Pay Versus Performance, 26329-26364 [2015-10429]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 88 (Thursday, May 7, 2015)]
[Proposed Rules]
[Pages 26329-26364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-10429]



[[Page 26329]]

Vol. 80

Thursday,

No. 88

May 7, 2015

Part II





Securities and Exchange Commission





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17 CFR Parts 229 and 240





Pay Versus Performance; Proposed Rule

Federal Register / Vol. 80 , No. 88 / Thursday, May 7, 2015 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 240

[Release No. 34-74835; File No. S7-07-15]
RIN 3235-AL00


Pay Versus Performance

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to Item 402 of Regulation S-K to 
implement Section 14(i) of the Securities Exchange Act of 1934 (the 
``Exchange Act''), as added by Section 953(a) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (the ``Dodd-Frank Act''). 
Section 14(i) directs the Commission to adopt rules requiring 
registrants to disclose in a clear manner the relationship between 
executive compensation actually paid and the financial performance of 
the registrant. The proposed disclosure would be required in proxy or 
information statements in which executive compensation disclosure 
pursuant to Item 402 of Regulation S-K is required. The proposed 
disclosure requirements would not apply to emerging growth companies or 
foreign private issuers.

DATES: Comments should be received on or before July 6, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed.shtml); or
     Send an Email to rule-comments@sec.gov. Please include 
File Number S7-07-15 on the subject line; or
     Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number S7-07-15. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's Web 
site (https://www.sec.gov/rules/proposed.shtml). Comments are also 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. All comments 
received will be posted without change; we do not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly.
    Studies, memoranda or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the SEC's Web site. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Eduardo A. Aleman, Special Counsel, in 
the Office of Rulemaking, Division of Corporation Finance, at (202) 
551-3430, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing to add new paragraph (v) to 
Item 402 of Regulation S-K.\1\
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    \1\ 17 CFR 229.402.
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Table of Contents

I. Introduction
II. Proposed Amendment
    A. Introduction
    B. New Item 402(v) of Regulation S-K
    C. Executives Covered
    D. Determination of ``Executive Compensation Actually Paid''
    E. Measure of Performance
    F. Time Period Covered
    G. Clear Description
    H. Smaller Reporting Companies
III. General Request for Comments
IV. Economic Analysis
    A. Background
    B. Baseline
    C. Discussion of Economic Effects
    1. Benefits
    2. Costs
    3. Implementation Alternatives
    D. Request for Comment
V. Paperwork Reduction Act
    A. Background
    B. Summary of Collection of Information Requirements
    C. Paperwork Reduction Act Burden Estimates
    D. Solicitation of Comments
VI. Initial Regulatory Flexibility Act Analysis
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority and Text of Proposed Amendments

I. Introduction

    We are proposing amendments today as required by Section 953(a) of 
the Dodd-Frank Act.\2\ Section 953(a) added Section 14(i) \3\ to the 
Exchange Act,\4\ which directs the Commission to adopt rules requiring 
registrants \5\ to disclose in any proxy or consent solicitation 
material for an annual meeting of shareholders a clear description of 
any compensation required to be disclosed by the issuer under Item 402 
of Regulation S-K \6\ (or any successor thereto), including information 
that shows the relationship between executive compensation actually 
paid and the financial performance of the registrant, taking into 
account any change in the value of the shares of stock and dividends of 
the registrant and any distributions. A report by the Senate Committee 
on Banking, Housing and Urban Affairs indicated that the rules mandated 
by Section 953(a) of the Dodd-Frank Act were not intended to be overly-
prescriptive and that Congress recognized that there could be many ways 
to disclose the relationship between executive compensation and 
financial performance of the registrant.\7\
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ 15 U.S.C. 78n(i).
    \4\ 15 U.S.C. 78a et seq.
    \5\ Section 102(a)(2) of the Jumpstart Our Business Startups Act 
(``JOBS Act'') amended Exchange Act Section 14(i) to exclude 
registrants that are ``emerging growth companies'' from the pay-
versus-performance disclosure requirements. Public Law 112-106, 126 
Stat. 306 (2012). Section 3(a) of the Exchange Act [15 U.S.C. 
78c(a)] defines an ``emerging growth company'' as an issuer with 
total annual gross revenues of less than $1 billion during its most 
recently completed fiscal year.
    \6\ 17 CFR 229.402.
    \7\ See Report of the Senate Committee on Banking, Housing and 
Urban Affairs to accompany S. 3217, S. Rep. No. 111-176, at 135 
(2010) (the ``Senate Report'') which stated with respect to Section 
953(a): ``This disclosure about the relationship between executive 
compensation and the financial performance of the issuer may include 
a clear graphic comparison of the amount of executive compensation 
and the financial performance of the issuer or return to investors 
and may take many forms.''
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    Section 953(a) was enacted contemporaneously with other executive 
compensation-related provisions in the Dodd-Frank Act that are 
``designed to address shareholder rights and executive compensation 
practices.'' \8\ Section 951 of the Dodd-Frank Act enacted new Exchange 
Act Section 14A \9\ which requires that not less than every three years 
a proxy or consent or authorization for an annual or other meeting of 
the shareholders for which the proxy solicitation rules of the 
Commission require compensation disclosure shall include a separate 
resolution subject to a non-binding shareholder vote to approve the

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compensation of executives. Pursuant to the mandate in Section 14A, we 
adopted rules requiring a shareholder advisory vote to approve the 
compensation of the named executive officers (``NEOs''), as disclosed 
pursuant to Item 402 of Regulation S-K, at an annual or other meeting 
of shareholders at which directors will be elected and for which such 
executive compensation disclosure is required.\10\
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    \8\ Dodd-Frank Act, H.R. Rep. 111-517, at 872 (2010).
    \9\ 15 U.S.C. 78n-1.
    \10\ See Shareholder Approval of Executive Compensation and 
Golden Parachute Compensation, Release No. 33-9178 (Jan. 25, 2011) 
[76 FR 6010] (Feb. 2, 2011).
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    We believe that the pay-versus-performance disclosure mandated by 
Section 953(a), and the disclosure of the ratio of the median annual 
total compensation of employees to the annual total compensation of the 
chief executive officer mandated by Section 953(b),\11\ are intended to 
provide shareholders with information that will help them assess a 
registrant's executive compensation when they are exercising their 
rights to cast advisory votes on executive compensation under Exchange 
Act Section 14A. The Senate Report accompanying the statute references 
shareholder interest in the relationship between executive pay and 
performance as well as the general benefits of transparency of 
executive pay practices.\12\
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    \11\ We proposed rules to implement Section 953(b), see Pay 
Ratio Disclosure, Release No. 33-9452 (Sept. 18, 2013) [78 FR 60560] 
(Oct. 1, 2013).
    \12\ The Senate Report includes the following with respect to 
Section 953 of the Dodd-Frank Act: ``It has become apparent that a 
significant concern of shareholders is the relationship between 
executive pay and the company's financial performance . . . The 
Committee believes that these disclosures will add to corporate 
responsibility as firms will have to more clearly disclose and 
explain executive pay.'' See Senate Report, supra note 7.
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    In that regard, the disclosure mandated by Section 14(i) of the 
Exchange Act will give shareholders a new metric for assessing a 
registrant's executive compensation relative to its financial 
performance. Currently, Item 402 of Regulation S-K specifies the 
information that must be included when the applicable form or schedule 
requires executive compensation disclosure. Information on financial 
performance is required by other items throughout Regulation S-K, 
including in Item 201(e),\13\ Item 301,\14\ Item 302 \15\ and Item 
303.\16\ There is currently no requirement to disclose specific 
information showing the relationship between executive compensation 
actually paid and the financial performance of the registrant. Instead, 
Item 402 of Regulation S-K contains detailed requirements for the 
disclosure of executive compensation and more principles-based 
disclosure requirements regarding the relationship between pay and 
performance. The Compensation Discussion and Analysis (``CD&A'') 
required by Item 402(b) of Regulation S-K requires registrants to 
provide an explanation of ``all material elements of the registrant's 
compensation of the named executive officers.'' \17\ With respect to 
performance, Item 402(b)(2) includes non-exclusive examples of 
information that may be material, including (i) specific items of 
corporate performance taken into account in setting compensation 
policies and making compensation decisions; (ii) how specific forms of 
compensation are structured and implemented to reflect these items of 
the registrant's performance; and (iii) how specific forms of 
compensation are structured and implemented to reflect the NEO's 
individual performance and/or individual contribution to these items of 
the registrant's performance.\18\
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    \13\ 17 CFR 229.201(e), Performance Graph.
    \14\ 17 CFR 229.301, Selected Financial Data.
    \15\ 17 CFR 229.302, Supplementary Financial Information.
    \16\ 17 CFR 229.303, Management's Discussion and Analysis of 
Financial Condition and Results of Operations.
    \17\ 17 CFR 229.402(b)(1).
    \18\ 17 CFR 229.402(b)(2)(v)-(vii).
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    The disclosure required by Exchange Act Section 14(i) can 
supplement the discussion in the CD&A as part of the shareholder's 
evaluation of the registrant's executive compensation practices and 
policies, including for purposes of the shareholder advisory vote on 
executive compensation. The proposed amendment provides a factual 
description of how the executive compensation actually paid related to 
the financial performance of the registrant.\19\ This disclosure may 
provide a useful point of comparison for the analysis provided in the 
CD&A about a compensation committee's approach to linking pay and 
performance. We also believe that the proposed disclosure may provide 
relevant information to shareholders when voting in an election of 
directors. By helping to inform a shareholder's assessment of a 
registrant's executive compensation, the new disclosure may help 
shareholders evaluate the directors' oversight of this important area.
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    \19\ We recognize that financial performance of the registrant 
is a broad term and can mean different things to different 
registrants. Throughout this release, we use the term ``financial 
performance'' to refer to the financial performance of the 
registrant as required to be disclosed by new Section 14(i) of the 
Exchange Act, which we propose to measure by cumulative total 
shareholder return as defined in Item 201(e) of Regulation S-K. See 
Section II.E below.
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    As with other Dodd-Frank Act rulemakings, we have sought comment 
from the public prior to the issuance of a proposing release.\20\ We 
have considered the pre-proposal comment letters received to date. 
Commenters were divided on whether we should provide specific rules on 
how the proposed disclosure must be prepared or whether we should allow 
registrants flexibility in determining how to disclose the relationship 
between pay and performance. Some commenters believed that we should 
propose specific requirements to encourage consistency and 
comparability across registrants.\21\ Other commenters were supportive 
of an approach to pay-versus-performance disclosure in which our rules 
would not provide specific requirements, but would allow registrants to 
determine the substance of such disclosure and how such disclosure 
should be presented.\22\
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    \20\ Comments related to the executive compensation provisions 
of the Dodd-Frank Act are available at https://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.
    \21\ See letters from Pay Governance LLC (``Pay Governance''), 
Farient Advisors (``Farient''), Compensia, Inc. (``Compensia''), 
Meridian Compensation Partners (``Meridian''), MDU Resources, Inc. 
(``MDU'') and Shareholder Value Advisors, Inc. (October 4, 2010) 
(``SVA I'').
    \22\ See letters from the Center on Executive Compensation 
(September 1, 2010) (``CEC I''), American Bar Association (``ABA''), 
Protective Life Corporation (``Protective Life''), ClearBridge 
Compensation Group (``ClearBridge'') and Davis Polk & Wardwell LLP 
(``Davis Polk'').
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    As discussed in more detail below, our proposed amendments would 
require registrants to provide disclosure that can be compared across 
registrants, while also continuing to allow registrants to supplement 
their disclosure about pay-versus-performance to reflect the specific 
situation of the registrant and its industry. Throughout the release we 
seek comment on this approach, and whether alternative approaches 
should be considered to accomplish the objectives of Section 14(i) of 
the Exchange Act.

II. Proposed Amendment

A. Introduction

    We are proposing new Item 402(v) of Regulation S-K that would 
require a registrant to provide a clear description of (1) the 
relationship between executive compensation actually paid to the 
registrant's NEOs and the cumulative total shareholder return (TSR) of 
the registrant, and (2) the relationship between the registrant's TSR 
and the TSR of a peer group chosen by the registrant, over each of the

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registrant's five most recently completed fiscal years.
    The proposed amendments would:
     Require that the executive compensation used in 
calculating the executive compensation actually paid be total 
compensation as disclosed in the Summary Compensation Table,\23\ 
modified to exclude changes in actuarial present value of benefits 
under defined benefit and actuarial pension plans that are not 
attributable to the applicable year of service, and to include the 
value of equity awards at vesting rather than when granted, which 
adjustments are intended to capture the Section 953(a) required measure 
of ``executive compensation actually paid''; \24\
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    \23\ Item 402(c) of Regulation S-K [17 CFR 229.402(c)].
    \24\ The terms ``stock,'' ``option,'' ``stock appreciation 
right,'' ``equity,'' ``plan'' and ``incentive plan'' used in this 
release are generally as defined in Item 402(a)(6) of Regulation S-K 
[17 CFR 229.402(a)(6)]. Similarly, while we do not define the term 
``defined benefit and actuarial pension plans,'' the term has the 
same meaning as in Item 402 of Regulation S-K.
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     Require registrants to measure financial performance using 
TSR, as defined in Item 201(e) of Regulation S-K, and TSR of a 
registrant peer group;
     Require registrants to provide the executive compensation 
actually paid, total compensation as disclosed in the Summary 
Compensation Table, TSR, and peer group TSR in a prescribed table;
     Require the executive compensation disclosure to be 
presented separately for the principal executive officer, and as an 
average for the remaining NEOs identified in the Summary Compensation 
Table;
     Require the disclosure of the relationship between (1) 
executive compensation actually paid and registrant TSR (for the same 
executives identified in the registrant's Summary Compensation Table), 
and (2) registrant TSR and peer group TSR, in each case over the 
registrant's five most recently completed fiscal years;
     For smaller reporting companies, require the disclosure of 
the relationship between executive compensation actually paid and TSR 
over the registrant's three most recently completed fiscal years, 
without requiring these companies to provide disclosure of peer group 
TSR;
     Require that the disclosure be provided in tagged data 
format using eXtensible Business Reporting Language (XBRL); and
     Provide a phase-in of the requirement.
    We discuss each of these aspects of our proposal in detail below.
    Foreign private issuers, as defined in Exchange Act Rule 3b-4 [17 
CFR 240.3b-4], would not be subject to the proposed amendment. Because 
securities registered by a foreign private issuer are not subject to 
the proxy statement requirements of Exchange Act Section 14,\25\ 
foreign private issuers would not be required to provide Item 402(v) 
disclosure. As proposed, registered investment companies would not be 
required to provide Item 402(v) disclosure. We believe that the 
management structure of, and the regulatory regime governing, 
registered investment companies differentiate them from issuers that 
are operating companies. Registered investment companies, unlike other 
issuers, are generally externally managed and often have few, if any, 
employees that are compensated by the registered investment company. 
Rather, such employees are generally compensated by the registered 
investment company's investment adviser. Furthermore, registered 
investment companies do not have named executive officers within the 
meaning of Item 402, and, therefore, are not required to conduct the 
shareholder advisory votes required by Exchange Act Section 14A.\26\ 
Business development companies are a category of closed-end investment 
company that are not registered under the Investment Company Act [15 
U.S.C. 80a-2(a)(48) and 80a-53-64]. As proposed, business development 
companies would be treated in the same manner as issuers other than 
registered investment companies and, therefore, would be subject to the 
disclosure requirement of Item 402(v).
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    \25\ Exchange Act Rule 3a12-3(b) [17 CFR 240.3a12-3(b)] 
specifically exempts securities registered by a foreign private 
issuer from Exchange Act Sections 14(a) and 14(c).
    \26\ As noted earlier, we believe that the pay-versus-
performance disclosure mandated by Section 953(a), together with the 
disclosure of the ratio of the median annual total compensation of 
employees to the annual total compensation of the chief executive 
officer mandated by Section 953(b), are intended to provide 
shareholders with information that will help them assess a 
registrant's executive compensation when they are exercising their 
rights to cast advisory votes on executive compensation under 
Exchange Act Section 14A. Further, as noted earlier, the Senate 
Report indicated that ``a significant concern of shareholders is the 
relationship between executive pay and a company's financial 
performance,'' and that the pay-versus-performance disclosure would 
``add to corporate responsibility as firms will have to more clearly 
disclose and explain executive pay.'' See Senate Report, supra note 
7.
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B. New Item 402(v) of Regulation S-K

1. Application and Operation of Proposed Item 402(v)
    Section 14(i) of the Exchange Act requires disclosure of the 
relationship of executive compensation actually paid and the financial 
performance of the registrant. Section 14(i) explicitly refers to Item 
402 of Regulation S-K as the reference point for the executive 
compensation to be addressed by the new disclosure relating 
compensation to performance. Because the disclosure mandated by Section 
14(i) relates specifically to executive compensation, we are proposing 
to require this new disclosure in a new Item 402(v) of Regulation S-K.
    We are also proposing that the disclosure called for under new Item 
402(v) of Regulation S-K be included in any proxy or information 
statement for which disclosure under Item 402 of Regulation S-K is 
required. Currently, Item 8 of Schedule 14A \27\ and Item 1 of Schedule 
14C \28\ require registrants to furnish Item 402 information if action 
is to be taken with regard to: The election of directors; any bonus, 
profit sharing or other contract or arrangement in which any director, 
nominee or executive officer of the registrant will participate; any 
pension or retirement plan in which they will participate; or the 
granting or extension to them of options, warrants or rights to 
purchase securities on a pro rata basis.\29\ By including the 
requirement in Item 402 and requiring this disclosure in proxy 
statements on Schedule 14A and in information statements on Schedule 
14C,\30\ shareholders would have available the pay-versus-performance 
disclosure,

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along with all other executive compensation disclosures called for by 
Item 402, in circumstances in which shareholder action is to be taken 
with regard to an election of directors or executive compensation. 
Because the proposed pay-versus-performance disclosure would be 
provided pursuant to Item 402 of Regulation S-K, it would be subject to 
the say-on-pay advisory vote under Exchange Act Rule 14a-21(a).\31\
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    \27\ 17 CFR 240.14a-101.
    \28\ Schedule 14C [17 CFR 240.14c-101] works in conjunction with 
Schedule 14A to generally require the disclosure of information 
called for by Schedule 14A to the extent that the item would be 
applicable to any matter to be acted on at a meeting if proxies were 
to be solicited. Schedule 14C implements Exchange Act Section 14(c) 
[15 U.S.C. 78n(c)] which created disclosure obligations for 
registrants that choose not to, or otherwise do not, solicit 
proxies, consents, or other authorizations from some or all of their 
security holders entitled to vote.
    \29\ The executive compensation disclosure called for under Item 
402 of Regulation S-K is also required in certain registration 
statements under the Securities Act and the Exchange Act, as well as 
in annual reports on Form 10-K. Most registrants satisfy the Form 
10-K disclosure requirement by incorporating by reference the 
information contained in their annual proxy or information 
statement.
    \30\ Even though Section 14(i) does not expressly include 
information statements provided for under Section 14(c), we believe 
that the purpose of information statements under Section 14(c), 
which established disclosure obligations for registrants that do not 
solicit proxies, does not support excluding the disclosure from 
information statements. Although Section 14(c) and Schedule 14C 
concern the provision of certain information when no solicitation is 
involved, Section 14(c) provides an obligation relating to 
information statements to transmit to holders ``such security 
information substantially equivalent to the information which would 
be required to be transmitted if a solicitation were made . . . .'' 
15 U.S.C. 78n(c).
    \31\ 17 CFR 240.14a-21.
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    We note that the language of Section 14(i) requires that the pay-
versus-performance disclosure be provided ``in any proxy or consent 
solicitation material for an annual meeting of the shareholders.'' 
Shareholder annual meetings are typically the venue in which directors 
are elected.\32\ This statutory language, if construed narrowly, would 
require the pay-versus-performance disclosure in different instances 
than our rules currently require for other executive compensation 
disclosure.\33\ In particular, under our current rules if a registrant 
solicits proxies \34\ with respect to the election of directors or 
executive compensation matters, its proxy statement must include 
specified information required by Item 402 of Regulation S-K, whether 
the election takes place at an annual or special meeting.\35\ We 
believe Item 402 disclosure, including the disclosure that would be 
required under proposed Item 402(v), is equally useful to shareholders 
without regard to the venue of the corporate action.
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    \32\ The Commission has previously recognized that directors 
ordinarily are elected at annual meetings. See, e.g., Exchange Act 
Rule 14a-6(a) [17 CFR 240.14a-6(a)] (acknowledging that registrants 
soliciting proxies in the context of an election of directors at an 
annual meeting may be eligible to rely on the exclusion from the 
requirement to file a proxy statement in preliminary form). See 
also, Exchange Act Rule 14a-3(b) [17 CFR 240.14a-3(b)] (requiring 
proxy statements used in connection with the election of directors 
at an annual meeting to be preceded or accompanied by an annual 
report containing audited financial statements). The requirement for 
registrants to hold an annual meeting at which directors are to be 
elected, however, is imposed by a source of legal authority other 
than the federal securities laws. In Delaware, for example, where 
more than 50% of the publicly traded issuers are incorporated, 
according to the State of Delaware's official Web site, Delaware 
General Corporation Law (DGCL), Section 211(b) is viewed as 
requiring an annual meeting for the election of directors. See R. 
Franklin Balotti & Jesse A. Finkelstein, Delaware Law of 
Corporations & Business Organizations, Sec.  7.1 (3d ed.), Edward P. 
Welch, Andrew J. Turezyn, & Robert S. Saunders, Folk on the Delaware 
General Corporate Law Sec.  211.2 (2013), and the text of DGCL 
Section 211(b), which reads in relevant part, ``unless directors are 
elected by written consent in lieu of an annual meeting as permitted 
by this subsection, an annual meeting of stockholders shall be held 
for the election of directors on a date and at a time designated by 
or in the manner provided in the bylaws.'' See also Charles R.T. 
O'Kelley & Robert B. Thompson, Corporations and Other Business 
Associations 167 (7th ed.) (explaining that the ``paramount 
shareholder function is the election of directors'' and that 
``[m]ost corporation codes protect this right by specifying 
immutably that directors shall be elected at an annually held 
meeting of shareholders.''), California Corporations Code, Section 
600(b), and 1969 Model Business Corporation Act (as amended through 
1981), Section 7.01(a) (each requiring an annual meeting of 
shareholders for the election of directors).
    \33\ The language of Section 14(i) calls for the disclosure to 
be provided in connection with annual meetings, the meeting at which 
registrants generally provide for the election of directors. 
Depending on the circumstances, this construction could be narrower 
or broader than the scope of Item 8 of Schedule 14A, which requires 
executive compensation disclosure in circumstances where action is 
to be taken with regard to an election of directors or executive 
compensation. For example, a registrant could solicit proxies to 
approve a management contract or arrangement or other compensation 
plan at a special meeting instead of an annual meeting and, in this 
instance, Item 8 would require Item 402 executive compensation 
disclosure. By contrast, although an annual meeting ordinarily 
involves an election of directors, in the unlikely event that an 
annual meeting did not include an election of directors or other 
executive compensation actions, the proposed amendment would not 
require any Item 402 executive compensation disclosure.
    \34\ Rule 14a-1(f) [17 CFR 240.14a-1(f)] defines the term 
``proxy'' to include every proxy, consent or authorization within 
the meaning of Section 14(a) of the Exchange Act. A solicitation of 
consents therefore constitutes a solicitation of proxies subject to 
Section 14(a) and Regulation 14A.
    \35\ See Item 8 of Schedule 14A.
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    Consistent with our approach to other Item 402 disclosures, we are 
proposing to require pay-versus-performance disclosure in these 
instances because we believe that the proposed disclosure would be most 
useful to shareholders when they are deciding whether to approve the 
compensation of the NEOs through the say-on-pay advisory vote, as well 
as when making voting decisions on a compensation plan in which NEOs 
participate, and making decisions pertaining to the election of 
directors. The Senate Report accompanying the statute references 
shareholder interest in the relationship between executive pay and 
performance as well as the general benefits of transparency of 
executive pay practices.\36\ Several commenters also noted that the 
mandate may help inform shareholders.\37\ For example, one commenter 
stated a belief that the requirements of Section 953(a), if implemented 
appropriately, ``will help investors better understand the executive 
pay decisions of the company, and make more informed `Say-on-Pay' 
votes.'' \38\
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    \36\ The Senate Report includes the following with respect to 
Section 953(a) of the Dodd-Frank Act: ``It has become apparent that 
a significant concern of shareholders is the relationship between 
executive pay and the company's financial performance . . . The 
Committee believes that these disclosures will add to corporate 
responsibility as firms will have to more clearly disclose and 
explain executive pay.'' See Senate Report supra note 7.
    \37\ See letters from American Federation of Labor and Congress 
of Industrial Organizations (Aug. 8, 2014) (``AFL-CIO''), 
PublicCitizen, ClearBridge and Pay Governance.
    \38\ See letter from Pay Governance.
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    By proposing to require the disclosure as a new Item 402 
requirement, however, the pay-versus-performance disclosure, unless 
otherwise limited, also would be required in a registrant's Form 10-K 
and in Securities Act registration statements that require Item 402 
disclosure. The language of Section 14(i) calling for the disclosure to 
be provided in solicitation material for an annual meeting of the 
shareholders suggests that the disclosure was intended to be provided 
in conjunction with a shareholder vote, and we believe that the 
disclosure would be most useful in this context. Therefore, we are 
proposing that Item 402(v) specify that the disclosure would only be 
required in a registrant's proxy or information statement. In addition, 
as proposed, the information will not be deemed to be incorporated by 
reference into any filing under the Securities Act or the Exchange Act, 
except to the extent that the registrant specifically incorporates it 
by reference.\39\
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    \39\ See Instruction 6 to proposed Item 402(v) of Regulation S-
K. As proposed, the information would therefore not be subject to 
forward incorporation by reference under Item 12(b) of Form S-3 [17 
CFR 239.13].
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2. Format and Location of Proposed Disclosure
    Section 14(i) of the Exchange Act requires us to adopt rules 
requiring disclosure of ``information'' that shows the relationship 
between executive compensation actually paid and registrant financial 
performance, but it does not specify the format or location of that 
disclosure.
    We are not proposing a specific location within the proxy statement 
or information statement for this new disclosure. We note that the 
proposed disclosure item is related to the CD&A because it would show 
the historical relationship between executive pay and registrant 
financial performance, and may provide a useful point of comparison for 
the analysis provided in the CD&A. However, including this disclosure 
as part of CD&A might suggest that the registrant considered the pay-
versus-performance relationship, as disclosed, in its compensation 
decisions, which may not be the case. Consequently, we believe it is 
appropriate to provide flexibility for registrants in determining where 
in the proxy or information statement to provide the disclosure 
required by proposed Item 402(v), although we

