI #128D.17

Awards that remain outstanding and have not yet vested, because performance or market conditions were not met in an eligible year, are not considered to have failed to meet the applicable vesting conditions.

C&DI #128D.18

If retirement eligibility is the only vesting condition, 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.

C&DI #128D.19

If certification by the compensation committee that performance conditions have been attained is an additional substantive vesting condition, and such certification occurs after year-end, then the award would not be considered vested at the end of the fiscal year. However, a provision containing a certification requirement should be analyzed to determine if it creates an additional substantive vesting condition, such as an employee does not vest in the award unless and until they remain employed through the date such certification occurs.  

C&DI #128D.20

A company may use  a valuation technique for PVP purposes that differs from the one used to determine the grant date fair value of option or other equity-based awards that are classified as equity in the financial statements if the valuation technique would be permitted under FASB ASC Topic 718, including that it meets the criteria for a valuation technique and the fair value measurement objective.

C&DI #128D.21

It is not acceptable to value equity awards as of the end of a covered fiscal year based on methods not prescribed by GAAP.

C&DI #128D.22

A company is not required to disclose detailed quantitative or qualitative performance condition for its awards under Item 402(v)(4) to the extent such information would be subject to the confidentiality protections of Instruction 4 to Item 402(b) of Regulation S-K regarding factors or criteria involving confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm for the company. However, the company must provide as much information as possible without disclosing the confidential information, such as a range of outcomes or a discussion of how a performance condition impacted the fair value.

C&DI #118.08

This  revised C&DI,  which addresses non-GAAP financial measures that are presented in pay-related circumstances in the proxy statement, replaced “the relationship between pay and performance” with “how pay is structured and implemented to reflect the registrant’s or a named executive officer’s performance,” and referenced the treatment of treatment of Company-Selected Measures pursuant to Item 402(v)(2)(vi), but the substance of the C&DI remains the same.