[[Page 26334]]

generally expect registrants would disclose it with the Item 402 
executive compensation disclosure.
    As proposed, Item 402(v) would require registrants to provide a 
table containing the values of the prescribed measures of executive 
compensation actually paid, TSR for the registrant and TSR for the 
selected peer group (see table below). For each amount disclosed as 
executive compensation actually paid in columns (c) and (e) of the 
prescribed table, proposed Item 402(v) would require footnote 
disclosure for both principal executive officer compensation and 
average NEO compensation of each amount deducted from, and added to the 
total compensation amount as provided in the Summary Compensation 
Table. As proposed, Item 402(v) also would require registrants to 
include in the table the total PEO compensation reported in the Summary 
Compensation Table (column (b), and, for NEOs, the average total 
compensation reported in the Summary Compensation Table (column (d)). 
Requiring disclosure of the Summary Compensation Table measure of total 
compensation together with our proposed measure of executive 
compensation actually paid would provide shareholders with disclosure 
of two measures in one single table and, we believe, would facilitate 
comparisons of the two measures of a registrant's executive 
compensation to the registrant's performance. To the extent that some 
shareholders may be interested in considering the relationship of 
performance with a measure of pay that excludes changes in the value of 
equity awards, they would be able to refer to the Summary Compensation 
Table measure of total compensation required alongside executive 
compensation actually paid in the tabular disclosure. Among other 
things, the Summary Compensation Table measure of total compensation 
reflects the grant date values of equity awards.
    We are proposing that the disclosure provided in each column of the 
proposed table, including any footnote disclosure, be provided in 
interactive data format using XBRL.\40\ The proposal would require 
registrants to tag separately the values disclosed in the required 
table, and to separately block-text tag the disclosure of the 
relationship among the measures, the footnote disclosure of deductions 
and additions used to determine executive compensation actually paid, 
and the footnote disclosure regarding vesting date valuation 
assumptions. The interactive data would have to be provided as an 
exhibit to the definitive proxy or information statement filed with the 
Commission, in addition to appearing with and in the same format as the 
rest of the disclosure provided pursuant to proposed Item 402(v) of 
Regulation S-K (e.g., in ASCII or HTML). Registrants would be required 
to prepare their interactive data using the list of tags the Commission 
specifies and submit them with any supporting files the EDGAR Filer 
Manual prescribes.\41\ We believe requiring the data to be tagged would 
lower the cost to investors of collecting this information, would 
permit data to be analyzed more quickly by investors and other end-
users than if the data was provided in a non-machine readable format, 
and would facilitate comparisons among public companies. In addition, 
requiring the data to be tagged would facilitate analysis of how 
information related to a single issuer changes over time.
---------------------------------------------------------------------------

    \40\ Data becomes interactive when it is labeled or ``tagged'' 
using a computer markup language such as XBRL that software can 
process for analysis.
    \41\ The EDGAR Filer Manual is available at: https://www.sec.gov/info/edgar/edmanuals.htm.>

                                                                 Pay Versus Performance
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Average summary
                                                                   compensation table   Average compensation
        Year          Summary compensation      Compensation       total for  non-PEO      actually paid to     Total shareholder     Peer group total
                       table total for PEO  actually paid to PEO     named executive        non-PEO named            return          shareholder return
                                                                        officers         executive officers
(a)                                 (b)                   (c)                   (d)                   (e)                   (f)                   (g)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      ....................  ....................  ....................  ....................  ....................  ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Because the statute requires disclosure of the relationship between 
executive compensation and registrant performance, we do not believe 
that simply disclosing the amount of executive compensation actually 
paid and the financial performance measure would satisfy this statutory 
requirement. Thus, using the values presented in the table, proposed 
Item 402(v) would require the registrant to describe (1) the 
relationship between the executive compensation actually paid and 
registrant TSR, and (2) the relationship between registrant TSR and 
peer group TSR. We believe disclosure about the relationship between 
registrant TSR and peer group TSR would provide information that 
investors can use to compare a registrant's performance with that of 
its peers, and may provide a useful point of comparison to assess the 
relationship between the registrant's executive compensation actually 
paid and its financial performance compared to the performance of its 
peers during the same time period.
    The disclosure about the relationship would follow the table and 
could be described as a narrative, graphically, or a combination of the 
two, and, as proposed, would be required to be provided in interactive 
data format using XBRL. Disclosure of the relationship could include, 
for example, a graph providing executive compensation actually paid and 
change in TSR on parallel axes and plotting compensation and TSR over 
the required time period. Alternatively, disclosure of the relationship 
could include showing the percentage change over each year of the 
required time period in both executive compensation actually paid and 
TSR together with a brief discussion of that relationship. Under our 
proposed amendments, while the presentation format used by different 
registrants to demonstrate the relationship between executive 
compensation actually paid and TSR may vary, the table required by Item 
402(v) together with existing disclosures would provide shareholders 
with clear information from which to determine the relationship between 
executive compensation actually paid and registrant performance so that 
shareholders could, if desired, compare the disclosure across 
registrants.
    Exchange Act Section 14(i) provides that the disclosure about the 
relationship may include a graphic

[[Page 26335]]

representation of the information. Commenters provided varying views on 
whether to require a graphic presentation. Some commenters indicated 
that a graphic representation would help provide meaningful 
disclosure,\42\ while other commenters supported a principles-based 
approach that would not include a specific requirement for a graphic 
representation.\43\ Consistent with the language of Exchange Act 
Section 14(i), we are proposing to permit, rather than require, a 
registrant to comply with the new requirement to disclose the 
relationship between executive compensation actually paid and 
registrant performance by including a graphic presentation of the pay-
versus-performance disclosure, in addition to the required table 
presenting the values of prescribed measures of executive compensation 
and TSR.
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    \42\ See letters from Farient, Meridian and Shareholder Value 
Advisors, Inc. (Apr. 27, 2012) (``SVA II'').
    \43\ See letters from ABA, CEC I, and Davis Polk.
---------------------------------------------------------------------------

Request for Comment
    1. Exchange Act Section 14(i) specifies that the pay-versus-
performance disclosure must be provided in any proxy or consent 
solicitation materials that relate to annual shareholder meetings. For 
the reasons discussed above, we are proposing to require the disclosure 
in a registrant's proxy or information statement where Item 402 
disclosure is required. Should we instead, or in addition, require the 
disclosure in any proxy or information statements relating to an annual 
shareholder meeting (or special meeting or written consent in lieu of a 
meeting)? Why or why not?
    2. To retain consistency in the executive compensation disclosure 
provided in proxy statements and information statements, we propose 
that the Item 402(v) disclosure be included in information statements 
on Schedule 14C as well as proxy statements on Schedule 14A for which 
Item 402 disclosure is required. Is there any reason that the proposed 
disclosure mandated by Section 14(i) should be limited to registrants 
that are soliciting proxies or consents on Schedule 14A?
    3. Should we also require the proposed disclosure in all other 
forms and schedules in which executive compensation disclosure is 
required? Would it be useful to shareholders to include the proposed 
disclosure in registration statements or annual reports as well? Why or 
why not?
    4. Should the disclosure required by Exchange Act Section 14(i) be 
a separate requirement under Item 402 of Regulation S-K, as proposed? 
Alternatively, should we require the disclosure as part of the CD&A? If 
so, please explain why.
    5. Should we require registrants to provide, as proposed, a table 
that includes the Summary Compensation Table total compensation, in 
addition to the values of the prescribed measures of executive 
compensation actually paid and registrant financial performance used 
for the pay-versus-performance disclosure? Why or why not?
    6. Should we further prescribe the format of the proposed 
disclosure to promote comparability across registrants? For example, 
should we require that registrants present the percentage change in 
executive compensation actually paid and registrant/peer group 
financial performance over each year of the required time period 
graphically or in writing? Are there other format requirements we 
should consider? Should we provide further guidance on how to present 
the information in a way that promotes comparability? Are there ways 
our proposed table can be improved?
    7. If we were to require a graphic presentation of the disclosure, 
should we specify requirements for this presentation so that each 
registrant provides comparable disclosure? Or should we allow 
registrants to determine the appropriate graphic presentation, if any? 
How should such a graph describe the relationship between executive 
compensation actually paid and registrant performance?
    8. Should we provide sample charts or other examples of graphic 
presentations that would comply with proposed Item 402(v)? If so, 
please provide examples.
    9. Would requiring disclosure of the values of the prescribed 
measures of executive compensation actually paid and registrant 
financial performance, without additional information about the 
``relationship'' of those data points, satisfy Section 14(i) of the 
Exchange Act?
    10. Would the stock performance graph required by Item 201(e) of 
Regulation S-K modified to add a line representing executive 
compensation actually paid provide meaningful disclosure about the 
relationship between executive pay and registrant performance? Why or 
why not? If so, should we require the stock performance graph, as so 
modified to be included in the proxy or information statement as well 
as, or instead of, in the annual report to security holders required by 
Exchange Act Rules 14a-3 and 14c-3 \44\? Would such disclosure satisfy 
Exchange Act Section 14(i)?
---------------------------------------------------------------------------

    \44\ 17 CFR 240.14a-3 and 17 CFR 240.14c-3.
---------------------------------------------------------------------------

    11. Under our current rules, unless specifically incorporated by 
reference, the disclosure required by Item 201(e) of Regulation S-K is 
not deemed to be ``soliciting material'' or to be ``filed'' with the 
Commission or subject to the liabilities of Exchange Act Section 
18.\45\ That same treatment is not afforded to the CD&A disclosure. 
Under the proposal, the pay-versus-performance disclosure, which would 
require disclosure of TSR as defined in Item 201(e) for the registrant 
and for a peer group used by the registrant for purposes of the CD&A or 
Item 201(e), would be filed in certain proxy or information statements. 
Should the disclosure about TSR be deemed to be filed, as proposed? Why 
or why not? Alternatively, should the TSR disclosure be deemed to be 
``furnished''? If the disclosure was treated as ``furnished'', should 
such treatment only apply to peer group TSR? Why or why not?
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78r; see Instruction 8 to Item 201(e) of 
Regulation S-K.
---------------------------------------------------------------------------

    12. Would the proposed tabular disclosure of the values of the 
executive compensation and registrant financial performance enhance 
comparability across registrants? Are there other formats that would be 
more useful in that regard?
    13. Should we require that the data be tagged in XBRL format, as 
proposed? Should we require a different format, such as, for example, 
eXtensible Markup Language (XML)? \46\ Should the proposed tabular 
disclosure be changed in any way to facilitate accurate and consistent 
tagging? If so, how? Should we require that, as proposed, disclosure 
about the relationship between executive compensation and registrant 
performance be tagged? Why or why not? Would tagging the relationship 
of executive compensation to financial performance enhance 
comparability among different registrants? Alternatively, instead of 
requiring that the disclosure about the relationship be tagged, should 
tagging this disclosure be optional? If a registrant chooses to add 
more information to the prescribed

[[Page 26336]]

table, should we require this additional information to be tagged as 
well, even if registrant-specific extensions are necessary?
---------------------------------------------------------------------------

    \46\ Another possible alternative for providing the information 
in interactive data format would be Inline XBRL, which would allow 
registrants to file the required information and data tags in one 
document rather than requiring a separate exhibit for the 
interactive data. Commission rules and the EDGAR system do not 
currently allow for the use of Inline XBRL. To the extent that a 
determination is made in the future to accept Inline XBRL 
submissions, we expect to revisit the format in which this 
disclosure requirement is provided.
---------------------------------------------------------------------------

    14. Should we require that the data be tagged in preliminary proxy 
statements and information statements, as well as in definitive proxy 
statements and information statements? Why or why not?
    15. Should we exempt smaller reporting companies from the XBRL 
requirement, rather than require them to provide such data? Why or why 
not? Would the costs be different for smaller reporting companies to 
comply with the proposed requirement to provide the data in XBRL format 
as compared to other companies? What would be the impact of not 
requiring tagging for smaller reporting companies? Should we, as 
proposed, provide a phase-in for smaller reporting companies to tag the 
disclosure? Why or why not? Should the period be longer or shorter than 
three years?
    16. Instruction 1 to Item 402(c)(2)(iii) and (iv) of Regulation S-K 
permits a registrant to omit disclosure in the Summary Compensation 
Table of the salary or bonus of an NEO if it is not calculable as of 
the latest practicable date.\47\ Item 5.02(f) of Form 8-K \48\ sets 
forth the requirements for the filing of information that was omitted 
from Item 402 disclosure in accordance with Instruction 1 to Item 
402(c)(2)(iii) and (iv), including the requirement to include a new 
total compensation figure for the NEO. Should we consider permitting 
registrants to omit pay-versus-performance disclosure until those 
elements of the NEO's total compensation are determined and to provide 
the pay-versus-performance disclosure in the same filing under Item 
5.02(f) of Form 8-K in which the salary or bonus is disclosed? Is such 
relief necessary given that, as proposed, registrants will not be 
required to incorporate the disclosure into the Form 10-K? If we were 
to provide the relief, should we require any additional or supplemental 
disclosure in connection with an amendment to Item 5.02(f)? If so, what 
would that disclosure entail?
---------------------------------------------------------------------------

    \47\ For smaller reporting companies, Instruction 1 to Item 
402(n)(2)(iii) and (iv) is the corresponding instruction.
    \48\ 17 CFR 249.308.
---------------------------------------------------------------------------

C. Executives Covered

    Exchange Act Section 14(i) does not specify which executives must 
be included in the disclosure of ``executive compensation actually 
paid.'' For registrants other than smaller reporting companies, we are 
proposing that the executives covered by the proposed Item 402(v) 
disclosure be the ``named executive officers'' as defined in Item 
402(a)(3) of Regulation S-K.\49\ For smaller reporting companies, we 
are proposing that the executives covered by the proposed Item 402(v) 
disclosure be the same as the ``named executive officers'' required to 
be disclosed under Item 402(m).\50\ These are the executive officers 
for whom, under our current rules, compensation disclosure is required 
in the Summary Compensation Table and the other executive compensation 
disclosure requirements. In addition, we are proposing that, for each 
year, the compensation information be presented separately for the 
principal executive officer \51\ and as an average for the remaining 
NEOs identified in the Summary Compensation Table.
---------------------------------------------------------------------------

    \49\ Item 402(a)(3) [17 CFR 229.402(a)(3)] defines the NEOs for 
whom Item 402 executive compensation is required as 1) all 
individuals serving as the registrant's principal executive officer 
or acting in a similar capacity during the last completed fiscal 
year (``PEO''), regardless of compensation level, 2) all individuals 
serving as the registrant's principal financial officer or acting in 
a similar capacity during the last completed fiscal year (``PFO''), 
regardless of compensation level, 3) the registrant's three most 
highly compensated executive officers other than the PEO and PFO who 
were serving as executive officers at the end of the last completed 
fiscal year, and 4) up to two additional individuals for whom Item 
402 disclosure would have been provided but for the fact that the 
individual was not serving as an executive officer of the registrant 
at the end of the last completed fiscal year. Because the pay-
versus-performance disclosure is being proposed as new paragraph (v) 
to Item 402, the disclosure also would be required for the NEOs.
    \50\ For smaller reporting companies, Item 402(m)(2) [17 CFR 
229.402(m)(2)] defines the NEOs for whom Item 402 executive 
compensation is required as 1) all individuals serving as the 
smaller reporting company's principal executive officer or acting in 
a similar capacity during the last completed fiscal year (PEO), 
regardless of compensation level, 2) the smaller reporting company's 
two most highly compensated executive officers other than the PEO 
who were serving as executive officers at the end of the last 
completed fiscal year, and 3) up to two additional individuals for 
whom disclosure would have been provided but for the fact that the 
individual was not serving as an executive officer of the smaller 
reporting company at the end of the last completed fiscal year.
    \51\ The term ``principal executive officer'' used in this 
release has the same meaning as in Items 402(a)(3) and 402(m)(2) of 
Regulation S-K and would include an individual acting in a similar 
capacity.
---------------------------------------------------------------------------

    We note that Section 14(i) specifically refers to compensation 
required to be disclosed under Item 402 of Regulation S-K. Because Item 
402 of Regulation S-K requires disclosure of NEO compensation, we 
believe that Congress intended for the rules to provide disclosure 
about that group. We also believe that covering only the NEOs should 
help to mitigate some of the costs associated with the proposed 
disclosure because registrants are already required to make the 
determination of who is an NEO and to track information about their 
compensation. Commenters that addressed this issue were generally 
supportive of requiring that the pay-versus-performance disclosure 
cover the NEOs.\52\
---------------------------------------------------------------------------

    \52\ See letters from ABA, Baker, Donelson, Bearman, Caldwell & 
Berkowitz (``Baker Donelson''), ClearBridge, Compensia, Brian Foley 
& Company (``Foley'') and MDU.
---------------------------------------------------------------------------

    We are proposing to require that the disclosure be provided 
separately for the PEO and as an average for the remaining NEOs 
identified in the Summary Compensation Table. Several commenters noted 
that shareholders have a particular interest in the compensation of the 
PEO.\53\ We are further proposing that if more than one person served 
as the PEO of the registrant, then the disclosure for the persons who 
served as PEO of the registrant shall be aggregated for the years in 
which more than one person served as the PEO because this reflects the 
total amount that was paid by the registrant for the services of a PEO.
---------------------------------------------------------------------------

    \53\ See letters from Farient, Johnson & Johnson (``J&J''), 
Meridian and Pay Governance. One such commenter recommended that we 
limit the disclosure solely to the PEO. See letter from Meridian. As 
discussed above, however, because Section 14(i) specifically refers 
to compensation required to be disclosed under Item 402, and Item 
402 applies to a broader group of NEOs than the PEO, we believe the 
disclosure should be required about that group.
---------------------------------------------------------------------------

    Finally, we are proposing to require disclosure of the average 
compensation actually paid for the remaining NEOs. We believe 
disclosure of the relationship of performance to average NEO 
compensation would be more meaningful to shareholders than individual 
or aggregate NEO compensation. There can be significant variability in 
the identity of the registrant's other NEOs over a five-year period. 
Moreover, the number of NEOs for whom Item 402 disclosure is required 
may fluctuate from year-to-year, which would make an aggregate total 
not comparable year over year.\54\ We believe requiring disclosure of 
the average compensation would help make the information about these 
NEOs more comparable from year to year in spite of the variability in 
the composition and number of NEOs who are not the PEO

[[Page 26337]]

over the years for which disclosure is required.
---------------------------------------------------------------------------

    \54\ For example, in any year, up to two additional individuals 
who were not serving as executive officers at the end of the year 
must be included if they otherwise would have been among the most 
highly compensated. Additionally, for registrants other than smaller 
reporting companies, if more than one person serves as principal 
financial officer during the year, each of them must be included in 
the Summary Compensation Table.
---------------------------------------------------------------------------

Request for Comment
    17. Should we require that the proposed disclosure cover the NEOs 
as defined in Item 402(a)(3) of Regulation S-K, or Item 402(m) for 
smaller reporting companies, as proposed? Alternatively, should we 
require disclosure for a different group of executives than the NEOs 
and, if so, how should such a group be defined? For example, would the 
appropriate group be all executive officers as defined in Rule 3b-7 
under the Exchange Act? \55\ What additional costs would registrants 
incur if they were required to provide information for executives not 
currently defined as NEOs?
---------------------------------------------------------------------------

    \55\ 17 CFR 240.3b-7.
---------------------------------------------------------------------------

    18. Should we require registrants to provide the pay-versus-
performance disclosure for NEOs other than the PEO as an average, as 
proposed, or should we specify that the disclosure must be made either 
in the aggregate (i.e., the sum of all other NEOs' compensation) or on 
an individual basis for each NEO? How would these approaches affect, 
either positively or negatively, the comparability across registrants? 
Alternatively, should registrants provide tabular disclosure of the 
executive compensation actually paid on an individual basis for each 
NEO but only be required to demonstrate the relationship to financial 
performance for the PEO's individual compensation and the average 
compensation of the other NEOs? Are there ways other than using an 
average for the other NEOs to appropriately account for the possibility 
that the size and identity of the group of other NEOs could change each 
year? What impact would changes to the group of other NEOs have on the 
comparability and usefulness of pay-versus-performance disclosure?
    19. Should we require separate disclosure for the PEO, as proposed? 
Should we require, in instances where a registrant had more than one 
PEO in a given year, that the amounts for each PEO be added together, 
as proposed? Under our executive compensation disclosure rules, if an 
individual served in the capacity of PEO during any part of a fiscal 
year for which executive compensation disclosure is required, 
information about the individual's compensation for the full fiscal 
year is required to be disclosed. Should the compensation amount for 
the pay-versus-performance disclosure include only compensation 
received as the PEO? Should we require separate disclosure for each 
individual who served as a PEO during the required time period of 
disclosure? Are there alternative approaches we should consider? For 
example, where a registrant had more than one PEO in a given year, 
should we permit registrants the flexibility to choose instead to 
annualize the compensation of the PEO serving at the end of the fiscal 
year?
    20. Should we require disclosure for only the PEO? Would 
information about the non-PEO NEOs be meaningful or useful for 
investors? Would information about the PEO's compensation provide 
adequate information to investors about the pay-versus-performance 
alignment of other NEOs? Would limiting the scope of disclosure to the 
PEO result in meaningful cost savings to registrants, for example by 
limiting the extent to which they must perform recalculations of 
compensation actually paid (see Section II.D below) or average 
calculations? Would limiting the disclosure to the PEO affect the 
usefulness of the information for investors?

D. Determination of ``Executive Compensation Actually Paid''

    Exchange Act Section 14(i) does not define the phrase ``executive 
compensation actually paid,'' but it does require a ``clear description 
of any compensation required to be disclosed by the registrant'' under 
Item 402 of Regulation S-K.\56\ We are proposing that ``executive 
compensation actually paid'' under proposed Item 402(v) of Regulation 
S-K would be total compensation as reported in the Summary Compensation 
Table,\57\ modified to adjust the amounts included for pension benefits 
and equity awards. We believe using as a starting point the total 
compensation that registrants already are required to report in the 
Summary Compensation Table and making adjustments to those figures 
reduces burdens to registrants and also may enhance comparability of 
the proposed disclosure across registrants.\58\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78n(i).
    \57\ Item 402(c) of Regulation S-K. Smaller reporting companies 
provide the scaled Summary Compensation Table disclosure specified 
in Item 402(n) of Regulation S-K.
    \58\ We note that the pay ratio disclosure required by Section 
953(b) of the Dodd-Frank Act is required to be based on total 
compensation as provided in the Summary Compensation Table. In light 
of the different language in Section 953(a), which references 
compensation that is ``actually paid,'' we believe it is appropriate 
to adjust the treatment of certain components of total compensation 
for the disclosure required by Section 953(a) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Although Exchange Act Section 14(i) refers to compensation required 
to be disclosed under Item 402 of Regulation S-K, it also uses the 
phrase ``actually paid,'' which differs from disclosure required under 
Item 402 of ``compensation awarded to, earned by or paid to'' the 
NEOs.\59\ We believe that Congress intended executive compensation 
``actually paid'' to be an amount distinct from the total compensation 
as reported under Item 402 because it used a term not otherwise 
referenced in Item 402. As such, we believe that adjustments to some of 
the elements in the Summary Compensation Table are appropriate to 
reflect executive compensation that is ``actually paid'' within the 
meaning of Section 14(i). Total compensation as reported in the Summary 
Compensation Table is the appropriate starting point and, as proposed, 
would be included in the table as discussed above, but registrants 
would need to adjust some elements of compensation determined according 
to the Summary Compensation Table reporting requirements to reflect 
amounts ``actually paid'' to the NEOs.
---------------------------------------------------------------------------

    \59\ See 17 CFR 229.402(a)(2).
---------------------------------------------------------------------------

    Some commenters were of the view that we should not prescribe the 
specific compensation elements to be covered \60\ or the method of 
determination of when equity awards are ``actually paid.'' \61\ 
Instead, these commenters suggested that registrants be permitted 
flexibility to determine which compensation elements should be included 
in pay-versus-performance disclosure.\62\ While such an approach could 
benefit registrants by permitting them to determine the disclosure they 
believe best reflects the relationship between executive pay and the 
registrant's performance, we believe that such flexibility would limit 
comparability across registrants, making the disclosure less useful to 
shareholders.\63\
---------------------------------------------------------------------------

    \60\ See letters from ABA, CEC I, ClearBridge and Davis Polk.
    \61\ See letters from ABA, CEC I, Davis Polk, Protective Life 
and Society of Corporate Secretaries and Governance Professionals 
(``SCSGP'').
    \62\ See letters from ABA, CEC I and Davis Polk. One commenter 
stated that ``[a]n issuer should be able to determine which 
compensation elements are based on performance and explain the 
rationale for why it included those elements in this analysis, and 
excluded others.'' See letter from Davis Polk.
    \63\ See, e.g., letters from AFL-CIO and Council of 
Institutional Investors (``CII'').
---------------------------------------------------------------------------

    Other commenters recommended that we limit the compensation 
required to be disclosed for purposes of the pay-versus-performance 
disclosure to the amounts that are based on the financial performance 
of the company.\64\ Some commenters supported particular

[[Page 26338]]

definitions of ``actually paid'' covering specific compensation 
elements,\65\ such as a measure including only the grant date fair 
value for all equity awards that are subject to performance-based 
vesting conditions and cash amounts awarded based on the financial 
performance of the registrant.\66\ Some commenters suggested that 
change in pension value should be excluded from the Summary 
Compensation Table calculation in computing the new measure.\67\ Other 
commenters, by contrast, recommended that the Commission define 
``executive compensation actually paid'' as broadly as possible, 
regardless of whether a particular component of compensation is awarded 
based on performance.\68\
---------------------------------------------------------------------------

    \64\ See letters from Compensia and Center for Executive 
Compensation (Oct. 17, 2014) (``CEC II'').
    \65\ See letters from ClearBridge and Pay Governance. 
ClearBridge and Pay Governance recommended using particular 
definitions of realizable pay.
    \66\ See letter from Compensia.
    \67\ See letters from Baker Donelson, Frederic W. Cook & Co., 
Inc. (``Cook''), and Meridian.
    \68\ See letter from CII. See also letter AFL-CIO (recommending 
that the Commission require disclosure of all forms of compensation 
as disclosed in the Summary Compensation Table).
---------------------------------------------------------------------------

    We are aware that a number of registrants have used the concepts of 
``realizable pay'' and ``realized pay'' in their proxy statements as a 
means of comparing pay and performance.\69\ While there continues to be 
work among various compensation constituencies to agree upon a 
consistent methodology for calculating ``realizable pay'' or ``realized 
pay,'' we are not aware that there has yet been broad agreement upon 
any particular formula. Registrants may choose to supplement the 
disclosure required by proposed Item 402(v) by providing pay-versus-
performance disclosure based on a measure of ``realized pay,'' 
``realizable pay,'' or another appropriate measure if they believe it 
provides useful information about the relationship between compensation 
and registrant performance, provided that the supplemental disclosure 
is not misleading and not presented more prominently than the required 
disclosure.
---------------------------------------------------------------------------

    \69\ The concepts of ``realized pay'' and ``realizable pay'' are 
designed to provide different measures of alignment between a named 
executive officer's pay and performance, though there are no 
standard definitions of either term. Registrants can tailor the 
concepts resulting in amounts which generally differ from the 
amounts disclosed in the Summary Compensation Table because they 
exclude various types of compensation such as the value of unvested 
or unexercised equity awards. We note that some proxy advisory 
services have also begun to take into account some version of 
``realizable pay'' or ``realized pay'' when making say-on-pay voting 
recommendations. See, e.g., Institutional Shareholder Services, 
Inc., U.S. Corporate Governance Policy 2014 updates (Nov. 21, 2013).
---------------------------------------------------------------------------

    Because the statute does not define ``executive compensation 
actually paid,'' we are using our discretion to define that term for 
the purpose of proposed Item 402(v) disclosure.\70\ As indicated above, 
while we believe the Summary Compensation Table is the appropriate 
starting point, we believe some adjustments are appropriate to give 
effect to the statutory language and reflect executive compensation 
that is ``actually paid.'' Specifically, as discussed below, we propose 
to modify the amounts included for pension benefits and equity 
awards.\71\ Moreover, we believe that the phrase ``executive 
compensation actually paid'' should include all compensation actually 
paid, regardless of whether the compensation is awarded based on the 
registrant's financial performance. In considering the relationship 
between executive compensation actually paid and the registrant's 
financial performance, we believe shareholders should be able to take 
into account components of compensation regardless of whether or not 
they are awarded based on the registrant's performance.
---------------------------------------------------------------------------

    \70\ Proposed Item 402(v)(2).
    \71\ These terms have the same definitions as in Item 402 of 
Regulation S-K.
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1. Changes in Actuarial Pension Value
    We propose to deduct the change in the actuarial present value of 
all defined benefit and pension plans from the Summary Compensation 
Table total for purposes of proposed Item 402(v).\72\ This Summary 
Compensation Table measure includes the change in actuarial present 
value of pension benefits previously accrued based on changes in 
interest rates, executive age, and other actuarial inputs and 
assumptions, which may introduce significant volatility into this 
measure, as well as the actuarial present value of accrued pension 
benefits earned by the executive based on an additional year of 
service.\73\ Item 402(v) would require, however, that the actuarially 
determined service cost for services rendered by the executive during 
the applicable year be added back.\74\ Thus, the portion of the total 
change in actuarial pension value that results solely from changes in 
interest rates, executive's age and other actuarial inputs and 
assumptions regarding benefits accrued in previous years would be 
excluded.
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    \72\ The change in actuarial present value, generally, reflects 
the difference between the actuarial present value of accumulated 
benefits at the end of the fiscal year and at the end of the prior 
fiscal year. This amount would be deducted only if the value is 
positive, and therefore included in the sum reported in column (h) 
of the Summary Compensation Table. Where such amount is negative, 
and therefore reported only in a footnote to column (h), it should 
not be reflected for purposes of proposed Item 402(v). See 
Instruction 3 to Item 402(c)(2)(viii). Smaller reporting companies 
would not need to deduct this amount because the Summary 
Compensation Table requirements for smaller reporting companies do 
not require disclosure of the change in actuarial present value.
    \73\ While commenters were divided on which elements of 
compensation should be included, some commenters supported 
calculating compensation by excluding changes in pension value and 
above-market earnings on deferred compensation from the compensation 
in the Summary Compensation Table. See letters from Meridian, Baker 
Donelson, and Cook.
    \74\ Service cost is defined in FASB ASC Topic 715 as the 
actuarial present value of benefits attributed by the pension plan's 
benefit formula to services rendered by the employee during the 
period. The measurement of service cost reflects certain 
assumptions, including future compensation levels to the extent 
provided by the pension plan's benefit formula.
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    We believe that including only the service cost for services 
rendered by the executive during the applicable year is a more 
appropriate measure for purposes of determining compensation ``actually 
paid'' during the applicable year because it is limited to pension 
costs for benefits earned during that year. The amount we proposed to 
include may be viewed to approximate the value that would be set aside 
currently by the registrant to fund the pension benefits payable upon 
retirement for the service provided during the applicable year. We 
recognize that registrants may differ as to whether they use defined 
benefit or defined contribution retirement plans, and this proposed 
change to the amount disclosed in the Summary Compensation Table is 
intended to provide a more meaningful comparison across registrants of 
the amounts ``actually paid'' under both types of plan. For defined 
contribution plans, the Summary Compensation Table requires disclosure 
of registrant contributions or other allocations to vested and unvested 
defined contribution plans for the applicable fiscal year,\75\ which 
will also be included in computing compensation actually paid for 
purposes of the new disclosure.
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    \75\ Item 402(c)(2)(ix)(E).
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    We do not expect that the proposed adjustments will require the 
collection of significant new data by registrants, or reveal 
significant new information to shareholders relative to the 
compensation disclosure that is currently required. The pension's 
annual service cost is not required to be reported separately, but can 
be calculated based on information reported in, and in footnotes to, 
the Pension Benefits Table. We believe that, for purposes of proposed 
Item 402(v), using the actuarially determined service

[[Page 26339]]

cost rather than the Summary Compensation Table pension measure may 
increase comparability of compensation provided through defined benefit 
and defined contribution plans because of the variability of the 
actuarial inputs and assumptions among different registrants.
2. Earnings on Non-Qualified Deferred Compensation
    Consistent with the current disclosure requirements of the Summary 
Compensation Table, the compensation calculation under proposed Item 
402(v) would include above-market or preferential earnings on deferred 
compensation that is not tax-qualified because these amounts represent 
compensation accrued during the relevant year.\76\ Above-market or 
preferential earnings on deferred compensation represent amounts 
accrued during the year based on the registrant's compensatory decision 
to pay an above-market return. Excluding this element from disclosure 
of compensation ``actually paid'' until its eventual payout would make 
disclosure contingent on an NEO's decision to withdraw or take a 
distribution from his or her account, rather than the registrant's 
compensatory decision to pay the above-market return. Such an approach 
would be inconsistent with the Summary Compensation Table disclosure of 
the underlying deferred amounts when earned,\77\ which we would carry 
forward to proposed Item 402(v), and could result in the relationship 
of this amount to company performance never being disclosed.
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    \76\ These earnings are reported pursuant to Item 
402(c)(2)(vii), or, for smaller reporting companies, Item 
402(n)(2)(viii). These earnings, like the aggregate change in 
defined benefit plan actuarial present value also reported pursuant 
to Item 402(c)(2)(viii), or Item 402(n)(2)(viii), are excluded for 
purposes of a registrant's NEO determination pursuant to Instruction 
1 to Item 402(a)(3), or, for smaller reporting companies, 
Instruction 1 to Item 402(n)(2)(viii). In adopting this Instruction, 
the Commission stated it was appropriate to exclude these items 
because their amounts generally are not determined by the 
Compensation Committee. Rather, they are ``compensation elements 
that principally reflect executives' decisions to defer compensation 
and wealth accumulation in pension plans, or are unduly influenced 
by age or years of service.'' See Executive Compensation and Related 
Person Disclosure, Release 33-8732A (Aug. 29, 2006) [71 FR 53158 
(Sept. 8, 2006)], at Section II.C.6 (``Executive Compensation 
Release''). These reasons, however, do not seem relevant to a 
determination of whether such compensation is ``actually paid'' for 
purposes of the disclosure mandated by Section 14(i).
    \77\ Instruction 4 to Item 402(c), or, for small reporting 
companies, Instruction 4 to Item 402(n).
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3. Equity Awards
    We are proposing that equity awards be considered actually paid on 
the date of vesting and valued at fair value on that date, rather than 
fair value on the date of grant as required in the Summary Compensation 
Table.\78\ Before vesting, an executive does not have an unconditional 
right to an equity award. For example, the terms of both options and 
restricted stock awards typically provide for forfeiture of the award 
if the executive leaves the registrant's employment before the vesting 
date or if specified performance criteria are not met. Accordingly, we 
do not believe that an option or other equity award should be 
considered ``actually paid'' for purposes of this disclosure before the 
applicable vesting conditions are satisfied. Satisfaction of these 
conditions, which are determined by the registrant, can be viewed as 
representing payment by the registrant. Moreover, using vesting-date 
valuations will result in a compensation measure that includes, upon 
the vesting date, the grant-date value of equity awards plus or minus 
any change in the value of equity awards between the grant and vesting 
date. Such changes in the value of equity grants after the grant date 
represent a direct channel, and one of the primary means, through which 
pay is linked to registrant performance.
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    \78\ Grant date fair value disclosure reflects compensation 
committee decisions during the relevant fiscal year relating to 
equity awards. See Proxy Disclosure Enhancements, Release No. 33-
9089 (Dec. 16, 2009) at Section II.A.2 [74 FR 68334] (Dec. 23, 
2009).
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    We do not believe that an award requiring exercise should be 
considered actually paid only upon its exercise, because once the award 
is vested the executive can control how and when the award is 
monetized, and thus could influence pay-versus-performance disclosure 
by controlling the fiscal year in which the executive receives the 
compensation. Changes in the fair value of the award after vesting 
generally reflect investment decisions made by the executive rather 
than compensation decisions made by the registrant.
    The value of stock awards upon vesting is disclosed in the Option 
Exercises and Stock Vested Table.\79\ Registrants are not currently 
required to report the value of option awards upon vesting if they are 
not exercised. However, registrants can apply existing models and 
methodologies to compute these values. Also, it is possible for 
shareholders to make reasonable estimates of these vesting-date fair 
values of options based on current disclosures.
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    \79\ See Item 402(g)(2)(v). Smaller reporting companies are not 
required to provide this table.
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    In particular, the terms of unexercised option awards in a given 
year, including their exercise prices and expiration dates, are 
required to be disclosed (together with information about other 
outstanding awards) in the Outstanding Equity Awards at Fiscal Year-End 
Table.\80\ Information about the valuation assumptions used by the 
registrant to calculate the grant-date value of option awards can be 
found in footnotes to the Summary Compensation Table (which may refer 
to disclosures made on Form 10-K) for the year corresponding to the 
grant date.\81\ Disclosures about the vesting conditions that applied 
to the awards can be used to determine which of the option awards are 
newly vested.\82\ The translation of the reported terms of these 
options into their fair values at vesting requires the choice of a 
valuation methodology and the use of public data and reasonable 
assumptions (potentially with reference to the registrant's disclosed 
grant-date valuation assumptions) to obtain the additional inputs 
required for option valuation at vesting date. Estimates thus computed 
by shareholders could differ from estimates computed by the registrant 
and, as mentioned above, current disclosure rules do not require 
registrants to compute and disclose their own estimates of these 
values.
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    \80\ See Item 402(f)(2)(v) and (vi). For smaller reporting 
companies, see Item 402(p)(2)(v) and (vi). Some options may be 
exercised in the same year as vesting. Whether an option award that 
was exercised had vested in the same year can be determined by 
comparing the Outstanding Equity Awards at Fiscal Year-End Table per 
Item 402(f) or, for smaller reporting companies, Item 402(p), to the 
same table for the prior year, and identifying as exercised options 
those that are no longer reported as outstanding. In such cases, the 
terms of these awards can be determined from the Outstanding Equity 
Awards at Fiscal Year-End Table and related footnotes for the prior 
year or, for options granted in the same year as exercise (which 
will not appear in disclosures for the prior year) in footnotes to 
the Summary Compensation Table for the same year.
    \81\ See Instruction 1 to Item 402(c)(2)(v) and (vi). For 
smaller reporting companies, see Instruction 1 to Item 402(n)(2)(v) 
and (vi).
    \82\ Registrants are required to describe the material 
conditions of awards, including a general description of the formula 
or criteria to be applied in determining the amounts payable, and 
the vesting schedule, in the narrative disclosure to the Summary 
Compensation Table and Grants of Plan-Based Awards table per Item 
402(e) in the year in which an option award is granted. Smaller 
reporting companies are required to describe the material conditions 
of awards in the narrative disclosure to the Summary Compensation 
Table per Item 402(o) in the year in which an option award is 
granted. The vesting date of options held at fiscal-year end must be 
disclosed by footnote to the Outstanding Equity Awards at Fiscal-
Year End table required by Item 402(f), or, for smaller reporting 
companies, Item 402(p), of Regulation S-K.
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    Accordingly, for purposes of proposed Item 402(v), the amounts 
reported pursuant to Items 402(c)(2)(v) and (vi) would be subtracted 
from total compensation reported in the Summary

[[Page 26340]]

Compensation Table, and the following would be added in their place: 
\83\
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    \83\ Proposed Item 402(v)(3) would require registrants to 
disclose in a footnote to the table required under paragraph (v)(1), 
the total compensation amount reported in the Summary Compensation 
Table for the covered fiscal year for each NEO as provided in 
paragraph (c)(2)(x), or, for smaller reporting companies, paragraph 
(n)(2)(x), and the individual amounts deducted from, and 
modifications to, the amounts reported in the Summary Compensation 
Table in generating the amounts disclosed pursuant to Item 402(v) 
for the PEO(s). For NEOs other than the PEO, proposed Item 402(v)(3) 
would require disclosure of these amounts as averages.
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     For awards of stock, that vested in the applicable year, 
the fair value at vesting date, computed in accordance with the fair 
value guidance in FASB ASC Topic 718; and
     For awards of options with or without tandem stock 
appreciation rights (``SARs'') that vested in the applicable year, the 
fair value at vesting date, computed in accordance with the fair value 
guidance in FASB ASC Topic 718. As proposed, a registrant would be 
required to disclose vesting date valuation assumptions if they are 
materially different from those disclosed in its financial statements 
as of the grant date.

We believe shareholders may be interested in vesting date valuation 
assumptions to the extent they believe that changes in the value of 
equity grants after the grant date are a primary channel through which 
pay is linked to performance. We believe that requiring disclosure of 
vesting date valuation assumptions would make these computations 
readily accessible to shareholders, which may be useful to shareholders 
to the extent they are interested in computing slightly different 
measures or using parts of the computations for other purposes. 
Further, if during the last completed fiscal year the registrant 
adjusted or amended the exercise price of previously vested options or 
SARs held by an NEO, whether through amendment, cancellation or 
replacement grants, or any other means, or otherwise has materially 
modified such awards, proposed Item 402(v) would require the registrant 
to include the incremental fair value, computed as the excess fair 
value of the modified award over the fair value of the original award 
upon vesting of the modified award. If the modified award is subject to 
multiple vesting dates, the pro rata incremental fair value would be 
determined and included in compensation actually paid at each vesting 
date.

    For example, a registrant grants an option (``original award'') for 
1,000 shares of common stock with an exercise price of $20 per share. 
By its terms, the original award vests upon completion of a two-year 
service period. Upon vesting, the then fair value of the original award 
is included in compensation actually paid. After the original award 
vests, assume the registrant modifies its terms to reduce the exercise 
price to $15 per share with 50% vesting immediately and 50% vesting 
upon completion of another two-year service period (``modified 
award''). The incremental fair value that is included in compensation 
actually paid will be computed at each of the modified award's two 
vesting dates based on the then excess fair value of the ratable 500 
shares using the modified award terms compared with the original award 
terms. In this example, compensation actually paid would be determined 
three times, as the full fair value of the original award at its 
vesting and the pro rata incremental fair value amounts at each of the 
two vesting dates of the modified award.\84\
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    \84\ See proposed Instruction 1 to Item 402(v). Note that if the 
original award had been modified before it vested, the compensation 
actually paid would be determined only twice, as the pro rata fair 
value of the modified award at each of its two vesting dates.
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Request for Comment
    21. Does our proposed definition appropriately capture the concept 
of ``executive compensation actually paid?'' Why or why not? Are there 
elements of compensation excluded by our proposed definition that 
should not be? Alternatively, does the proposed definition include any 
items that should be excluded? If so, which ones and why?
    22. Our proposal is designed, in part, to enhance comparability 
across registrants. Is comparability across registrants relevant or 
necessary in determining which compensation elements should be covered 
by the pay-versus-performance disclosure? Why or why not?
    23. Under our proposed approach, the disclosure may not necessarily 
align a particular executive's compensation with the time period during 
which the registrant's performance may be attributed to the executive. 
For example, this may be the case where a turn-around specialist is 
hired and provided a substantial incentive payment up front in order to 
assume the task of improving the company's performance. Should our 
approach account for this? If so, should we require this to be 
addressed in supplemental disclosure? Are there other approaches we 
should consider?
    24. Instead of our proposal, should we permit a principles-based 
approach that would allow registrants to determine which elements of 
compensation to include, so long as they clearly disclosed how the 
amount was calculated? Why or why not? How should such a provision be 
structured? What requirements should we include?
    25. Are there alternative methods of determining which compensation 
is relevant to pay-versus-performance disclosure that we should 
consider?
    26. Instead of our proposal, should we require only the use of the 
total compensation reported in the Summary Compensation Table and 
permit registrants to supplement this disclosure as they determine best 
reflects how their compensation relates to company performance? How 
would this approach affect the usefulness, comparability and cost of 
the pay-versus-performance disclosure?
    27. Does our proposal to require only the actuarial present value 
of benefits attributable to services rendered during the applicable 
fiscal year, rather than the change in actuarial present value of 
pension benefits that is required by the Summary Compensation Table, 
appropriately reflect compensation ``actually paid'' to NEOs during 
that year for purposes of the pay-versus-performance disclosure 
mandated by Section 14(i)?
    28. Is our proposal to include in the Item 402(v) calculation only 
above-market or preferential earnings on deferred compensation that is 
not tax-qualified appropriate? Should the calculation instead include 
all earnings on deferred compensation that are not tax-qualified rather 
than just the above-market portion? Should the calculation only include 
the above-market portion once any vesting conditions applicable to 
those earnings have been satisfied?
    29. Should we value equity awards at vesting date fair value as 
proposed? Should we instead value equity awards at grant date fair 
value as currently required by Item 402(c)(2)(v) and (vi) or fair value 
at some other point in time? If so, why? Should we require disclosure 
of vesting date valuation assumptions if they are materially different 
from those disclosed in a registrant's financial statements as of the 
grant date, as proposed? Would the disclosure of these assumptions 
provide meaningful information to shareholders?
    30. What concerns, if any, are presented if we require equity 
awards to be valued at vesting date fair value as opposed to grant date 
fair value? Would any concerns be mitigated by the inclusion in the 
table of the total compensation amount as provided in the Summary 
Compensation Table?

[[Page 26341]]

    31. Should any other components of compensation, such as registrant 
contributions to defined contribution plans, also be included only 
after any applicable vesting conditions have been satisfied?
    32. For equity awards that require exercise, is our proposal to 
consider them ``actually paid'' when vested the appropriate point in 
time for purposes of Item 402(v) disclosure? If not, please explain. 
Should we instead require that for an award that requires exercise to 
be considered ``actually paid,'' it must also be exercisable, making 
the valuation date the date on which the award is both vested and 
exercisable? Is there an alternative approach we should consider?
    33. Are there other specific elements of compensation in the 
Summary Compensation Table that we should exclude or modify for 
purposes of the pay-versus-performance disclosure called for under 
proposed Item 402(v)?

E. Measure of Performance

    We are proposing to require that registrants use TSR (as defined in 
Item 201(e) of Regulation S-K) as the measure of financial performance 
of the registrant for purposes of pay-versus-performance 
disclosure.\85\ Exchange Act Section 14(i) does not specify how 
registrant financial performance is to be measured, although the 
language in the statute requires financial performance to take into 
account any change in the value of the shares of stock and dividends of 
the registrant and any distributions of the registrant. We believe 
using TSR as the measure of financial performance is consistent with 
this requirement and we received several comments that supported this 
approach.\86\
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    \85\ Item 201(e) of Regulation S-K, which prescribes disclosure 
for the stock performance graph included in the annual report to 
security holders required by Rules 14a-3 and 14c-3, provides that 
cumulative total shareholder return is calculated by ``dividing the 
(i) sum of (A) the cumulative amount of dividends for the 
measurement period, assuming dividend reinvestment, and (B) the 
difference between the registrant's share price at the end and the 
beginning of the measurement period; by (ii) the share price at the 
beginning of the measurement period.'' 17 CFR 229.201(e).
    \86\ See letters from ClearBridge, Compensia, Farient, Meridian 
and MDU.
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    Several commenters in the pre-proposal stage indicated that 
absolute company performance may not be a sufficient basis for 
comparison and advocated disclosure of registrant performance relative 
to that of a peer group.\87\ Consistent with these suggestions, we also 
are proposing to require registrants, other than smaller reporting 
companies, to disclose peer group total shareholder return, using 
either the same peer group used for purposes of Item 201(e) of 
Regulation S-K,\88\ or, a peer group used in the CD&A for purposes of 
disclosing registrants' compensation benchmarking practices.\89\ If the 
peer group is not a published industry or line-of-business index, the 
registrant would be required to disclose the identity of the issuers. A 
registrant that has previously disclosed the composition of issuers in 
its peer group in prior filings with the Commission would be permitted 
to comply with the proposed requirement by incorporation by reference 
to those filings. We believe this would avoid the potential for 
duplicative disclosure.
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    \87\ See letters from Farient, J&J, MDU, Pay Governance, 
Shareholder Value Advisors.
    \88\ 17 CFR 229.201(e)(1)(ii).
    \89\ See Item 402(b)(xiv) of Regulation S-K (17 CFR 
229.402(b)(xiv)). We note that smaller reporting companies are not 
subject to Item 201(e) and that requiring disclosure of peer group 
total shareholder return would require smaller reporting companies 
to collect and disclose information that they are not currently 
required to disclose.
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    Requiring registrants to use a consistently calculated measure, 
such as TSR, should increase the comparability of pay-versus-
performance disclosure across registrants. Using TSR also would provide 
a measure of financial performance that is objectively determinable 
from the share price of the registrant and not open to subjective 
determinations of performance. In addition, using a measure that 
registrants are already required to determine and disclose, and with 
which shareholders already are familiar, would reduce the burden of 
providing and analyzing pay-versus-performance disclosure as compared 
to requiring registrants to calculate and shareholders to review a new 
measure of financial performance.
    Some commenters suggested permitting registrants to choose the 
performance measure best-suited for their company.\90\ One commenter 
suggested that registrants should be required to present additional 
performance measures.\91\ We note that, as with other mandated 
disclosures, registrants would be permitted to provide supplemental 
measures of financial performance so long as any additional disclosure 
is clearly identified, not misleading and not presented with greater 
prominence than the required disclosure.
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    \90\ See letters from ABA, CEC I, Davis Polk, Protective Life 
and SCSGP.
    \91\ See letter from Public Citizen (recommending that 
registrants be required to present the relationship of compensation 
with four performance measures: Total shareholder return, return on 
assets, return on equity, and the growth in earnings per share).
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Request for Comment
    34. Should we require registrants to use TSR as the performance 
measure? Would the comparability across registrants resulting from this 
proposal benefit shareholders? Would prescribing the use of TSR hinder 
registrants from providing meaningful disclosure about the relationship 
between executive pay and financial performance? Would requiring the 
use of TSR result in shareholders or management focusing too much on 
this single measure of performance or emphasizing short-term stock 
price improvement over the creation of long-term shareholder value? If 
so, are there ways we could mitigate that risk?
    35. Should we allow registrants flexibility in choosing the 
relevant measure of performance they are required to disclose? Besides 
TSR, what other measures of financial performance take into account any 
change in the value of the shares of stock and dividends and 
distributions of the registrant, as required by the statute? Are there 
metrics other than TSR that measure a company's performance and meet 
the requirements of the statute? If so, would they result in 
disclosures that are more or less meaningful than TSR? How is corporate 
performance measured today? How is this information incorporated into 
investment decisions?
    36. If companies do not currently use TSR as a factor in 
determining executive compensation, could requiring disclosure of this 
relationship cause companies to change their compensation strategy to 
focus on this factor? If so, what would be the effect?
    37. Does TSR, standing alone, provide sufficient information about 
a registrant's performance such that a registrant would provide only 
the information that would be mandated by this rule? Will registrants 
opt to provide additional information based on their own calculations 
or metrics to provide additional context for investors to consider the 
alignment of pay versus performance?
    38. Should we permit voluntary use of other measures of performance 
in addition to TSR, as proposed? Should we instead include specific 
requirements relating to the use of alternative performance measures in 
the proposed rules?
    39. Should we require disclosure of TSR on an absolute basis, as 
well as disclosure of peer group TSR, as proposed? Why or why not? Are 
there other parameters we should consider

[[Page 26342]]

requiring registrants to implement for the selection of peer groups?
    40. Should we require disclosure about the registrant's selection 
of the peer group? For example, if a registrant using a peer group 
changes its peer group from one used in the previous fiscal year, 
should we require a brief narrative explaining the reasons for the 
change? \92\
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    \92\ See, e.g., Item 201(e)(4) of Regulation S-K, which provides 
that if a registrant chooses a different index for the stock 
performance graph than the one used in the previous fiscal year, 
then the registrant is required to explain the reason for the change 
and is also required to compare total return with both the old and 
the new index.
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    41. Our proposal requires a registrant to use the same peer group 
used for purposes of Item 201(e) or the CD&A. Should a registrant be 
permitted to choose between these two options, or should we prescribe 
which peer group should be used? Why or why not? Should a registrant be 
permitted to choose a peer group different from that used for purposes 
of Item 201(e) or its CD&A? Please explain. Should there be any 
restrictions on how registrants select their peer groups?

F. Time Period Covered

    Section 14(i) does not specify the time period that the pay-versus-
performance disclosure must cover. Several commenters expressed concern 
that meaningful pay-versus-performance disclosure would need to address 
the time periods over which pay and performance are evaluated.\93\ 
Commenters recommended a variety of solutions to provide meaningful 
disclosure, recommending varying types of disclosure over varying time 
periods.\94\
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    \93\ See, e.g., letters from ClearBridge, Pay Governance and 
SCSGP.
    \94\ See letters from Brian Foley & Company, ClearBridge and Pay 
Governance (supporting a one-year and a three-year aggregate 
disclosure to capture annual and long-term compensation); J&J 
(including a copy of their proxy materials in which they disclosed 
their PEO's annual compensation over five years in relation to total 
shareholder return and provided a separate table showing aggregate 
compensation over a three-year period relative to a peer group); and 
from Baker Donelson, Cook, Meridian, and MDU (supporting a five-year 
time period).
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    For registrants other than smaller reporting companies, we are 
proposing to require registrants to provide the pay-versus-performance 
disclosure for the five most recently completed fiscal years.\95\ As 
noted above, several commenters supported a disclosure period of five 
years.\96\ While the Summary Compensation Table required by Item 402(c) 
of Regulation S-K requires compensation disclosure for each of the last 
three completed fiscal years, we note that the stock performance graph 
required by Item 201(e) of Regulation S-K requires disclosure for the 
previous five fiscal years, although it does not include any 
compensation information. We believe that requiring disclosure of the 
relationship between executive compensation and registrant performance 
over the five most recently completed fiscal years is appropriate 
because it provides a meaningful period over which a relationship 
between annual measures of pay and performance over time can be 
evaluated.\97\
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    \95\ See proposed Item 402(v)(2) of Regulation S-K.
    \96\ See letters from Baker Donelson, Frederic Cook, MDU (noting 
that a five-year measurement period moderates annual volatility and 
leads to more balanced comparisons), and Meridian.
    \97\ We are proposing to require smaller reporting companies to 
provide the disclosure over three years because they are not subject 
to Item 201(e) and provide Summary Compensation Table disclosure for 
two completed fiscal years. See Item 402(n) of Regulation S-K.
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    Smaller reporting companies would be required to provide the 
disclosure for the three most recently completed fiscal years.\98\ Our 
executive compensation rules require smaller reporting companies to 
provide disclosure for only the last two completed fiscal years,\99\ 
but we believe that requiring pay-versus-performance disclosure for 
three fiscal years, instead of two, provides more useful information 
from which investors can evaluate the relationship between a 
registrant's executive compensation actually paid and its financial 
performance, and provides a longer time horizon over which to observe 
any potential trends. We also are proposing to provide a transition 
period for registrants to provide the disclosure. Existing smaller 
reporting companies would be required to provide the disclosure for 
only the last two fiscal years in the first applicable filing after the 
rules become effective. In subsequent years such companies would be 
required to provide disclosure for the last three fiscal years.\100\ 
Any other registrants would be required to provide the proposed Item 
402(v) disclosure for three fiscal years, instead of five, in the first 
applicable filing after the rules become effective, and provide 
disclosure for an additional year in each of the two subsequent annual 
proxy filings where disclosure is required.
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    \98\ See proposed Instruction 8 to Item 402(v)(2) of Regulation 
S-K.
    \99\ See Item 402(n) of Regulation S-K.
    \100\ See proposed Instruction 1 to Item 402(v).
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    We are also proposing that a registrant provide pay-versus-
performance disclosure only for years that it was a reporting company 
pursuant to Section 13(a) or Section 15(d) of the Exchange Act. Thus, a 
newly-reporting registrant would be required to provide pay-versus-
performance disclosure for only the most recently ended fiscal year in 
any proxy statement or information statement in which executive 
compensation disclosure pursuant to Item 402 of Regulation S-K is 
required in its first year as a reporting company, and in the two most 
recently completed fiscal years in any proxy statement or information 
statement in which executive compensation disclosure pursuant to Item 
402 of Regulation S-K is required in its second year as a reporting 
company. This treatment is consistent with the phase-in period for new 
reporting companies in their Summary Compensation Table 
disclosure.\101\
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    \101\ See Instruction 1 to Item 402(c) of Regulation S-K. 
Similarly, Item 201(e)(2) provides that if the registrant has been 
registered under Section 12 for a shorter period of time than the 
prescribed measurement period, the period covered by the performance 
graph may correspond to that time period.
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Request for Comment
    42. Does a five-year disclosure period (for registrants other than 
smaller reporting companies) and a three-year disclosure period (for 
smaller reporting companies), as proposed, provide meaningful pay-
versus-performance disclosure? Should the timeframes be shorter or 
longer? For example, should we require only three years of disclosure 
for all registrants consistent with the time period required by the 
Summary Compensation Table for registrants other than smaller reporting 
companies? What impact would a different time period have on the 
disclosure and its usefulness to shareholders?
    43. Should we provide the proposed transition period for existing 
registrants? Why or why not? Should the transition period be shorter or 
longer? Does it depend on the type of registrant?
    44. Should we permit registrants voluntarily to include fiscal 
years beyond the five-year period, as proposed? Please explain why or 
why not. Is there a risk that some registrants may choose the time 
period which is most favorable for performance? How could we mitigate 
this risk?
    45. Is the proposed phase-in for new reporting companies 
appropriate? Is sufficient information readily available for these 
companies to provide adequate pay-versus-performance disclosure in any 
proxy statements or information statements requiring Item 402 
disclosure in their first two years as a reporting company? If not, 
what are the costs of

[[Page 26343]]

developing this information? Would pay-versus-performance disclosure 
for only the most recently completed fiscal year in the first proxy 
statement filed by a newly-reporting company, as proposed, provide 
sufficient and meaningful information for shareholders to evaluate the 
executive compensation actually paid as compared to the registrant's 
financial performance, given the limited time period covered? Does the 
importance of the information to shareholders justify the costs of 
preparing the disclosure without a phase-in period?
    46. Should the pay-versus-performance disclosure be required to use 
annual data from the five most recently completed fiscal years, as 
proposed, or aggregated data for the five most recently completed 
fiscal years? If the years are aggregated, should the relationship 
between pay and performance be demonstrated across peers because it can 
no longer be demonstrated over time? Alternatively, should the pay-
versus-performance comparison be presented for both the last completed 
fiscal year and in aggregate for the five most recently completed 
fiscal years? If so, please explain why a different period and 
different level of aggregation than proposed would be more informative 
to shareholders or otherwise more appropriate.
    47. Are there other transition issues or accommodations that we 
should consider? For example, should emerging growth companies\102\ 
that are statutorily excluded from the requirements of Section 14(i) be 
provided the same phase-in period of pay-versus-performance disclosure 
applicable to other registrants when they first become subject to the 
proposed requirement to provide five fiscal years of pay-versus-
performance disclosure?
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    \102\ Section 102(a)(2) of the JOBS Act excludes ``emerging 
growth companies'' from the requirements of Section 14(i). In 
accordance with this provision, we are not proposing to require an 
emerging growth company to provide pay-versus-performance 
disclosure.
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G. Clear Description

    Exchange Act Section 14(i) requires a ``clear description'' of the 
compensation disclosure required by Item 402 of Regulation S-K. We 
believe the requirement in Item 402(a)(2) of Regulation S-K \103\ for 
``clear, concise and understandable disclosure'' and the Plain English 
principles in Exchange Act Rules 13a-20 \104\ and 15d-20 \105\ give 
effect to the requirement in new Section 14(i) of the Exchange Act for 
clear compensation disclosure. When the current compensation disclosure 
requirements were adopted, we also amended Exchange Act Rules 13a-20 
and 15d-20 so that the Plain English principles would apply to the 
amended compensation disclosure.\106\ In adopting the Plain English 
requirement for compensation disclosure, we stated, ``clearer, more 
concise presentation of executive and director compensation . . . can 
facilitate more informed investing and voting decisions in the face of 
complex information about these important areas.'' \107\ We think this 
statement applies equally to pay-versus-performance disclosure. In 
addition, we noted that the Plain English principles applicable to 
compensation disclosure would permit registrants to ``include tables or 
other design elements, so long as the design is not misleading and the 
required information is clear, understandable, consistent with 
applicable disclosure requirements, consistent with any other included 
information, and not misleading.'' \108\ As a result, registrants are 
permitted to provide additional information beyond what is specifically 
required by our rules so long as the information is not misleading and 
does not obscure the required information.
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    \103\ 17 CFR 229.402(a)(2).
    \104\ 17 CFR 240.13a-20.
    \105\ 17 CFR 240.15d-20.
    \106\ See Executive Compensation Release, supra note 76.
    \107\ Id.
    \108\ Id.
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Request for Comment
    48. Are there changes to our rules that are necessary or 
appropriate in order to give effect to the requirement in Section 14(i) 
of the Exchange Act for a clear description of the Item 402(v) 
compensation disclosure?
    49. Is it appropriate to apply the Plain English principles to the 
pay-versus-performance disclosure? If not, please explain why.

H. Smaller Reporting Companies

    As proposed, smaller reporting companies as defined in Item 
10(f)(1) of Regulation S-K \109\ would be required to provide Item 
402(v) disclosure. In an effort to minimize the reporting costs for 
these registrants, consistent with the Commission's treatment of 
smaller reporting companies in other areas (e.g., executive 
compensation), these companies would be permitted to provide scaled 
disclosure, as follows:
---------------------------------------------------------------------------

    \109\ 17 CFR 229.10(f)(1).
---------------------------------------------------------------------------

     First, smaller reporting companies would be required to 
present Item 402(v) disclosure for the three most recently completed 
fiscal years, as opposed to the five most recently completed fiscal 
years required for other registrants. This is consistent with our 
general approach to scaling the requirements for executive compensation 
disclosure provided by smaller reporting companies.
     Second, smaller reporting companies would not be required 
to disclose amounts related to pensions for purposes of disclosing 
executive compensation actually paid because they are subject to scaled 
compensation disclosure that does not include pension plans.
     Finally, smaller reporting companies would not be required 
to present a peer group TSR. Smaller reporting companies are not 
subject to Item 201(e) and therefore are not otherwise required to 
present the TSR of a peer group, and they are not required to present a 
CD&A.

In addition, as proposed, the rule includes a transition period that 
would permit an existing smaller reporting company to provide two years 
of data, instead of three, in the first applicable filing after the 
rules become effective, and three years of data in subsequent proxy 
filings.
    Smaller reporting companies are only required to provide Summary 
Compensation Table disclosure for the two most recently completed 
fiscal years. While the time period applicable for the proposed 
disclosure is longer than what smaller reporting companies currently 
are required to disclose in the Summary Compensation Table, we note 
that the information required to make the pay-versus-performance 
calculations for these additional years would be available in 
disclosures from prior years.
    As proposed, smaller reporting companies would be required to 
provide the disclosure in the prescribed table in XBRL format, but we 
are proposing a phase-in under which smaller reporting companies would 
be required to provide the data in XBRL beginning with the third filing 
in which it provides pay-versus-performance disclosure.\110\ This 
phase-in is intended to permit smaller reporting companies to plan and 
implement their data tagging with the benefit of the experience of 
other registrants that do not have a phase-in.

[[Page 26344]]

It also will give them a longer period of time over which to spread 
first-year data tagging costs. While we recognize that requiring this 
disclosure to be provided in interactive data format would impose 
additional costs and burdens on these companies, beyond what they 
currently incur in producing interactive data for other purposes in 
other filings, we anticipate that these expenses would be relatively 
lower than what they currently incur in producing interactive data for 
other purposes given the limited disclosures that would be required to 
be tagged.
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    \110\ Providing a phase-in for smaller reporting companies is 
consistent with how we have previously implemented certain new 
disclosure requirements applicable to these companies. See, e.g., 
Interactive Data to Improve Financial Reporting, Release No. 33-9002 
(Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)]; Shareholder Approval 
of Executive Compensation and Golden Parachute Compensation, Release 
No. 33-9178 (Jan. 25, 2011) [76 FR 6010 (Feb. 2, 2011)].
---------------------------------------------------------------------------

    We do not expect the compliance burden associated with providing 
this disclosure to be substantial given that much of the information 
required by the proposed rule is derived from information currently 
required under existing Regulation S-K. We also note that smaller 
reporting companies are subject to the say-on-pay advisory votes 
required under Exchange Act Rule 14a-21,\111\ which the pay-versus-
performance disclosure required under proposed Item 402(v) is intended 
to facilitate. We believe that shareholders of smaller reporting 
companies may benefit from having the proposed pay-versus-performance 
disclosure when casting their say-on-pay advisory votes and that such 
disclosure can be provided without imposing undue costs on smaller 
registrants.
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    \111\ See Release No. 33-9178, supra note 10 (``We do not 
believe that smaller reporting companies should be permanently 
exempt from the say-on-pay vote, frequency of say-on-pay votes and 
golden parachute and vote because we believe investors have the same 
interest in voting on the compensation of smaller reporting 
companies and in clear and simple disclosure of golden parachute 
compensation in connection with mergers and similar transactions as 
they have for other issuers.'').
---------------------------------------------------------------------------

Request for Comment
    50. Would the proposed scaled disclosure requirements for smaller 
reporting companies provide meaningful disclosure to investors without 
imposing undue costs and burdens on these companies? Are there ways we 
could modify the proposed disclosure requirements to reduce the costs 
and still provide useful information for shareholders? For example, 
should we require only a two-year disclosure period for smaller 
reporting companies (similar to the timeframe for which they are 
required to provide disclosure in the Summary Compensation Table)?
    51. Should we exempt smaller reporting companies from the proposed 
pay-versus-performance disclosure requirements? Why or why not? What 
impact, if any, would the absence of the proposed disclosure have on 
the ability of shareholders of smaller reporting companies to 
effectively exercise of their say-on-pay voting rights? Would 
shareholders be able to assess the relationship between the company's 
financial performance and the compensation paid absent the disclosure 
required under proposed Item 402(v)? Would the proposed disclosure be 
more or less meaningful to shareholders in the absence of CD&A and Item 
201(e) performance graph disclosure? What are the burdens on smaller 
reporting companies of requiring pay-versus-performance disclosure and 
would the benefits of requiring this disclosure for smaller reporting 
companies justify the burdens? If not, please explain why not. Should 
registrants that exit smaller reporting company status be provided the 
same phase-in period applicable to other registrants when they first 
become subject to the proposed requirement to provide five fiscal years 
of pay-versus-performance disclosure?

III. General Request for Comments

    We request and encourage any interested person to submit comments 
on any aspect of our proposals, other matters that might have an impact 
on the amendments, and any suggestions for additional changes. With 
respect to any comments, we note that they are of greatest assistance 
to our rulemaking initiative if accompanied by supporting data and 
analysis of the issues addressed in those comments and by alternatives 
to our proposals where appropriate.
    In addition, we request data to quantify the costs and the value of 
the benefits described in this release. We seek estimates of these 
costs and benefits, as well as any costs and benefits not already 
defined, that may result from the adoption of these proposed 
amendments. We also request qualitative feedback on the nature of the 
benefits and costs we have identified and any benefits and costs we may 
have overlooked.
    To assist in our consideration of these costs and benefits, we 
specifically request comment on the following:
    52. Would there be any significant transition costs imposed on 
registrants as a result of the proposal, if adopted? Please be detailed 
and provide quantitative data or support, as practicable.
    53. Have we struck the appropriate balance between prescribing 
rules to satisfy the requirements of Exchange Act Section 14(i) and 
allowing registrants to disclose pay-versus-performance information 
most relevant to shareholders?
    54. Are there alternatives to the proposals we should consider that 
would satisfy the requirements of Section 14(i) of the Exchange Act?

IV. Economic Analysis

A. Background

    As discussed above, Section 953(a) of the Dodd-Frank Act added 
Section 14(i) to the Exchange Act, directing the Commission to require 
registrants to disclose in any proxy or consent solicitation material 
for an annual meeting of the shareholders the relationship between 
executive compensation actually paid and the financial performance of 
the registrant. Section 14(i) of the Exchange Act does not define key 
terms, such as ``executive compensation actually paid'' or issuer 
``financial performance,'' or prescribe a specific format for this 
disclosure. As a result, we apply discretion in our proposed 
implementation of the provision.
    New Item 402(v) proposed by the Commission to satisfy the mandate 
of Section 14(i) requires the disclosure of information that is largely 
already required to be reported under current disclosure rules, but 
that is currently not computed or presented in the way the proposal 
would require. The proposal requires registrants to present the values 
of prescribed measures of executive compensation and performance for 
each of their five most recently completed fiscal years (three years 
for smaller reporting companies) in a standardized table. Registrants 
would be required to provide a clear description of the relationship 
between these measures, but would be allowed to choose the format used 
to present the relationship, such as a graph or narrative description. 
The proposal would also allow registrants to supplement the required 
elements of the disclosure with additional measures or additional years 
of data. The disclosure would be required to be provided in tagged data 
format using XBRL.
    The proposed amendments would require that the compensation covered 
by the disclosure be ``executive compensation actually paid.'' 
Registrants would also be required to include the Summary Compensation 
Table measure of total compensation in the tabular disclosure for 
purposes of comparison. The proposal defines executive compensation 
actually paid as total compensation, as currently disclosed in the 
Summary Compensation Table, with modifications to the amounts disclosed

[[Page 26345]]

for pension benefits (under all defined benefit and actuarial pension 
plans) and equity awards in order to better reflect amounts ``actually 
paid.''
    Specifically, we propose that, instead of the total change in 
actuarial pension value, executive compensation actually paid include 
only the actuarial present value of benefits attributable to services 
rendered during the applicable fiscal year. That is, the measure would 
exclude that part of the change in actuarial pension value that results 
from any change in the actuarial value of benefits accrued in previous 
years, and should thus increase the comparability between compensation 
provided through defined benefit and defined contribution plans. This 
adjustment is also expected to reduce the volatility in measured 
pension compensation caused by changes in interest rates and other 
actuarial assumptions, and should thus make it easier to evaluate the 
relationship of pay-versus-performance. Because the scaled compensation 
disclosure that applies to smaller reporting companies does not include 
pension plans, this adjustment would not be required of smaller 
reporting companies. We also propose that executive compensation 
actually paid include the values of equity awards at the time of 
vesting rather than the date they are granted. Using vesting-date 
valuations would result in a compensation measure that includes, upon 
the vesting date, the grant date value of equity awards plus or minus 
any change in the value of equity awards between the grant and vesting 
date. As discussed below, such changes in the value of equity awards 
after the grant date represent a direct channel, and one of the primary 
means, though which pay is linked to registrant performance. We 
therefore believe that it is important that such changes in the value 
of equity awards be reflected in the pay-versus-performance 
disclosure.\112\
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    \112\ To the extent that some shareholders may be interested in 
considering the relationship of performance with a measure of pay 
that excludes such changes in the value of equity awards, they would 
be able to refer to the Summary Compensation Table measure of total 
compensation required alongside executive compensation actually paid 
in the tabular disclosure. The Summary Compensation Table measure of 
total compensation reflects the grant date values of equity awards.
---------------------------------------------------------------------------

    All of the individual components needed to calculate executive 
compensation actually paid must already be reported under current 
disclosure rules, with the exception of the values to be included with 
respect to pension benefits and option awards. The actuarial present 
value of pension benefits of an individual NEO attributable to services 
rendered during the applicable fiscal year is not currently required to 
be reported but can be estimated by shareholders based on existing 
disclosures with respect to pension benefits and pension valuation 
assumptions. The vesting-date values of option awards can similarly be 
estimated by shareholders using existing disclosures regarding the 
terms of option awards, their grant-date values and grant-date 
valuation assumptions, but arriving at such estimates could require 
shareholders to make vesting-date valuation assumptions that could 
differ from the grant-date valuation assumptions. The disclosure of 
executive compensation actually paid may therefore provide shareholders 
with marginal new information about the particular assumptions made by 
registrants in estimating vesting-date valuations.
    The proposed amendments would require TSR to be the measure of 
financial performance used for the pay-versus-performance disclosure. 
Registrants other than smaller reporting companies would be required to 
include the TSR for a peer group as well as the registrants' own TSR in 
the required table. Registrants would also be required to provide a 
description of the relationship of their own TSR with executive 
compensation actually paid and, for registrants other than smaller 
reporting companies, of their own TSR with the reported peer group TSR. 
For this purpose, registrants may use the peer group used for their 
Item 201(e) performance graph in their annual report or the peer group 
used in their CD&A, if any.
    The proposed amendments would permit registrants to present 
supplemental measures of both performance and compensation. Also, the 
proposed amendments would not prescribe the format in which the 
relationship between executive compensation actually paid and TSR is 
presented, though the amendment would require that the disclosure 
present this relationship over the five prior fiscal years (three years 
for smaller reporting companies). The proposal would also require 
footnote disclosure of the adjustments made to compute executive 
compensation actually paid and disclosure of the vesting date valuation 
assumptions, if materially different from the grant date assumptions.
    We are proposing these amendments to satisfy the statutory mandate 
of Section 14(i) of the Exchange Act. The Senate Report that 
accompanied the statute references shareholder interest in the 
relationship between executive pay and performance as well as the 
general benefits of transparency of executive pay practices.\113\ As 
discussed above, we believe that the statute is intended to provide 
further disclosures for shareholders to consider when making say-on-pay 
voting decisions, as well as when making other voting decisions on the 
compensation plans in which NEOs participate, and making decisions 
pertaining to the election of directors.
---------------------------------------------------------------------------

    \113\ The Senate Report includes the following with respect to 
Section 953(a) of the Dodd-Frank Act: ``It has become apparent that 
a significant concern of shareholders is the relationship between 
executive pay and the company's financial performance of the issuers 
. . . The Committee believes that these disclosures will add to 
corporate responsibility as firms will have to more clearly disclose 
and explain executive pay.'' See the Senate Report supra note 7.
---------------------------------------------------------------------------

    Exchange Act Section 3(f) requires us, when engaging in rulemaking 
that requires us to consider or determine whether an action is 
necessary or appropriate in the public interest, to consider, in 
addition to the protection of shareholders, whether the action will 
promote efficiency, competition and capital formation. Exchange Act 
Section 23(a)(2) requires us, when adopting rules under the Exchange 
Act, to consider the impact that any new rule would have on competition 
and not to adopt any rule that would impose a burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act.
    The discussion below addresses the economic effects of the proposed 
amendments, including its anticipated costs and benefits, as well as 
the likely effects of the proposed amendment on efficiency, 
competition, and capital formation. The proposed amendments reflect the 
statutory mandate in Section 14(i) as well as the discretion we 
exercise in implementing that mandate. For purposes of this economic 
analysis, we address the costs and benefits resulting from the 
statutory mandate and from our exercise of discretion together, 
recognizing that it is difficult to separate the costs and benefits 
arising from these two sources. We also analyze the potential costs and 
benefits of significant alternatives to what is proposed. We request 
comment throughout this release on alternative means of meeting the 
statutory mandate of Section 14(i) of the Exchange Act and on all 
aspects of the costs and benefits of the proposed approach and of 
possible alternatives. We also request comment on any effect the 
proposed disclosure requirements may have on efficiency, competition 
and capital formation.

[[Page 26346]]

B. Baseline

    To assess the economic impact of the proposed amendments, we are 
using as our baseline the current state of the market without a 
requirement for registrants to disclose the relationship between 
executive compensation actually paid and the financial performance of 
the registrant. We consider the impact of the proposed amendment on 
shareholders, registrants, and their NEOs. The proposed amendments 
would apply to all companies that are registered under Section 12 of 
the Exchange Act and are therefore subject to the federal proxy rules, 
except emerging growth companies. The proposed amendments would also 
not apply to foreign private issuers or companies with reporting 
obligations only under Section 15(d) of the Exchange Act, which are not 
subject to the proxy rules. In addition, for some Section 12(g) 
registrants, such as limited partnerships, the disclosure requirement 
might not apply in some or all years because these registrants might 
not file either proxy or information statements every year.\114\
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    \114\ Registrants subject to the proposed amendments would be 
required to make pay-versus-performance disclosure under proposed 
Item 402(v) when they file proxy statements or information 
statements in which executive compensation disclosure pursuant to 
Item 402 of Regulation S-K is required. Proxy statement disclosure 
obligations only arise under Section 14(a) when a registrant with a 
class of securities registered under Section 12 chooses to solicit 
proxies. Whether or not a registrant has to solicit proxies is 
dependent upon any requirement under its charter and/or bylaws, or 
otherwise imposed by law in the state of incorporation and/or stock-
exchange (if listed), not the federal securities laws. For example, 
NYSE, NYSE Market, and NASDAQ require the solicitation of proxies 
for annual meetings of shareholders. A Section 12(b) registrant is 
listed on a national securities exchange, and therefore likely would 
solicit proxies and be compelled to provide the disclosure 
identified in proposed Item 402(v) annually. Registrants with 
reporting obligations under Section 12(g), but not Section 12(b), 
would not be subject to any obligation to solicit proxies under the 
listing standards of an exchange, but may nevertheless solicit 
proxies as a result of an obligation under their charters, bylaws, 
or law of the jurisdiction in which they are incorporated. When 
Section 12 registrants that do not solicit proxies from any or all 
security holders are nevertheless authorized by security holders to 
take a corporate action at or in connection with an annual meeting 
or by written consent in lieu of such meeting, disclosure 
obligations also would arise under proposed Item 402(v) due to the 
requirement to file and disseminate an information statement under 
Section 14(c).
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    We estimate that approximately 6,075 registrants would be subject 
to the proposed amendments, including approximately 2,430 smaller 
reporting companies.\115\ Among all registrants subject to the federal 
proxy rules, we estimate that there are approximately 360 emerging 
growth companies, of which approximately 230 are also smaller reporting 
companies, all of which would not be subject to the proposed 
amendments.\116\
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    \115\ These estimates are based on a review of calendar year 
2013 EDGAR filings.
    \116\ Id.
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    The economic effects of pay-versus-performance disclosure will 
depend, in part, on whether new information that could not be derived 
from existing disclosures would be made available to shareholders. The 
proposed amendments are not expected to result in the provision of 
significant new information to shareholders, or to require registrants 
to collect significant new data, relative to disclosure requirements 
under the baseline. The registrants that would be subject to the 
proposed amendments must currently comply with Item 402 of Regulation 
S-K and, except in the case of smaller reporting companies, with Item 
201(e). The underlying information required to provide the proposed 
pay-versus-performance disclosure is, with the exception of vesting-
date valuation assumptions for options, already encompassed by these 
existing disclosure requirements and, for smaller reporting companies 
and for registrants that use a peer group from their CD&A, in the 
public availability of stock return data.
    Specifically, Item 201(e) requires the disclosure of the TSR for 
the registrant as well as a peer group (a published industry or line-
of-business index, peer issuers selected by the registrant, or issuers 
with similar market capitalizations), for the past five years, in 
annual reports.\117\ The proposed amendments mandate that TSR of the 
registrant and a peer group be the primary measures of performance used 
in the pay-versus-performance disclosure. While registrants may instead 
choose to use the peer group disclosed in their CD&A, if they use a 
peer group in benchmarking their compensation, the components of such a 
peer group would be disclosed in the CD&A and the shareholder returns 
of these companies would be publicly available from many sources, if 
not already reported in the CD&A. Similarly, while smaller reporting 
companies are not required to comply with Item 201(e) or CD&A 
disclosure requirements and yet would still have to report their own 
TSR under the proposed rules, data about their returns is publicly 
available. The proposal does not require smaller reporting companies to 
present the performance of a peer group.
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    \117\ Item 201(e) disclosure is only required in an annual 
report that precedes or accompanies a registrant's proxy or 
information statement relating to an annual meeting of security 
holders at which directors are to be elected (or special meeting or 
written consents in lieu of such meeting). As discussed above, an 
annual meeting could theoretically not include an election of 
directors, such that Item 201(e) disclosure would not be required, 
although pay-versus-performance disclosure would still be required 
in such years if action is to be taken with regard to executive 
compensation.
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    Further, Item 402 currently requires the affected registrants to 
disclose extensive information about the compensation of NEOs. For 
example, registrants subject to Item 402 are required to report the 
value of total compensation and each of its components,\118\ including, 
for the affected registrants other than smaller reporting companies, 
the total change (if positive) in actuarial present value of pension 
benefits and, for all of the affected registrants, the grant-date value 
of equity awards, for all NEOs in the Summary Compensation Table. Item 
402 requires further disclosure in additional related tables, 
footnotes, and/or the accompanying textual narrative. Based on this 
information, it would be possible in the absence of the proposed 
disclosure for shareholders to estimate the proposed measure of 
executive compensation actually paid by deducting the current values 
reported with respect to pension and equity awards from total 
compensation and then estimating and adding to this value the proposed 
revised values with respect to these two components where applicable.
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    \118\ For registrants that are not smaller reporting companies, 
total compensation consists of the dollar value of the executive's 
base salary and bonus, plus the fair market value at the grant date 
of any new stock and option awards, the value of any non-equity 
incentive plan awards, the change (if positive) in actuarial value 
of the accumulated benefit under all defined benefit and pension 
plans, any above-market interest or preferential earnings on 
deferred compensation and all other compensation. The all other 
compensation component includes, among other things, the value of 
perquisites and other personal benefits (unless less than $10,000 in 
aggregate) and registrant contributions to defined contribution 
plans.
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    Specifically, the proposed definition of executive compensation 
actually paid for a fiscal year is total compensation as reported in 
the Summary Compensation Table for that year (i) less the change in the 
actuarial present value of pension benefits,\119\ (ii) less the grant-
date value of any stock and option awards granted during that year that 
are subject to vesting, (iii) plus the actuarial present value of 
benefits attributable to services rendered during the applicable year,

[[Page 26347]]

and (iv) plus the value at vesting of stock and option awards that 
vested during that year. Adjustments (i) and (iii) with respect to 
pension plans would not apply to smaller reporting companies as they 
are not otherwise required to disclose executive compensation related 
to pension plans. As discussed above, the amounts to be subtracted in 
this computation, as well as the value of stock awards at vesting 
(which must be added back), must be reported under existing Item 402 
requirements. The other amounts that must be added back in this 
computation are not required to be directly reported under existing 
disclosure requirements but can be estimated based on existing 
disclosures. While the time period applicable for Item 402 disclosures 
(two years for smaller reporting companies and three years for other 
affected registrants) is shorter than would be required for the pay-
versus-performance disclosure (three years for smaller reporting 
companies and five years for other affected registrants), the 
information required to make these computations for the additional 
years would be available in disclosures from previous years.
---------------------------------------------------------------------------

    \119\ If the change in actuarial value of pension plans is not 
positive, it is not currently included in total compensation and 
therefore need not be deducted for the purpose of this adjustment.
---------------------------------------------------------------------------

    Thus, under the baseline, shareholders already have the required 
data to compute a reasonable estimate of the proposed measure of 
executive compensation actually paid, even though registrants are not 
required to compute or disclose this measure. In particular, as 
discussed above, the actuarial present value of benefits attributable 
to services rendered during the applicable fiscal year can be computed 
using the detailed existing disclosures of pension plan terms and 
valuation assumptions. It is also possible for shareholders to make 
reasonable estimates of the vesting-date fair values of options based 
on existing compensation disclosures and public data. However, as 
discussed above, estimates of vesting-date valuations computed by 
shareholders could differ from estimates computed by the registrant. 
Under the baseline, because registrants are not currently required to 
disclose vesting-date valuation assumptions (which may differ from 
grant-date assumptions), shareholders may not know how the registrant 
would apply its discretion in choosing from a range of reasonable 
assumptions to compute vesting-date valuations.
    For the affected registrants other than smaller reporting 
companies, Item 402 also requires a description in the CD&A of how the 
registrant's compensation policy relates pay to performance, if 
material to the registrant's compensation policies and decisions. 
However, registrants are not currently required to report the actual 
historical relationship between any measures of compensation and 
financial performance. Some registrants voluntarily provide such 
disclosures, which are generally limited to analyses of the 
compensation of the PEO and which vary with regard to the compensation 
and performance measures used.\120\ The comparability of these 
voluntary disclosures is therefore limited, and observers have raised 
concerns that registrants have selected measures that make the 
alignment of pay and performance appear more favorable.\121\
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    \120\ A compensation consulting firm found that, of 250 large 
public companies examined, 27% provided tabular or graphical 
information on the relationship between pay and performance in the 
CD&A of their 2013 proxy statements, and the majority of these 
provided such information only with respect to the PEO's 
compensation. See 2013 Corporate Governance & Incentive Design 
Survey, Meridian Compensation Partners, Fall 2013, available at 
https://www.meridiancp.com/images/uploads/Meridian_2013_Governance_and_Design_Survey.pdf. In a study of the 
300 largest companies filing proxy statements in the year ended 
April 2013, another consulting firm found over half a dozen 
different approaches to realizable pay-versus-performance 
disclosures. See Executive Compensation 2013, Hay Group, Feb. 2014, 
available at https://www.haygroup.com/downloads/us/exec_comp_2013.pdf.
    \121\ See, e.g., Dave Michaels, Misleading CEO Pay-for-
Performance Numbers Target of SEC, Bloomberg, Dec. 17, 2013, 
available at https://www.bloomberg.com/news/2013-12-17/misleading-ceo-pay-for-performance-numbers-target-of-sec.html.
---------------------------------------------------------------------------

    Certain shareholders also may have access to analyses of historical 
pay-versus-performance data produced by third parties, such as proxy 
advisory firms and compensation consultants. These analyses are based 
on compensation and performance information disclosed by registrants, 
and they may apply more consistent methodologies across registrants, 
but the computations and analytical approaches used vary across the 
third-party information providers.\122\ Some other shareholders may 
generate their own pay-versus-performance analyses, but we do not have 
access to information about the computations or approaches that they 
find to be useful.
---------------------------------------------------------------------------

    \122\ See, e.g., https://www.issgovernance.com/file/publications/evaluatingpayforperformance.pdf, and https://www.glasslewis.com/issuer/pay-for-performance for detail on quantitative analyses of 
pay for performance used by Institutional Shareholder Services Inc. 
and Glass Lewis & Co., LLC, respectively.
---------------------------------------------------------------------------

    An important factor to consider when analyzing the effects of the 
proposed pay-versus-performance disclosure requirements is the 
variation in compensation structures that is likely to exist among the 
affected registrants. In particular, because the proposed amendments 
require that equity awards and compensation related to pension plans be 
valued differently, and (in the case of equity awards) in different 
years than as valued in the Summary Compensation Table, the variation 
in usage and design of these items in executive compensation packages 
may affect the comparability of the disclosures and the burden involved 
in making the required calculations to provide the disclosures.
    The proposed amendments require that executive compensation 
actually paid include the vesting-date values of stock grants, which 
are provided in the Option Exercises and Stock Vested Table but likely 
differ from the grant date values included in total compensation in the 
Summary Compensation Table. The use of stock grants, and the frequency 
of such grants to the CEO, by some of the potentially affected 
registrants is reported in the table below.\123\
---------------------------------------------------------------------------

    \123\ These statistics are based on staff analyses of 
compensation data from the Standard & Poor's Execucomp database, 
which in turn is sourced from company proxy statements. Execucomp 
covers firms in the S&P Composite 1500 Index (which includes the S&P 
500, S&P MidCap 400, and S&P SmallCap 600) as well as some firms 
that were previously removed from the index but are still trading 
and some client requests. Years mentioned refer to fiscal years, 
under the convention that companies with fiscal closings after May 
31 in a given year are assigned to that fiscal year while companies 
with fiscal closings on or before May 31 in a given year are 
assigned to the previous fiscal year. Use of the term ``CEO'' is 
based on the use of this term in the Execucomp database, and is 
believed to be equivalent to the term ``principal executive 
officer'' used in this release.

                   Table 1--Use of Executive Stock Grants by Registrants Covered by Execucomp
----------------------------------------------------------------------------------------------------------------
                                                All firms in    Firms in  S&P     Firms in S&P     Firms in S&P
                                                  database           500           MidCap 400      SmallCap 600
----------------------------------------------------------------------------------------------------------------
Firms in Sample.............................          1,812              496              396              598
Stock Grants to 2012 CEO:
    % of CEOs Granted Stock in 2012.........             80.2             88.9             87.4             76.8

[[Page 26348]]

 
Among firms for which 2012 CEO was also CEO
 in 2011 and 2010:
    % of CEOs Granted Stock 1 out of Past 3               7.8              3.6              6.0             10.6
     Years (2010-2012) \124\................
    % of CEOs Granted Stock 2 out of Past 3              10.3              7.0              7.9             11.6
     Years (2010-2012) \125\................
    % of CEOs Granted Stock 3 out of Past 3              70.1             81.1             79.6             62.2
     Years (2010-2012) \126\................
Stock Grants to Other 2012 NEOs:
    % of Firms that Granted Stock to Any NEO             86.9             94.4             93.9             83.4
     other than CEO in 2012.................
    Among Firms that Made Such Grants,                    4.1              4.3              4.2              3.9
     Average Number of Other NEOs Granted
     Stock in 2012..........................
----------------------------------------------------------------------------------------------------------------

    The proposed amendments require that executive compensation 
actually paid include the vesting-date values of option grants, values 
that are not currently reported and likely differ from the grant date 
values included in total compensation in the Summary Compensation 
Table. The use of option grants, and the frequency of such grants to 
the CEO, by some of the potentially affected registrants is reported in 
the table below.\127\
---------------------------------------------------------------------------

    \124\ This percentage is only taken among those firms for which 
the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, 
and represents the percentage of such firms that issued this 
individual stock in only one fiscal year from 2010 through 2012.
    \125\ This percentage is only taken among those firms for which 
the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, 
and represents the percentage of such firms that issued this 
individual stock in two fiscal years from 2010 through 2012.
    \126\ This percentage is only taken among those firms for which 
the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, 
and represents the percentage of such firms that issued this 
individual stock every fiscal year from 2010 through 2012.
    \127\ See supra note 123.

                Table 2--Use of Executive Stock Option Grants by Registrants Covered by Execucomp
----------------------------------------------------------------------------------------------------------------
                                                All firms in    Firms in  S&P     Firms in S&P     Firms in S&P
                                                  database           500           MidCap 400      SmallCap 600
----------------------------------------------------------------------------------------------------------------
Firms in Sample.............................          1,812              496              396              598
Option Grants to 2012 CEO:
    % of CEOs Granted Options in 2012.......             50.3             64.1             49.0             43.1
Among firms for which 2012 CEO was also CEO
 in 2011 and 2010:
    % of CEOs Granted Options 1 out of Past              10.6              6.5             11.0             12.2
     3 Years (2010-2012) \128\..............
    % of CEOs Granted Options 2 out of Past              12.3              9.8             11.6             12.2
     3 Years (2010-2012) \129\..............
    % of CEOs Granted Options 3 out of Past              42.4             59.8             40.9             34.3
     3 Years (2010-2012) \130\..............
Option Grants to Other 2012 NEOs:
    % of Firms that Granted Options to Any               57.8             68.5             55.8             51.3
     NEO other than CEO in 2012.............
    Among Firms that Made Such Grants,                    3.9              4.2              4.0              3.6
     Average Number of Other NEOs Granted
     Options in 2012........................
----------------------------------------------------------------------------------------------------------------

    In addition, because the proposed amendments require the valuation 
of equity awards as of their vesting dates, it is also important to 
consider the variation in time-based vesting schedules. In particular, 
the proposed measure of executive compensation actually paid includes 
the vesting-date value of equity awards that vested during the 
applicable year. The measure as of vesting reflects the grant-date 
valuation as well as changes in value of the award between the grant 
and vesting date, such as those related to gains and losses of the 
underlying stock since the award was granted. The proposed measure of 
executive compensation actually paid may thus increase sharply in any 
year during which significant equity awards vest. The degree of 
volatility in the executive compensation actually paid measure that may 
result is likely to be higher when grants vest all at once or when 
vesting dates are less frequent.
---------------------------------------------------------------------------

    \128\ This percentage is only taken among those firms for which 
the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, 
and represents the percentage of such firms that issued these 
individual options in only one fiscal year from 2010 through 2012.
    \129\ This percentage is only taken among those firms for which 
the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, 
and represents the percentage of such firms that issued these 
individual options in two fiscal years from 2010 through 2012.
    \130\ This percentage is only taken among those firms for which 
the CEO for the 2012 fiscal year was also the CEO in 2011 and 2010, 
and represents the percentage of such firms that issued these 
individual options every fiscal year from 2010 through 2012.
---------------------------------------------------------------------------

    A compensation research and services firm estimates that 34% of 
stock grants and 6.8% of option grants awarded by S&P 1500 firms in 
2012 are scheduled to vest in full at the end of their vesting period 
(``cliff vesting'') while the remaining are scheduled to vest in 
increments over the period of vesting (``graded vesting'').\131\ 
Considering grants awarded over a longer horizon, an academic study 
that explored the vesting of option grants of some of the potentially 
affected registrants from 1997 to 2008 found that 32% of the grants 
studied cliff vested, 55% vested in equal installments over the period 
of vesting, and 13% had an alternative, irregular vesting pattern.\132\ 
Some equity

[[Page 26349]]

awards may also be subject to performance-based vesting conditions, 
where the performance conditions may be based on the registrants' stock 
prices, their accounting performance, one or more nonfinancial 
measures, or some combination of these. A preliminary academic study 
finds that performance-based vesting conditions have become more 
prevalent in recent years, such that in 2012 just under 70% of large 
U.S. firms utilized such a provision in a grant to one or more 
executives, compared to approximately 20% of such firms in the year 
2000.\133\
---------------------------------------------------------------------------

    \131\ See Equity Vesting Schedules for S&P 1500 CEOs, a 2013 
report by Equilar, available at https://www.equilar.com/corporate-governance/2013-reports/equity-vesting-schedules-for-s-p-1500-ceos.
    \132\ See B. Cadman, T. Rusticus, and J. Sunder, Stock option 
grant vesting terms: Economic and financial reporting determinants, 
Review of Accounting Studies, Vol. 18, No. 4, (Dec. 2013), at 1159-
1190. Because this paper uses data from 1997 to 2008, it might not 
accurately reflect current practices.
    \133\ See J. C. Bettis, J. Bizjak, J. Coles, and S. Kalpathy, 
Performance-Vesting Provisions in Executive Compensation, working 
paper (Dec. 2013), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2289566.
---------------------------------------------------------------------------

    Another component of compensation that is measured differently in 
the proposed definition of executive compensation actually paid as 
compared to total compensation in the Summary Compensation Table is, 
for the affected registrants other than smaller reporting companies, 
compensation related to pension plans. The use of pension plans and the 
years of credited service at some of the potentially affected 
registrants are reported in the table below.\134\
---------------------------------------------------------------------------

    \134\ See supra note 122.

                        Table 3--Use of Pension Plans by Registrants Covered by Execucomp
----------------------------------------------------------------------------------------------------------------
                                                All firms in    Firms in  S&P     Firms in S&P     Firms in S&P
                                                  database           500           MidCap 400      SmallCap 600
----------------------------------------------------------------------------------------------------------------
Firms in Sample.............................          1,812              496              396              598
2012 Pension Plans
    % of CEOs with Pension Plans............             33.7             54.0             37.6             21.9
    Among Firms with CEO Plans, Median Years             20               23               19               19
     of Credited Service in Pension Plan....
     % Firms with Pension Plans for any NEO              38.9             59.9             41.2             26.4
     other than CEO.........................
    Among Firms with Other NEO Plans,                     3.3              3.6              3.2              3.0
     Average Number of Other NEOs with
     Pension Plans..........................
----------------------------------------------------------------------------------------------------------------

    For the affected registrants other than smaller reporting 
companies, the proposed amendments require that executive compensation 
actually paid include only the actuarial present value of benefits 
attributable to services rendered during the applicable fiscal year, a 
value which is not currently required to be reported and will usually 
differ from the total change in actuarial value of pension benefits 
included, if positive, in total compensation reported in the Summary 
Compensation Table. In particular, the value currently included in 
total compensation reflects the change in actuarial pension value 
related to changes in the value of benefits accrued in prior years as 
well as the value of benefits attributable to services rendered during 
the applicable fiscal year. As such, the value currently included with 
respect to pensions in total compensation reported in the Summary 
Compensation Table will generally be more volatile (because of changes 
in interest rates and other actuarial assumptions) than the value to be 
included with respect to pensions in the proposed executive 
compensation actually paid measure. The degree of difference between 
these two computations will generally increase with an executive's 
total number of years of credited service (and thus the extent of 
benefits already accumulated) under the pension plan.

C. Discussion of Economic Effects

    Compensating executive officers with pay that varies with 
registrant performance is widely considered to be a tool that can be 
used to encourage executive officers, through the financial incentives 
provided by such compensation plans, to exert effort and make decisions 
that create value. However, there are also downsides of such 
compensation plans. For example, some such plans may cause executives 
to focus overly on short-term performance to the detriment of long-term 
performance, or may make some executives less likely to take on risky 
but (from a typical shareholder's perspective) valuable investments if 
they are unwilling to take the chance that the investment could fail 
and result in lower compensation than would result from less risky 
projects.
    An optimal compensation policy is generally considered to be one 
that maximizes shareholder value in the long term by balancing the need 
to provide executives with the incentive to perform well against the 
monetary costs and potential detrimental effects of the compensation 
policy. What constitutes an optimal compensation policy, including 
which performance metrics should be considered and how much 
compensation should vary with these metrics, is difficult to ascertain 
and will vary with a registrant's individual circumstances. Academic 
research has been mixed as to whether prevailing compensation 
structures are optimal, are too closely linked to company performance, 
or should be more sensitive to performance.\135\ Thus, it is unclear 
whether changes that would more closely link executive pay with 
registrant performance than current compensation structures would have 
a positive, negative, or no impact on firm value creation.
---------------------------------------------------------------------------

    \135\ See, e.g., Alex Edmans and Xavier Gabaix, Is CEO Pay 
Really Inefficient? A Survey of New Optimal Contracting Theories. 
Eur. Fin. Mgmt, Vol. 15, No. 3, (June 2009), at 486-496, Michael 
Jensen and Kevin Murphy, Performance Pay and Top-Management 
Incentives. 98 J. Pol. Econ., No. 2, 225 (Apr. 1990), and Lucian 
Bebchuk and Jesse Fried, Pay Without Performance: The Unfulfilled 
Promise of Executive Compensation, Harvard University Press, Oct. 
2006.
---------------------------------------------------------------------------

    In addition to uncertainties about the optimality of pay-versus-
performance alignment, there are challenges in measuring such 
alignment. For example, the available performance statistics may not 
adequately measure a given executive's contribution to a registrant's 
performance, such as when registrant performance is strongly related to 
market moves, sector opportunities, commodity prices, or other factors 
unrelated to managerial effort or skill.\136\ Even if the performance 
measure were not subject to such concerns, it could be

[[Page 26350]]

difficult to match performance with associated compensation because of 
timing differences. For example, an executive may be rewarded with 
extra compensation for an accomplishment in the year it is made, even 
though expected profits related to this performance (such as an 
investment or restructuring decision) might not follow until several 
years later. Similarly, a registrant's stock price may rise at the 
announcement of a new PEO who is expected to add significant value to 
the firm, even though he or she may not commence employment and begin 
receiving compensation until the following year. Pay-versus-performance 
alignment can also be difficult to evaluate without also considering 
holdings of vested equity which link an executive's wealth to the 
performance of the company even if they were not obtained as 
compensation or, if they were provided as compensation, even after they 
have been ``actually paid.'' \137\ Such issues may lead to concerns 
with any standardized approach to evaluating pay-versus-performance 
alignment.
---------------------------------------------------------------------------

    \136\ See, e.g., Marianne Bertrand and Sendhil Mullainathan, Are 
CEOS Rewarded for Luck? The Ones without Principals Are, 116 Q. J. 
of Econ., No. 3, 901 (2001). Other situations in which registrant 
performance statistics may differ from an executive's performance 
include cases in which the statistics measure managerial effort but 
not of the particular manager in question (which may be particularly 
likely in the case of NEOs other than the PEO) and situations in 
which other factors such as registrant size affect the translation 
of a given level of managerial effort into the measured statistics.
    \137\ See, e.g., Kevin J. Murphy, Executive Compensation: Where 
We Are, and How We Got There, August 12, 2012, forthcoming in George 
Constantinides, Milton Harris, and Ren[eacute] Stulz (eds.), 
Handbook Econ. Fin., at 24-25, available at SSRN: https://ssrn.com/abstract=2041679 (stating that incentive compensation is negatively 
correlated with manager's vested equity interests, reflecting the 
redundancy of granting further equity awards to executives whose 
wealth is already substantially tied to the company's equity).
---------------------------------------------------------------------------

    Despite these challenges, shareholders may evaluate executive 
compensation packages and consider the optimality of pay-versus-
performance alignment when making voting decisions relating to the 
compensation of the NEOs and the election of directors, as well as when 
making investment decisions.\138\ As discussed above, shareholders 
currently have access to detailed information disclosed by registrants 
with respect to executive compensation and financial performance. For 
example, substantial detail on compensation packages is currently 
required in proxy statements where action is to be taken with regard to 
the election of directors, including the specific terms of performance-
related awards as well as information in the CD&A (for affected 
registrants other than smaller reporting companies) regarding how the 
compensation policy relates pay to performance, to the extent it is 
considered material. However, data from the required, standardized 
tables and accompanying information may require further computation and 
analysis before shareholders can evaluate actual historical pay-versus-
performance alignment. Also, CD&A disclosures that may, on a voluntary 
basis, provide more direct measures of the historical pay-versus-
performance relationship lack standardization and comparability, as 
discussed above. In this vein, the introduction of quantitative 
analyses of pay-versus-performance alignment by the major proxy 
advisory firms in recent years may be a sign of shareholder demand for 
additional computations regarding this relationship, beyond existing 
disclosures.\139\
---------------------------------------------------------------------------

    \138\ See, e.g., 2015 Investor Survey: Deconstructing Proxy 
Statements--What Matters to Investors, February 2015, Stanford 
University, RR Donnelley, and Equilar, February 2015, available at 
https://www.sec.gov/comments/4-681/4681-3.pdf (providing survey 
evidence that 64% of institutional investors surveyed indicated that 
their firms used pay-for-performance alignment information from 
proxy statements to make voting decisions; 34% of those surveyed 
indicated that this information was used to make investment 
decisions).
    \139\ See, e.g., supra note 122.
---------------------------------------------------------------------------

    The proposed amendments mainly require registrants to repackage in 
one location information that is disclosed in various other locations 
under existing rules. The anticipated benefits and costs of the 
proposed amendments are therefore driven by the impact that this 
additional format for presenting information may have on shareholders. 
The economic benefits and costs of the proposed amendments, including 
impacts on efficiency, competition and capital formation, are discussed 
below. We also discuss the relative benefits and costs of significant, 
reasonable implementation alternatives to the amendments as proposed.
1. Benefits
    As discussed above, for the most part, the proposed amendments 
require a different presentation of certain existing information rather 
than the disclosure of new information. The primary benefits of the 
proposed amendments relative to the baseline will therefore depend on 
the extent to which the computations provided or the format used for 
the proposed disclosure is useful to shareholders.
    Shareholders may benefit from the proposed amendments to the extent 
that the new presentation of data required by these amendments lowers 
their burden of analysis in evaluating the executive compensation 
policies of the affected registrants. Shareholders may evaluate 
executive compensation when making decisions relating to the say-on-pay 
vote and other votes relating to the compensation of the NEOs and the 
election of directors, as well as when making investment decisions. As 
part of this process, shareholders likely spend time and other 
resources to analyze current disclosures, including making computations 
that enable them to understand how compensation is related to 
performance. Existing disclosures regarding compensation are quite 
detailed, often lengthy, and, in some portions, subject to considerable 
variation. If the repackaging of some of this information into the 
required pay-versus-performance disclosure allows shareholders to more 
quickly or easily process the information accurately, the proposed 
amendments may generate efficiencies by preventing duplicative 
analytical effort by shareholders. Also, requiring that the disclosure 
be provided in a tagged data format may facilitate the extraction and 
analysis of any or all of this information across a large number of 
registrants or, eventually, across a large number of years. If the 
proposed disclosure is of interest to shareholders, it may be 
particularly beneficial to those shareholders who do not have access to 
third-party analyses, have fewer analytical resources, or are less 
adept at interpreting current disclosures on their own. If the 
disclosure helps shareholders process and understand compensation data 
faster, this information may also be more quickly incorporated in 
market prices, marginally increasing the informational efficiency of 
markets.
    The size of this potential benefit depends on the extent to which 
the proposed disclosure approximates or contributes to any of the 
calculations and analyses that sophisticated shareholders would choose 
to perform on their own in order to process the existing disclosures, 
which is difficult to ascertain. The proposed requirement that 
registrants use standardized measures of compensation and performance 
would likely increase the comparability of disclosures specifically 
addressing the relationship of pay and performance relative to the 
broad variability under the baseline in the narrative discussion that 
may be provided in the CD&A and in voluntary pay-versus-performance 
disclosures.
    To the extent that shareholders are interested in the prescribed 
measures, this enhanced comparability would likely enable more 
efficient processing of the information. In particular, standardization 
should reduce the time that shareholders would spend to learn what 
different measures represent: For example, once they understand what 
executive compensation actually paid reflects, they can understand what 
that measure means in other pay-versus-performance disclosures without 
having to examine each registrant's own

[[Page 26351]]

definition. In addition, prescribing these measures reduces the ability 
of registrants to only disclose measures of pay and performance that 
lead to more favorable pay-versus-performance disclosures, which may 
allow shareholders to spend less time interpreting the choice of 
measures in the disclosure. Comparability may also allow shareholders 
to more easily evaluate a pay-versus-performance disclosure in the 
context of the pay-versus-performance disclosure of other registrants. 
Requiring disclosure of the annual values of the prescribed measures in 
a table should enhance such comparability of the disclosure across 
registrants by facilitating comparisons of the underlying content of 
the disclosures even when the format in which the relationship between 
the prescribed pay and performance measures is presented differs across 
registrants.
    As noted above, these benefits of standardization would apply only 
to the extent that shareholders find the prescribed measures to be 
useful. Whether or not shareholders will be interested in the 
prescribed measures is unclear. For example, as discussed above, there 
are challenges associated with measuring an executive's contribution to 
registrant performance that may lead to concerns with any performance 
measure. However, TSR reflects information from a variety of underlying 
performance metrics, including market expectations of the future impact 
of current executive actions, and may thus be a useful metric in this 
context. While a registrant's own TSR as well as relative performance 
information will generally be available in Item 201(e) disclosures in 
annual reports for registrants other than smaller reporting companies, 
including peer performance in the pay-versus-performance disclosure may 
be useful to shareholders as it would enable them to evaluate the 
performance of a registrant relative to peers without requiring 
shareholders to refer to other disclosure documents.
    Similarly, while the prescribed compensation measure would provide 
little incremental information beyond existing disclosures, the measure 
would reflect new required computations based on this existing data 
that may be particularly relevant in the context of evaluating the 
relationship of pay-versus-performance. These computations, and the 
tagging of the disclosure, may make information of interest to 
shareholders more readily available than it is under the baseline. For 
example, shareholders may be interested in the vesting-date valuations 
of options because academic studies indicate that changes in the value 
of equity awards after the grant date are a primary channel though 
which pay is linked to registrant performance.\140\ For this reason, we 
believe that shareholders may be particularly interested in such post-
grant changes in the value of equity awards when evaluating the 
relationship of pay-versus-performance. Shareholders may also be 
interested in the actuarial present value of benefits attributable to 
services rendered during a given year because these amounts may be more 
comparable to registrant contributions to defined contribution plans 
than the total change in actuarial pension value. The proposed 
adjustment with respect to pension plans is also expected to reduce the 
volatility in measured pension compensation caused by changes in 
interest rates and other actuarial assumptions, and should thus make it 
easier to evaluate the relationship of pay-versus-performance. Although 
shareholders could estimate the amounts proposed to be included in 
executive compensation actually paid with respect to equity awards and 
pension plans using existing disclosures, they may benefit from these 
computations becoming readily available in the prescribed compensation 
measure.
---------------------------------------------------------------------------

    \140\ See, e.g., Kevin J. Murphy, Executive Compensation: Where 
We Are, and How We Got There, (stating that studies show that 
virtually all of the sensitivity of pay to corporate performance for 
the typical CEO is attributable to the direct link between stock 
price performance and the CEO's portfolio of stock and options).
---------------------------------------------------------------------------

    In addition, some shareholders may be interested in computing 
slightly different measures or using parts of the required computations 
for other purposes, in which case they are likely to benefit from the 
proposed footnote disclosure of the adjustments made to compute 
executive compensation actually paid and the disclosure of vesting date 
valuation assumptions, if materially different from the grant date 
assumptions. Also, as discussed above, requiring that the disclosure be 
provided in tagged data format may benefit shareholders interested in 
extracting and analyzing some or all of the data in the disclosure 
across a large number of filings.
    On the other hand, if the prescribed measure of executive 
compensation actually paid is significantly different from measures 
that shareholders would choose to construct on their own in order to 
evaluate compensation alignment, benefits may be limited and some 
shareholders may be confused by the disclosures, as discussed in more 
detail below. For example, the potential benefit of more efficient data 
processing is likely to be tempered by the fact that the proposed 
measure of executive compensation actually paid may be subject to 
substantial potential volatility due to its sensitivity to equity award 
vesting schedules, which may reduce the meaningfulness of relating the 
variation in the measure over time to stock price performance. Also, 
while tabular disclosure of the underlying data will provide some 
degree of comparability, benefits to shareholders may be either 
mitigated or enhanced by the proposed latitude in format for presenting 
the relationship between the prescribed pay and performance measures. 
The impact of this flexibility depends on whether the usefulness of 
more customized formats outweighs any added complexity in interpreting 
the disclosure and the reduction in comparability across registrants.
    The proposed amendments could also have indirect benefits if the 
required disclosures lead to more optimal compensation policies, 
perhaps as a result of increased attention on the level or structure of 
NEO compensation and/or registrant performance. Specifically, if, by 
virtue of the disclosure, NEOs become less likely to demand, and/or 
boards become less likely to approve, a compensation level or structure 
that is not optimal (in that, as discussed above, it does not maximize 
long-term shareholder value),\141\ then benefits will arise to 
shareholders and registrants. The resulting pay packages may represent 
either a benefit or a cost to the NEOs depending on whether or not the 
more optimal compensation structure, including the level of 
compensation as well as the risk exposure, is preferred by the 
executives.
---------------------------------------------------------------------------

    \141\ It is important to note that, as mentioned above, a closer 
link between executive pay and stock performance than the current 
status of compensation could be either beneficial or detrimental to 
firm value creation.
---------------------------------------------------------------------------

    The likelihood of such indirect effects is difficult to estimate 
because the ideal pay-versus-performance analysis for shareholders, as 
well as the optimal pay structure, is uncertain and may vary by 
company, and because reactions to the repackaging of information are 
difficult to predict. As discussed above, the proposed disclosure is 
intended to facilitate shareholders' consideration of the alignment 
between pay and performance when making related voting decisions. 
However, because the proposal does not require the disclosure of 
significant new information, and given high levels of existing 
attention to pay practices, we believe that it is unlikely that the 
proposed amendments

[[Page 26352]]

would play a significant role in encouraging more optimal pay packages. 
We therefore believe that the proposed amendments are likely to have no 
material beneficial effects on competition or capital formation.
    We believe that the only incremental information that the required 
disclosures under the proposed amendments would provide relative to 
existing public information is related to the calculation of option 
values as of the vesting date instead of the grant date. Registrants 
are also not currently required to disclose the actuarial present value 
of benefits attributable to services rendered during the applicable 
year, but they must disclose the pension plan terms and assumptions 
that could be used to compute this value. In contrast, while the 
valuation of options also involves certain assumptions, registrants are 
not currently required to disclose vesting-date valuation assumptions 
for option grants.
    Using existing disclosures, shareholders can themselves make 
estimates of the vesting-date values based on the disclosed option 
terms, by using publicly available data to make reasonable valuation 
assumptions.\142\ A vesting-date valuation provided directly by the 
registrant would reflect its discretion in choosing a valuation 
methodology and estimating the inputs required, particularly the 
expected option life and the expected volatility of the stock.\143\ The 
grant-date valuations provided by registrants already demonstrate, to 
some extent, how the registrants choose to apply their discretion in 
the valuation process.\144\ It is unclear to what extent shareholders 
would find the additional disclosure of a vesting-date valuation, which 
would similarly reflect registrant discretion, to provide meaningful 
new information. Also, shareholders may be concerned that such 
discretion could be used to understate compensation actually paid, 
affecting the reliability of registrant valuations. We therefore 
believe that the potential benefits of the proposed amendments derive 
primarily from the manner in which the information is presented rather 
than the disclosure of any significant new information.
---------------------------------------------------------------------------

    \142\ Such data might include financial statement footnote 
disclosures relating to significant assumptions made by the 
registrant in arriving at disclosed grant-date valuations and 
information regarding the past exercise behavior at the registrant 
or a broader group of firms, as well as market information on bond 
and dividend yields and stock price volatilities.
    \143\ While FASB ASC Topic 718 requires that the assumptions 
used shall not represent the biases of a particular party, there 
will generally be a range of assumptions that could be considered to 
be reasonable, and so the choice of particular assumptions will 
reflect registrant discretion.
    \144\ An academic study of executive compensation among firms in 
the S&P 1500 from 1996 to 2001 found that the grant-date valuations 
of option awards by these registrants were, on average, understated. 
However, because this paper uses data from 1996 to 2001, it might 
not accurately reflect current practices. See David Aboody, Mary E. 
Barth and Ron Kasznik, Do Firms Understate Stock-Based Compensation 
Expense Disclosed under SFAS 123? 11 Rev. of Acc. Stud., No. 4, 429 
(2006). Notably, when evaluating executive compensation, two major 
proxy advisory firms each use their own, standardized set of 
methodologies and assumptions to value option grants rather than 
relying on each registrant's estimate of grant-date value. See, 
e.g., https://www.issgovernance.com/policy/ExecutiveCompensationFAQ, 
and https://www.glasslewis.com/issuer/stock-option-model-details.
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2. Costs
    We believe that the costs to registrants of complying with the 
proposed amendments likely would be relatively low, given that the 
required disclosures do not require the collection of any significant 
new information relative to the baseline and the required additional 
computations are straightforward. The valuation of options as of a 
different date and the required computations with respect to pension 
plans can be accomplished by entering new inputs into the existing 
valuation models used to calculate currently disclosed values. These 
costs will also be limited by phasing in the time periods for the 
disclosure for both new and existing registrants, thereby reducing the 
computations required when first producing the disclosure, and phasing 
in the tagging requirement for smaller reporting companies. The primary 
costs of complying with the proposed amendments include the time and 
expense to make the required computations, to design and apply a format 
for the disclosure, to apply XBRL data tagging, and to ensure 
appropriate review, such as by management, in-house counsel, outside 
counsel and members of the board of directors. As discussed above, 
registrants would be required to file the pay-versus-performance 
disclosure in certain proxy or information statements. While much of 
the disclosure would be based on information that is otherwise 
disclosed, the new computations and new presentation of this underlying 
information, as well as the inclusion of existing measures--TSR and 
peer group TSR--that are otherwise ``furnished'' but not ``filed,'' may 
create an incremental risk of litigation under Section 18 of the 
Exchange Act. However, we note that Section 18 does not create strict 
liability for ``filed'' information.\145\
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    \145\ See Exchange Act Section 18 [15 U.S.C. 78r]. A plaintiff 
asserting a claim under Section 18 would need to meet the elements 
of the statute to establish a claim, including purchasing or selling 
a security in reliance on the misstatement, and damages caused by 
that reliance.
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    The compliance costs are likely to vary somewhat among registrants 
depending on the complexity of their compensation structures. For 
example, the computation of executive compensation actually paid from 
total compensation reported in the Summary Compensation Table involves 
adjustments to the treatment of equity awards and pension benefits. As 
shown in the baseline section above, while a relatively higher 
proportion of large companies have pension plans and grant stock and 
option awards to executives, a significant fraction of mid-sized and 
smaller companies feature these components in their compensation plans 
as well. Thus, while the compliance costs are likely to be low, these 
costs may be slightly more burdensome for those affected registrants 
which have complex compensation packages and are small enough that the 
costs of the disclosure are relatively more consequential in comparison 
to their size. Smaller reporting companies would be subject to scaled 
requirements consistent with their existing disclosure requirements, 
including fewer years of disclosure, no requirement to report peer 
group performance, and the exclusion of items related to pension plans 
in computing executive compensation actually paid. Smaller reporting 
companies are not currently required to comply with Item 201(e), so 
they may face a small incremental burden of computing their own TSR for 
the purpose of this disclosure as compared to other affected 
registrants.
    Based on analysis for purposes of the Paperwork Reduction Act 
(``PRA''), as discussed in Section V of this release, we estimate that 
the total incremental burden on all registrants of the proposed 
amendments would be, annually, 67,500 hours for internal company time, 
and $9,000,000 for the services of outside professionals. Certain 
registrants--such as those that have infrequent equity grant vesting 
dates or other compensation structures that result in a more volatile 
measure of executive compensation actually paid--may be more likely to 
voluntarily supplement the disclosure with additional measures, 
explanations, or analyses in order to explain the patterns in the 
required disclosure, and may thus face higher overall costs. However, 
we do not believe that any of the variation in the compliance burden 
will be large enough to have a material detrimental effect on 
competition or capital formation.

[[Page 26353]]

    Shareholders may bear additional information processing costs as a 
consequence of the proposed amendments if they increase the length and 
complexity of existing disclosures without significantly adding to the 
ease of interpretation. The likelihood and extent of such costs may be 
a function of the potential confusion resulting from the proposed 
disclosure, as discussed in more detail below, and the related increase 
in supplementary disclosures that may result, as well as the complexity 
of and variation in presentation formats, as discussed above. If the 
proposed disclosure were to confuse rather than help shareholders and 
therefore complicate the task of understanding executive pay policies, 
it may marginally decrease the informational efficiency of markets.
    The proposed amendments may confuse shareholders about the 
optimality of pay practices if it brings attention to a particular 
relationship that may not be meaningful in the context of a given 
registrant. As discussed above, there are challenges in measuring pay-
versus-performance alignment which are likely to impact any 
standardized approach to presenting this relationship. Including peer 
group performance in the disclosure may help shareholders to identify 
when registrant performance could be driven by market moves, sector 
opportunities, commodity prices, or other factors unrelated to 
managerial effort or skill. However, the proposed disclosure may be 
less meaningful if the disclosed performance, even relative to peers, 
is different from the contribution of the given NEO to performance, or 
if the disclosed relationship between compensation and performance does 
not (because of timing considerations or vested equity holdings) 
accurately capture the economic relationship between the company's 
performance and the financial rewards to the NEO.
    In addition to the general concerns raised above, the proposed 
definition of executive compensation actually paid may be particularly 
subject to volatility based on the vesting pattern of equity awards, 
because the measure includes in the year of vesting the original grant-
date value and all gains (or losses) related to returns in all years 
since the grant was made. In particular, the proposed measure is likely 
to increase sharply in any year during which significant equity awards 
vest, and gains or losses on equity awards are likely to be reflected 
in different years than the stock performance that generated them. Such 
volatility could make it difficult to understand the relationship, or 
lead to incorrect inferences about the relationship, between pay and 
performance.
    The treatment of equity awards may also reduce the comparability of 
the compensation measure across registrants. The exclusion of grant 
date values in the year of grant may make it difficult to compare the 
total value of compensation packages. For example, for a given fiscal 
year, if one PEO is paid $1 million in cash and another PEO is paid $1 
million in restricted stock that vests after one year, the executive 
compensation actually paid for the year will be $1 million in the first 
case and zero in the second case. This measure would be accompanied in 
the proposed tabular disclosure by the Summary Compensation Table 
measure of total compensation, which reflects the grant date values of 
equity awards, and may thus contribute to a more complete view of a 
compensation package. However, the reduced comparability resulting from 
the exclusion of the grant date values of equity awards from the 
proposed measure may still complicate the task of interpreting the 
disclosure.
    The sensitivity of the proposed measure of executive compensation 
actually paid to vesting schedules may also reduce comparability. For 
example, consider two NEOs who are granted large, one-time awards of 
restricted stock that vest in full after one year, but with vesting 
dates that are one day apart--on the last day of a fiscal year versus 
the first day of the next fiscal year. The pattern in compensation 
actually paid may look very different for these two executives because 
the award of stock will be reflected in different years.
    The potential for confusion is particularly of concern given that 
the proposed disclosure may be of most interest to less sophisticated 
shareholders, who may be less likely to have access to third-party pay-
versus-performance analyses or may be less adept at conducting their 
own such analyses. The possibility of confusion is mitigated by 
allowing registrants to provide supplemental measures of pay and 
performance in the proposed disclosure, as well as the ability of 
registrants to provide further explanatory disclosures (such as in the 
CD&A for affected registrants other than smaller reporting companies). 
However, such clarifying disclosures may be more likely to be provided 
when the proposed disclosure is perceived by the registrant to 
incorrectly indicate the misalignment of pay and performance than when 
the proposed disclosure is perceived to incorrectly indicate strong 
alignment.
    The proposed amendments could also lead to indirect costs if the 
required disclosures lead to changes in compensation packages that are 
not beneficial. Registrants may make changes to avoid disclosure that 
they perceived to correctly or, because of the limitations of the 
standardized approach, incorrectly indicate the misalignment of pay-
versus-performance. For example, by virtue of the disclosure, boards 
may become more likely to approve compensation structures that more 
strongly link pay to stock price performance, even in situations in 
which this would not be optimal.\146\ More subtle changes in 
compensation structures may also be made to improve the appearance of 
pay-versus-performance alignment. For example, registrants may choose 
to apply shorter or more graduated equity award vesting schedules to 
generate a less volatile measure of executive compensation actually 
paid. However, such changes in the design of compensation packages 
could harm shareholder value creation by, for example, placing more 
than the optimal weight on short-term performance.\147\ Thus, if such 
changes are indirectly encouraged by the proposed amendments, they may 
entail costs to registrants and their shareholders. The resulting pay 
packages may represent either a benefit or a cost to the NEOs depending 
on whether or not the less optimal compensation structure, including 
the level of compensation as well as the risk exposure, is preferred by 
the executives.
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    \146\ See supra notes 135 and 136 regarding academic studies 
that find that a stronger link between pay and stock price 
performance may not be optimal.
    \147\ See, e.g., Alex Edmans, Vivian Fang and Katharina 
Lewellen, Equity Vesting and Managerial Myopia, NBER Working Paper 
No. 19407, (Sept. 2013), available at https://www.nber.org/papers/w19407.
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    As in the case of the potential benefits outlined above, many of 
these costs are difficult to quantify because the ideal pay-versus-
performance analysis for shareholders, as well as the optimal pay 
structure, is uncertain and may vary by company and because reactions 
to the repackaging of information are difficult to predict. Still, 
because the proposal does not require the disclosure of significant new 
information, and given high levels of existing attention to pay 
practices, we believe that it is unlikely that the proposed amendments 
would play a significant role in encouraging poor pay practices. We 
therefore believe that the proposed amendments likely would have no 
material detrimental effects on competition or capital formation.

[[Page 26354]]

3. Implementation Alternatives
    In this section, we present significant implementation alternatives 
that have been considered and a discussion of their benefits and costs 
relative to the amendments as proposed.
a. Registrants and Filings Subject to the Disclosure
    An alternative to the amendments as proposed would be to require 
that pay-versus-performance disclosure would accompany any Item 402 
disclosure, including in Form 10-K or Form S-1. Such an approach would 
make pay-versus-performance disclosures more consistently available for 
Section 12(g) registrants subject to the amendments and broaden the 
disclosure requirement to include Section 15(d) registrants other than 
emerging growth companies. As discussed above, we believe that the 
proposed disclosure would be most useful to shareholders when they are 
deciding whether to approve the compensation of the NEOs through the 
say-on-pay vote, voting on the election of directors or acting on a 
compensation plan. The proposed approach would require pay-versus-
performance disclosure in proxy statements in each of these cases. 
Nonetheless, shareholders making voting decisions at a particular 
registrant may benefit from broader and more consistent availability of 
pay-versus-performance disclosures on an annual basis at other 
registrants. Specifically, these disclosures may allow shareholders to 
more easily compare pay practices across registrants when deciding how 
to vote at a particular registrant, particularly, for example, in the 
case of smaller companies whose peers may be more likely to be Section 
12(g) or Section 15(d) registrants. Such disclosures may also be of use 
to some shareholders in making investment decisions, irrespective of 
any matters that are up for a vote.
    However, registrants with reporting obligations only under Section 
12(g) or Section 15(d) do not have securities that are registered on 
national securities exchanges, so the markets for their shares are 
likely to be comparatively less liquid. Estimates of share values and 
therefore of total shareholder return for such registrants may be less 
precise and less readily available, potentially making pay-versus-
performance comparisons based on this metric less meaningful across 
such registrants. Also, as in the case of smaller reporting companies, 
Section 15(d) registrants are not subject to Item 201(e) requirements 
for stock price performance disclosure. Similarly, Section 12(g) 
registrants may not be required to disclose Item 201(e) information in 
some or all years, so Section 15(d) registrants and some Section 12(g) 
registrants would bear an additional burden of calculating their own 
TSR and, except in the case of smaller reporting companies, the TSR of 
a peer group for this purpose.
    An alternative that would narrow the applicability of the 
disclosure would be to exempt smaller reporting companies from the 
proposed disclosure requirement. Exempting smaller reporting companies 
generally would be consistent with the overall scaled disclosure 
requirements that apply to smaller reporting companies. While the 
proposal would subject smaller reporting companies to scaled 
requirements in order to limit the incremental burdens such companies 
may face relative to other registrants, some such burdens remain. For 
example, smaller reporting companies are currently not required to 
disclose their TSR in annual reports, so they would face a higher 
burden than other registrants to include this measure in the pay-
versus-performance disclosure. We note, also, that requiring only a 
scaled version of the pay-versus-performance disclosure for smaller 
reporting companies may limit the benefits to shareholders by reducing 
the content and comparability of the disclosures. Also, in the absence 
of CD&A disclosure, shareholders would have less information with which 
to interpret pay-versus-performance disclosures from these registrants.
    On the other hand, it is possible that some shareholders may 
benefit from the proposed pay-versus-performance disclosure for these 
registrants, particularly because these registrants currently provide 
less extensive disclosure about compensation and the data that they do 
disclose is unlikely to be available in aggregate form from data 
vendors that collect such data from the proxy statements of larger 
companies. For example, shareholders who believe that the long-term 
performance of younger, high growth companies may be particularly 
sensitive to the design of compensation structures may benefit from 
smaller reporting company pay-versus-performance disclosures, even if 
these disclosures are not directly comparable with the disclosures of 
other affected registrants. Shareholders that are interested in 
comparing executive compensation across smaller reporting companies 
would benefit from this data being tagged, particularly because of the 
lack of commercial databases collecting executive compensation 
information for such registrants. The proposal would permit smaller 
reporting companies to present fewer years of information in the 
disclosure, to not include peer group performance, and to exclude items 
related to pension plans in computing executive compensation actually 
paid. While the scaled requirements for smaller reporting companies may 
limit the potential benefits to shareholders interested in executive 
compensation at such registrants, these scaled requirements should 
substantially limit the incremental burdens faced by smaller reporting 
companies in providing pay-versus-performance disclosure.
b. Disclosure Requirements
    We have considered several reasonable alternatives to the proposed 
disclosure requirements.
    Some commenters recommended a more principles-based approach that 
would permit registrants to determine which measures of pay and 
performance to disclose and how to disclose the relationship between 
these measures based on what they deem to be appropriate for their 
individual situations.\148\ Such an approach could have the potential 
to allow shareholders to more directly observe how management views the 
alignment of pay and performance at a given registrant, and might 
reduce reporting costs because registrants need only report what they 
believe to be appropriate given their unique circumstances. To the 
extent that the prescribed measures may be less meaningful at 
particular registrants, a principles-based approach could reduce 
shareholder confusion in understanding the relationship between pay and 
performance at a particular registrant. A principles-based approach 
would also reduce the risk that the disclosure requirements could lead 
registrants to change their compensation structures in ways that are 
less than optimal for the sake of achieving what they perceive to be 
more favorable pay-versus-performance disclosure. However, such an 
approach may reduce comparability of the disclosure across registrants 
and could increase shareholder confusion because the choice of pay and 
performance measures, and the disclosure horizon, may vary 
significantly. Also, a principles-based approach may allow registrants 
to selectively choose the measures or horizon that result in the most 
favorable disclosure. The proposed approach of specifying some uniform 
requirements for the disclosure and permitting supplemental disclosure

[[Page 26355]]

should promote comparability while preserving flexibility to tailor the 
disclosure to a registrant's individual situation.
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    \148\ See letters from SCSGP, ABA, CEC I, ClearBridge, 
Protective Life, and Davis Polk.
---------------------------------------------------------------------------

    In particular, the proposed disclosure promotes a level of 
comparability by requiring standardized measures of compensation and 
performance that are consistent across registrants. Similarly, the 
proposed requirement that the disclosure cover, at minimum, a five-year 
(three-year for smaller reporting companies) time period after the 
initial phase-in should also increase the comparability and usefulness 
of the disclosure compared with the alternative of allowing the 
registrant to potentially choose a shorter time period for disclosure. 
Registrants will be permitted to present supplemental measures of 
compensation and performance and additional years of data in the pay-
versus-performance disclosure, will have flexibility as to the format 
in which to present the relationship between pay and performance, and 
will continue to have significant latitude in presenting additional 
compensation analyses (such as in the CD&A, for affected registrants 
other than smaller reporting companies), all of which should help 
registrants to clarify their unique circumstances and considerations in 
evaluating compensation.
    Conversely, we also have considered increasing the comparability of 
pay-versus-performance disclosures by prescribing a uniform format or 
some minimum requirements for the presentation format of the 
relationship. Under the proposal, registrants may apply a wide range of 
formats when presenting the relationship between the measures that 
might not be directly comparable, particularly as some registrants may 
present the relationship between the prescribed measures using 
percentage changes or ratios while others may present the levels of 
these measures. However, the tabular disclosure of the annual values of 
executive compensation actually paid and registrant and peer group 
performance should allow shareholders to compare the content of the 
disclosures across registrants using different formats. Still, 
shareholders' ability to easily compare the disclosure across 
registrants may be further increased by requiring a uniform format for 
presenting the relationship, such as a standardized graphical 
presentation, or some minimum standards for the presentation format, 
such as a requirement that the disclosure be in the form of a graph. 
The cost of these more prescriptive approaches would be the 
restrictions on the ability of registrants to tailor the format of the 
required disclosures to best reflect their individual circumstances, 
which may vary significantly.
    A further alternative would be to require registrants to provide an 
analysis of the presented information in narrative accompanying the 
factual disclosure. For example, registrants could be required to 
explain which compensation decisions or which elements of compensation, 
if any, were most responsible for the patterns in the presented 
relationship between executive compensation actually paid and total 
shareholder return. Such supplementary analysis may help shareholders 
to interpret the disclosures, particularly in cases where, as discussed 
above, the presented relationship may be distorted by issues such as 
timing mismatches and factors unrelated to managerial performance that 
may affect stock prices. The proposed amendments permit such 
explanations to be provided on a voluntary basis but, as discussed 
above, such clarifying disclosures may be more likely to be provided 
when the proposed disclosure is perceived by the registrant to 
incorrectly indicate the misalignment of pay and performance than when 
the proposed disclosure is perceived to incorrectly indicate strong 
alignment. However, making the provision of such narrative disclosure 
mandatory may increase the compliance burden and might suggest that the 
registrant considered, or should consider, the pay-versus-performance 
relationship in its compensation decisions.
    We have also considered increasing or decreasing the minimum 
information required to be included in the disclosures. With respect to 
increasing the minimum information, we considered requiring the 
inclusion of additional measures of pay or performance or requiring 
that the disclosure cover a longer time period. Shareholders may find 
expanded disclosures to be beneficial. For example, a longer time 
period (e.g., the entire service period of the executive) \149\ for the 
disclosure may provide shareholders with additional context with which 
to evaluate the disclosure. In particular, requiring a longer horizon 
may help shareholders to understand timing mismatches that the 
disclosures may be subject to, as discussed above, by increasing the 
likelihood that the disclosures include pay (or performance) that may 
appear in a different time period than the corresponding performance 
(or pay). Mandating the inclusion of additional measures of pay and 
performance (such as relative pay measures and accounting measures of 
performance) may increase the usefulness of the disclosure in some 
cases by summarizing more information that could be relevant in 
evaluating pay versus performance alignment. Also, requiring more years 
of data or more prescribed measures may increase the comparability of 
the disclosures if, under the proposed requirements, some but not all 
registrants choose to provide such additional information.
---------------------------------------------------------------------------

    \149\ See letter from CII.
---------------------------------------------------------------------------

    However, such extended requirements would impose a higher 
compliance burden while potentially requiring registrants to include 
information that they do not believe to be relevant to their 
circumstances, and/or which shareholders may not find to be relevant. 
Also, requiring additional measures may also make the disclosure of the 
relationship between pay and performance more difficult to process 
quickly, while not adding to the total amount of underlying information 
available to shareholders from public disclosures.
    With respect to decreasing the minimum required information, we 
also considered reducing the required disclosure period to three years, 
excluding Summary Compensation Table total compensation from the 
required tabular disclosure, or not requiring TSR for a peer group. On 
the one hand, these alternatives could reduce the compliance burden on 
registrants by limiting the total amount of information that would need 
to be included in pay-versus-performance disclosures, while continuing 
to provide flexibility to registrants to include additional information 
if they find it to be appropriate. On the other hand, decreasing the 
minimum required information could reduce the benefits to shareholders 
discussed above and may not substantially reduce compliance costs given 
that, for example, the excluded information would generally still be 
required to be disclosed in other years, other parts of the proxy or 
information statement, or other filings. Overall, we believe that the 
proposed minimum required information appropriately balances a level of 
comparability and usefulness against the costs of complying with the 
requirements of pay-versus-performance disclosure.
    One commenter \150\ recommended that registrants subject to the 
amendments be required to present relative pay compared to relative 
performance, each measured with respect to a group of peer companies.

[[Page 26356]]

While performance information for a peer group would be required to be 
included under the proposal, also incorporating pay information for a 
peer group in order to produce relative pay-versus-performance 
disclosures may be useful to shareholders as it would provide further 
context in which to evaluate the pay-versus-performance alignment of a 
registrant. Using a relative approach would also permit the 
relationship of pay and performance to be presented across registrants 
using, for example, an aggregate three-year compensation measure, 
rather than the relationship being presented across time for an 
individual registrant using annual measures.\151\ The use of aggregate 
measures, recommended by several commenters, may reduce the potential 
timing mismatches and volatility in executive compensation actually 
paid.\152\ However, requiring further comparisons to a peer group may 
reduce the comparability of disclosures because of registrant 
discretion in selecting the peer group or variation in the availability 
of a closely comparable peer group. There are also practical 
implementation considerations, as peer compensation for the last fiscal 
year is not likely to be available at the time a registrant is 
compiling the disclosure. Further, even if these practical 
considerations could be mitigated (e.g., by permitting peer information 
to be excluded when unavailable), requiring relative pay-versus-
performance would most likely impose higher compliance costs.
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    \150\ See letters from SVA.
    \151\ Aggregating compensation over a three-year period would 
result in a single number representing executive compensation 
actually paid for this full period. Such aggregation would thus make 
it impossible to demonstrate the relationship between pay and 
performance over time, and so this relationship could only be 
demonstrated across another dimension, such as across peers. The 
proposed amendment requires the use of an annual measure so that 
registrants can present the relationship of pay and performance over 
time at the particular registrant.
    \152\ See letters from ClearBridge, Pay Governance, and SVA.
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    Requiring peer performance but not peer compensation information as 
in the proposal should help shareholders to understand when registrant 
performance could be driven by market moves, sector opportunities, 
commodity prices, or other factors unrelated to managerial effort or 
skill. Under the proposed amendments, registrants that prefer to 
include information about peer pay-versus-performance will be permitted 
to present relative measures of pay and alternative measures of 
relative performance as additional measures in the pay-versus-
performance disclosure and will continue to have the ability to present 
relative compensation analyses in the CD&A. Because registrants might 
only choose to present this information when they perceive the 
comparison to peers to appear favorable, allowing such voluntary 
disclosure would not provide the full benefits of mandating relative 
pay-versus-performance disclosure. However, shareholders could also 
construct relative pay-versus-performance analyses on their own by 
comparing the separate pay-versus-performance disclosures of each of a 
registrant's peers, based on the peer group reported by a registrant 
under Item 201(e) or in the CD&A.
    Another commenter recommended that the pay-versus-performance 
disclosure be limited to the PEO's compensation.\153\ This alternative 
may focus the disclosure on the information that is likely to be of 
most interest to shareholders. Also, as discussed above, the 
contribution of NEOs other than the PEO to firm performance is less 
likely to be adequately measured by overall registrant performance 
statistics such as the TSR. This alternative would marginally reduce 
compliance costs as compared to requiring disclosures regarding the 
average compensation of the other NEOs as proposed. However, limiting 
the disclosure to the PEO may also reduce the benefits to shareholders, 
to the extent they would use the proposed disclosures to evaluate the 
compensation of the other NEOs.
---------------------------------------------------------------------------

    \153\ See letter from Meridian.
---------------------------------------------------------------------------

    We could require pay-versus-performance disclosure for each 
individual NEO, rather than or in addition to the average of the other 
NEOs as a group. Disclosure with respect to the individual NEOs could 
be required only in the required tabular disclosure of the prescribed 
measures or in both the disclosure of these measures and in the 
disclosure of the relationship between the measures. Such approaches 
would allow shareholders to more directly compare pay-versus-
performance for NEOs with the same or similar titles across different 
registrants. Also, some shareholders may be interested in the pay-
versus-performance alignment of particular NEOs other than the PEO and 
would thus benefit from such individual disclosures. Since the 
computations required to produce individual disclosures would already 
be made in order to produce disclosure on an average basis for all of 
the NEOs, the incremental burden of producing such individual 
disclosures may be low.
    However, while some shareholders may be interested in such 
disclosure, variability in the composition and number of other NEOs 
over the horizon of the disclosure may complicate the interpretation of 
the relationship between pay and performance over the years for which 
disclosure is required. The roles of individual NEOs might not be 
comparable, and their titles might not be consistent, across 
registrants, limiting the benefits to shareholders interested in 
comparing pay alignment for particular roles across registrants. Also, 
firm-level performance measures may be less likely to adequately 
measure an NEO's contribution to a registrant's performance than that 
of the PEO, given the more focused roles (such as division head or 
chief technology officer, among many other possibilities) of individual 
NEOs, so individual disclosures for the NEOs could be of limited 
benefit in many cases. Because of these limitations, and the increase 
in the length and complexity of the disclosure required to present 
individual NEO information, requiring pay-versus-performance 
disclosures for each individual NEO could increase the time required 
for a shareholder to analyze and process the information and increase 
the likelihood of shareholder confusion.
    We are proposing to require XBRL tagging of the disclosure because 
some shareholders may be interested in extracting and analyzing the 
information in the table across large numbers of registrants or, 
eventually, a large number of years, and would thus benefit from the 
proposed tagging requirement.\154\ The proposal would require 
registrants to tag the numerical data disclosed in the required table, 
and to separately block-text tag, as three blocks, the disclosure of 
the relationship among the measures, the disclosure of deductions and 
additions used to determine executive compensation actually paid, and 
the disclosure regarding vesting date valuation assumptions. We have 
considered alternatives with respect to the proposed XBRL tagging 
requirement, including not requiring that the underlying data disclosed 
in tabular form be provided in an interactive data

[[Page 26357]]

format, requiring more or less of the information to be tagged, 
allowing supplementary information to be tagged, or requiring a 
different tagging format.
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    \154\ Some shareholders that are interested in analyzing 
compensation data across a large number of filings may also wish to 
analyze the substantial amount of other information regarding 
compensation in the proxy statement. Because this other data is not 
currently provided in an interactive data format, such shareholders 
would have to continue to purchase such data from a data vendor that 
aggregates this data or to electronically parse or hand-collect such 
data from filings. The incremental benefit of the proposed data 
tagging requirement is likely to be lower for such shareholders than 
for those primarily interested in the data proposed to be tagged.
---------------------------------------------------------------------------

    The affected registrants are familiar with data tagging because 
they are required to provide information in other filings in 
interactive data format, but the exact specifications differ and they 
are not required to provide any interactive data in proxy or 
information statements.\155\ Requiring an interactive data format would 
impose additional costs and burdens on registrants, beyond what they 
currently spend on producing interactive data for other purposes, 
because their contracts with outside data tagging vendors and/or the 
responsibilities of their in-house staff that works on data tagging 
would have to be expanded to include the new tagging requirement. 
Despite these costs, some shareholders may benefit from the data 
tagging requirement to the extent that it is helpful in extracting the 
tagged data across large numbers of filings.
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    \155\ Business development companies are not currently required 
to provide their financial statements and financial statement 
footnotes in XBRL format, and may thus be less familiar with data 
tagging than other registrants. We estimate that there are 
approximately 13 business development companies that would be 
subject to the proposed amendment.
---------------------------------------------------------------------------

    We considered not requiring registrants to tag, as a block, the 
graphical and/or narrative disclosure that would follow the tabular 
disclosure. While the nature and potential variation in format of this 
disclosure may make it less suitable for large-scale analysis than the 
numerical data required to be tagged under the proposal, the 
incremental costs of tagging this disclosure as block-text should be 
low and such tagging could benefit shareholders interested in 
extracting this part of the disclosure from a large number of filings. 
We also considered not requiring registrants to tag, as blocks, the 
disclosures of deductions and additions used to determine executive 
compensation actually paid and the disclosure regarding vesting date 
valuation assumptions. The cost of block tagging these disclosures 
should be low and shareholders interested in this information may find 
such tagging to be useful. Alternatively, we could require that each 
numerical item in the deductions and additions used to determine 
executive compensation actually paid and the vesting date valuation 
assumptions be tagged separately. While such tagging may benefit 
shareholders interested in using this data, it would require some 
incremental compliance costs. Another alternative would be to allow 
registrants to tag any supplemental measures of pay and performance 
that they include in the disclosure beyond the prescribed measures. 
While some shareholders may benefit from such tagging, the supplemental 
measures included, if any, are likely to vary across registrants and 
such data may thus be less suitable for large-scale analysis than the 
prescribed measures.
    We also considered requiring registrants to provide the data in XML 
format rather than XBRL. An XML format could be appropriate given the 
fixed structure of the proposed tabular disclosure and would permit the 
use of existing EDGAR applications that can convert submitted 
information to XML. This could increase the ease with which registrants 
could implement the structured formatting requirement, and could thus 
reduce costs, particularly for smaller registrants. However, XBRL is 
more appropriate for capturing information that is not well suited for 
tabular disclosures; in particular, standard XML is not able to tag 
large blocks of information without customization, whereas this 
function is standard in XBRL. XBRL is therefore more suitable for 
implementing the proposed requirements for block tags. In determining 
to propose a requirement to tag the data in XBRL format as opposed to 
XML format, we also considered the fact that XBRL allows for more 
flexibility to implement, for example, potential extensions to the data 
to be tagged as discussed above.
c. Definition of Executive Compensation Actually Paid
    We have also considered several reasonable alternatives for the 
definition of executive compensation actually paid.
Incremental Compensation Earned
    One approach would be to define ``executive compensation actually 
paid'' as the incremental compensation earned by an executive in a 
given year over those amounts that had already been earned in previous 
years. In this case, executive compensation actually paid would, as in 
the proposed measure, include all of the components included in the 
Summary Compensation Table (such as salary and cash bonuses) but with 
adjustments to the amounts included for equity awards and pension 
plans. In contrast to the proposal, the measure based on the 
incremental compensation earned would include in a given fiscal year 
the grant-date values of any new equity awards granted that year 
together with the annual change in value (whether positive or negative) 
of any outstanding, unvested option and stock grants. The change in 
values of these grants would be included in each fiscal year until 
their vesting date. In the case of options, these changes in value 
would be measured by applying the registrant's chosen option valuation 
methodology (e.g., Black-Scholes or lattice valuation). This treatment 
of equity awards is similar to an approach used by one commenter.\156\
---------------------------------------------------------------------------

    \156\ See letter from J&J.
---------------------------------------------------------------------------

    The corresponding treatment for pension plans would be to include 
the present value of those benefits that were earned in the last fiscal 
year, which may differ from the actuarial present value attributable to 
services rendered during the applicable fiscal year. In particular, the 
latter may be based on estimates of future benefits that include the 
impact of assumptions about future levels of compensation. The former, 
on the other hand, is intended to capture the present value of the 
impact on future benefits that can be directly linked to the change in 
inputs to the benefit formula (including compensation levels as well as 
years of service) over the last fiscal year.
    A potential benefit to shareholders of applying these alternative 
adjustments to equity and pension plans in presenting executive 
compensation actually paid is that, with respect to equity awards, it 
would reduce the volatility in executive compensation actually paid, 
which, as discussed above, could reduce the comparability of the 
disclosures and the meaningfulness of relating the variation in the 
compensation measure over time to stock performance. In particular, 
this alternative approach would limit the value attributed to equity-
based awards in any year to the change in value that is directly 
related to the stock return over that year, rather than including in 
the year of vesting the gains related to returns in all years since the 
grant was made. This approach may therefore allow shareholders to more 
readily interpret the relationship between variation in the 
compensation measure over time and stock performance. It may also 
reduce the unintended, indirect encouragement of shorter or more 
graduated vesting schedules in order to smooth executive compensation 
actually paid under the proposed definition.
    In addition, this alternative approach would limit potentially 
significant differences in the measured executive compensation of 
registrants that provide very similar equity awards but with vesting 
schedules that are not synchronized. As discussed above, if

[[Page 26358]]

two NEOs receive one-time awards of restricted stock that vest in full 
after one year, but with vesting dates that are one day apart--on the 
last day of a fiscal year versus the first day of the next fiscal 
year--the proposed approach would reflect the full value of the award 
in different years for the two NEOs. The alternative approach based on 
the incremental compensation earned would reflect any change in the 
value of each award over a given fiscal year in that same fiscal year, 
generally resulting in a more similar annual measure of compensation 
for the two NEOs in this example than the proposed measure.
    Finally, including the value of equity awards at the grant date and 
then reflecting changes in this value in the years until vesting would 
increase the comparability of the disclosures across registrants that 
rely on equity awards to different extents while still demonstrating 
the performance sensitivity of unvested equity awards. For example, 
consider the example above, in which, for a given fiscal year, one PEO 
is paid a $1 million salary in cash and another PEO is paid $1 million 
in restricted stock that vests after one year, each of which comprises 
their total compensation. In contrast to the proposed approach, which 
would reflect executive compensation actually paid of $1 million and 
zero, respectively, for the two executives in that year, this 
alternative would reflect the same level of compensation for the two 
PEOs in that year, while still presenting any changes in the value of 
the second PEO's stock grant over the next year. It is important to 
note that these changes in value could be negative. For example, if the 
price of the stock granted to the second PEO were to fall significantly 
thereafter, or if the vesting conditions were not satisfied, this 
alternative approach could result in a large negative adjustment to 
that PEO's executive compensation actually paid in the year of such 
price change or failure to vest.
    With respect to pensions, this alternative approach would provide a 
measure of future benefits that may be more directly tied to changes 
over the last fiscal year. Pension benefits may be a function of 
compensation levels, as in the case of pay-related, final-pay, final-
average-pay, or career-average-pay plans. In the proposed approach, the 
values included for pensions are based on estimates that may already 
incorporate projections about future compensation levels. As a result, 
the effect of actual changes in current compensation levels on the 
value included for pensions in the proposed measure may be dampened. 
Because actual changes in current compensation may be related to 
performance, and these changes in compensation may be magnified by 
pension benefits that are a function of compensation levels, the 
alternative approach may be more useful in evaluating the relationship 
between pay and performance. The alternative approach may also further 
increase the comparability between compensation provided through 
defined benefit and defined contribution plans, since registrant 
contributions to defined benefit plans may also be directly related to 
current compensation levels or other such metrics with respect to the 
last fiscal year.
    However, interpreting compensation ``actually paid'' as the 
incremental compensation earned by an executive in a given year would 
increase the reporting burden for registrants, because equity awards 
would have to be revalued in each year from the grant date until the 
time of vesting, rather than only at the grant date (for the purpose of 
the Summary Compensation Table and related disclosures) and at any 
vesting dates (for the purpose of the proposed pay-versus-performance 
disclosure). Also, the calculations to be made with respect to pensions 
may be less directly related to the values already calculated for the 
purpose of financial statement reporting, and could therefore be more 
burdensome. Overall, this approach may provide some benefits but could 
result in additional costs.
Other Alternative Definitions
    Some commenters suggested excluding components of pay that may be 
considered to be unrelated to performance--such as perquisites, values 
related to retirement benefits, or even base salaries--from the 
definition of executive compensation actually paid.\157\ We believe 
that restricting the definition of executive compensation actually paid 
in such a way would not provide shareholders with a complete 
understanding of compensation and how it relates to financial 
performance. While compensation committees may rely mainly on 
particular components of compensation in order to provide performance 
incentives, other components of compensation (such as perquisites, 
registrant contributions to defined contribution plans, and life 
insurance premiums paid by the registrant) may or may not vary with 
company performance and, even if they do not vary with performance, may 
be important to consider in order to understand how sensitive the 
totality of compensation is to performance. Restricting the types of 
compensation included in executive compensation actually paid may also 
reduce the comparability of disclosures across registrants that rely 
more heavily on types of compensation that are excluded from the 
prescribed measure versus those that rely more heavily on compensation 
types that are included.
---------------------------------------------------------------------------

    \157\ See letters from CEC II (recommending that the measure 
exclude one-time special make-whole awards because they are non-
performance-based), Compensia (recommending that the measure only 
include items that ``are paid and awarded based on the financial 
performance of the company,'' which are listed as amounts paid under 
both short-term and long-term incentive compensation plans and 
performance-based equity awards for which the performance measures 
are based on financial criteria), Cook (recommending that that 
measure exclude changes in actuarial pension value, above-market 
earnings on deferred compensation, and the All Other Compensation 
category ``because these figures have nothing to do with 
performance''), Davis Polk (recommending that the measure only 
include ``items that an issuer believes are based in some measure on 
attainment of company performance objectives'' and exclude items 
such as pension accruals, deferred compensation earnings, issuer 
contributions to tax-qualified and non-qualified deferred 
compensation plans and perquisites and welfare benefits), and Foley 
(recommending that the measure reflect ``performance-based pay (with 
or without base salary added in).'')
---------------------------------------------------------------------------

    The proposal would require registrants to include the Summary 
Compensation Table measure of total compensation together with 
executive compensation actually paid in the tabular disclosure of pay 
and performance measures, but some commenters have suggested that 
executive compensation actually paid also be defined to be more similar 
to this existing measure. For example, four commenters supported the 
use of grant-date values for equity awards in executive compensation 
actually paid.\158\ Such an approach would reduce the costs of 
compiling the required disclosure and would result in a compensation 
measure that, because of its comprehensiveness, would be reasonably 
comparable across registrants. However, this approach would not reflect 
the performance sensitivity of unvested equity awards. As discussed 
above, because academic research has demonstrated that the empirical 
relationship between pay and performance is driven by changes in the 
value of executive stock and option holdings, considering only grant-
date values may ignore one of the primary channels for relating pay and 
performance.\159\ We note that this concern was raised by one 
commenter.\160\ Some commenters have

[[Page 26359]]

also suggested that the definition of executive compensation actually 
paid follow total compensation in its approach to pension plans, by 
including the total change in actuarial pension value in the 
measure.\161\ As in the case of the treatment of equity awards, 
mirroring the approach in total compensation in this way would reduce 
compliance costs. However, this alternative would introduce additional 
volatility to the compensation measure for registrants whose NEOs have 
large pension balances, as the actuarial values of the previously 
accumulated benefits are likely to be strongly impacted by factors such 
as changes in interest rates.
---------------------------------------------------------------------------

    \158\ See letters from Compensia, Cook, MDU, and Meridian.
    \159\ See supra note 140.
    \160\ See letter from SCSGP.
    \161\ See letters from MDU and SVA.
---------------------------------------------------------------------------

D. Request for Comment

    Throughout this release, we have discussed the anticipated costs 
and benefits of the proposed amendments. We request and encourage any 
interested person to submit comments regarding the proposed amendments 
and our analysis of the potential effects of the amendments. We request 
comment from the point of view of registrants, shareholders, and other 
market participants. With regard to any comments, we note that such 
comments are particularly helpful to us if accompanied by quantified 
estimates or other detailed analysis and supporting data regarding the 
issues addressed in those comments. We also are interested in comments 
on the qualitative benefits and costs we have identified and any 
benefits and costs we have overlooked.
    55. We seek comment and data on the magnitude of all of the costs 
and benefits identified as well as any other costs and benefits that 
may result from the adoption of the proposed amendments. In addition, 
we seek views regarding these costs and benefits for particular types 
of covered registrants, including small registrants, and for particular 
types of shareholders.
    56. Would the proposed disclosure facilitate shareholders' 
evaluation of a registrant's executive compensation practices? Are 
there alternative definitions of executive compensation actually paid 
and financial performance, or other types of computations or 
compensation data, which would be more useful to shareholders in 
evaluating pay-versus-performance alignment, while still satisfying the 
mandate of Exchange Act Section 14(i)? Would limiting the applicability 
of the amendments to PEO compensation rather than that of all NEOs 
affect the benefit to shareholders? Would requiring the disclosure 
separately for each NEO affect this benefit?
    57. How would the proposed treatment of equity awards, particularly 
the valuation and inclusion of such awards in executive compensation 
actually paid at the time at which they meet all vesting conditions, 
affect compliance costs and the comparability of the disclosure across 
registrants? Would the registrant's valuation of equity awards as of 
their vesting date provide new data of use to shareholders, relative to 
the compensation data currently required to be disclosed? What are the 
costs and benefits of alternative approaches to treating equity awards 
in the definition of executive compensation actually paid?
    58. How would the proposed treatment of pension plans in executive 
compensation actually paid for registrants other than smaller reporting 
companies affect the costs and benefits of the proposed amendments, 
including any effects on compliance costs and the comparability of the 
disclosure across registrants? Would the inclusion in this compensation 
measure of only the actuarial present value of benefits attributable to 
services rendered during the applicable fiscal year provide new data of 
use to shareholders, relative to the pension information currently 
required to be disclosed? Would the adjustment provide a computation 
that makes information of interest to shareholders more readily 
available to them, even if this information is already disclosed in 
another form? What are the costs and benefits of alternative approaches 
to treating pension plans in the definition of executive compensation 
actually paid?
    59. Would the proposed scaled disclosure requirements for smaller 
reporting companies reduce the compliance burden for such registrants 
while not adversely impacting shareholders? Could the disclosure be 
otherwise scaled for smaller reporting companies to minimize the 
incremental burden on smaller reporting companies while preserving the 
benefits to shareholders?
    60. What effect would the proposed amendments have on the 
incentives of boards, senior executives, and shareholders? Would the 
proposed amendments be likely to change the behavior of these parties, 
registrants, shareholders, or other market participants? Should we 
alter the proposed requirements to address that impact? If so, describe 
any changes that would address that impact and discuss any related 
costs and benefits that would arise from such a change.
    61. Is the proposal likely to lead to shareholder confusion, such 
as about the optimality of current pay-versus-performance alignment? Is 
the proposed ability to provide additional, alternative measures of 
compensation and performance, as well as the proposed flexibility in 
presentation format, sufficient to offset potential shareholder 
confusion? Would such additional measures or variation in formats 
meaningfully limit the comparability of the disclosure across 
registrants or otherwise affect the benefits of Exchange Act Section 
14(i)? Is there additional information that we could require of all 
registrants, or particular minimum standards for the presentation 
format, that would enhance comparability and the benefits to 
shareholders at a reasonable cost to registrants?
    62. What effect would the proposed amendments have on competition? 
Would the proposed amendments put registrants subject to the 
requirements or particular types of registrants subject to the 
requirements at a competitive disadvantage? If so, what changes to the 
proposed requirements could mitigate the impact while still satisfying 
the mandate of Exchange Act Section 14(i)?
    63. What effect would the proposed amendments have on market 
efficiency? Are there any positive or negative effects of the proposed 
amendments on efficiency that we should consider? How could the 
amendments be changed to promote any positive effect or to mitigate any 
negative effect on efficiency, while still satisfying the mandate of 
Exchange Act Section 14(i)?
    64. What effect would the proposed amendments have on capital 
formation? How could the amendments be changed to promote capital 
formation or to mitigate any negative effect on capital formation 
resulting from the amendments, while still satisfying the mandate of 
Exchange Act Section 14(i)?

V. Paperwork Reduction Act

A. Background

    Certain provisions of the proposed amendments contain a 
``collection of information'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\162\ The Commission is submitting the 
proposed amendments to the Office of Management and Budget (``OMB'') 
for review in accordance with the PRA.\163\ An agency may not conduct 
or sponsor, and a person is not required to comply with, a collection 
of information unless it displays a currently valid control number. The 
titles for the collections of information are:
---------------------------------------------------------------------------

    \162\ 44 U.S.C. 3501 et seq.
    \163\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.

---------------------------------------------------------------------------

[[Page 26360]]

    ``Regulation S-K'' (OMB Control No. 3235-0071); \164\
---------------------------------------------------------------------------

    \164\ The paperwork burden from Regulation S-K is imposed 
through the forms that are subject to the requirements in those 
regulations and is reflected in the analysis of those forms. To 
avoid a Paperwork Reduction Act inventory reflecting duplicative 
burdens and for administrative convenience, we assign a one-hour 
burden to Regulation S-K.
---------------------------------------------------------------------------

    ``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-0059); 
and
    ``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-0065).
    We adopted all of the existing regulations and schedules pursuant 
to the Securities Act or the Exchange Act. The regulations and 
schedules set forth the disclosure requirements for registration 
statements and proxy and information statements filed by registrants to 
help shareholders make informed investment and voting decisions. Our 
proposed amendments to existing schedules and regulations are intended 
to satisfy the requirements of Section 14(i) of the Exchange Act.
    The hours and costs associated with preparing, filing and sending 
the schedule constitute reporting and cost burdens imposed by each 
collection of information. An agency may not conduct or sponsor, and a 
person is not required to respond to, a collection of information 
unless it displays a currently valid OMB control number. Compliance 
with the amendments is mandatory. Responses to the information 
collections will not be kept confidential and there is no mandatory 
retention period for the information disclosed.

B. Summary of Collection of Information Requirements

    We are proposing to add new Item 402(v) to Regulation S-K. This 
item would require registrants to provide a table containing the values 
of the prescribed measures of executive compensation actually paid and 
the Summary Compensation Table measure of total compensation for the 
PEO and as an average for the other NEOs, as well as TSR both for the 
registrant and the peer group. The data in the table, including the 
footnote disclosure of the amounts deducted and added to the Summary 
Compensation Table measure, would be required to be tagged in XBRL. 
Proposed Item 402(v) also would require a registrant to provide a clear 
description of the relationship between executive compensation actually 
paid to its NEOs and the registrant's TSR for each of the five most 
recently completed fiscal years. A registrant also would be required to 
disclose the relationship between its TSR and peer group TSR. This 
disclosure about the relationship between a registrant's executive 
compensation actually paid and its TSR, and the disclosure about a 
registrant's TSR and peer group TSR would be required to be tagged in 
XBRL. Emerging growth companies and foreign private issuers would not 
be required to provide the disclosure. Smaller reporting companies 
would be subject to scaled disclosure requirements. The proposed 
disclosure would be required in proxy statements on Schedule 14A and 
information statements on Schedule 14C in which executive compensation 
disclosure pursuant to Item 402 of Regulation S-K is required.
    We have proposed to base much of the information required in the 
pay-versus-performance disclosure on items that are already required 
elsewhere in the executive compensation disclosure provided by 
registrants. We believe that using as a starting point the total 
compensation that registrants already are required to report in the 
Summary Compensation Table and making adjustments to those figures will 
help reduce the burden on registrants in preparing the disclosure 
required by new Item 402(v) of Regulation S-K. As discussed above, the 
proposed amendments are not expected to result in the provision of 
significant new information to shareholders, or to require registrants 
to collect significant new data, relative to current disclosure 
requirements. All of the individual components and assumptions needed 
to calculate executive compensation actually paid already must be 
reported under existing disclosure requirements, with the exception of 
vesting-date valuation assumptions for options.
    We arrived at the estimates discussed below by reviewing our burden 
estimates for similar disclosure and considering our experience with 
other tagged data initiatives. We believe that the proposed amendments 
regarding pay-versus-performance disclosure would enhance the already 
required compensation disclosure. In addition, we believe that much of 
the information required to prepare the pay-versus-performance 
disclosure would be readily available to registrants because it is 
required to be gathered, determined or prepared in order to satisfy the 
other disclosure requirements of Item 402 of Regulation S-K.
    We estimate that the average incremental burden for a registrant to 
prepare the pay-versus-performance disclosure would be 15 hours. This 
estimate includes the time and cost of preparing disclosure that has 
been appropriately reviewed, including, as applicable, by management, 
in-house counsel, outside counsel and members of the board of directors 
as well as tagging the data in XBRL format. Because this estimate is an 
average of all companies, the burden could be more or less for any 
particular company, and may vary depending on a variety of factors, 
such as the degree to which companies use the services of outside 
professionals, or internal staff and resources to tag the data in XBRL. 
This burden, as discussed in more detail below, would be added to the 
current burdens for Schedule 14A and Schedule 14C.
    As a result of the estimates discussed above, we estimate for 
purposes of the PRA that the total incremental burden on all 
registrants of the proposed amendments would be 67,500 hours for 
internal company time and $9,000,000 for the services of outside 
professionals. For the proxy and information statements on Schedule 14A 
and Schedule 14C, we estimate that 75% of the burden of preparation is 
carried by the company internally and that 25% of the burden of 
preparation is carried by outside professionals retained by the company 
at an average cost of $400 per hour. The portion of the burden carried 
by outside professionals is reflected as a cost, while the portion of 
the burden carried by the company internally is reflected in hours. 
There is no change to the estimated burden of Regulation S-K because 
the burdens that this regulation imposes are reflected in our revised 
estimates for the forms.

C. Paperwork Reduction Act Burden Estimates

    We derived our new burden hour and cost estimates by estimating the 
total amount of time it would take a registrant to prepare and review 
the disclosure requirements contained in the final rules. This estimate 
represents the average burden for all registrants, both large and 
small. Because it is difficult to determine the precise number of 
emerging growth companies, we have not adjusted the estimates to back 
the number of these companies out of our estimate, even though emerging 
growth companies would not be subject to the proposed amendments. In 
deriving our estimates, we recognize that the burdens will likely vary 
among individual registrants based on a number of factors, including 
the size and complexity of their executive compensation arrangements. 
We believe that some registrants will experience costs in excess of 
this average in the first year of compliance with the amendments and 
some registrants may

[[Page 26361]]

experience less than the average costs.\165\
---------------------------------------------------------------------------

    \165\ The number of responses reflected in the table equals the 
three-year average of the number of schedules filed with the 
Commission and currently reported by the Commission to OMB.
---------------------------------------------------------------------------

    A summary of the proposed changes is included in the table below.

                                              Table 1--Calculation of Incremental PRA Burden Estimates\165\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Current      Proposed     Current    Increase in    Proposed      Current     Increase in    Proposed
                                                  annual       annual       burden       burden       burden    professional  professional  professional
                                                responses    responses      hours        hours        hours         costs         costs         costs
                                                       (A)          (B)          (C)          (D)    (E) = C+D           (F)           (G)         = F+G
                                              ----------------------------------------------------------------------------------------------------------
Schedule 14A.................................        5,446        5,446      714,586       61,268      775,854   $85,664,277    $8,169,000   $93,833,277
Schedule 14C.................................          554          554       66,784        6,232       73,016     7,952,549       831,000     8,783,549
                                              ----------------------------------------------------------------------------------------------------------
    Total....................................  ...........  ...........  ...........       67,500  ...........  ............     9,000,000  ............
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Solicitation of Comments

    We request comments in order to evaluate: (1) Whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information would 
have practical utility; (2) the accuracy of our estimate of the burden 
of the proposed collection of information; (3) whether there are ways 
to enhance the quality, utility, and clarity of the information to be 
collected; (4) whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and (5) whether the proposed amendments will 
have any effects on any other collections of information not previously 
identified in this section.\166\
---------------------------------------------------------------------------

    \166\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments about the 
accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should send a copy to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File No. ____ . Requests 
for materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. 
____, and be submitted to the Securities and Exchange Commission, 
Office of FOIA Services, 100 F Street NE., Washington, DC 20549-2736. 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days of publication.

VI. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \167\ requires the 
Commission, in promulgating rules under Section 553 of the 
Administrative Procedures Act,\168\ to consider the impact of those 
rules on small entities. Section 603(a) of the RFA \169\ generally 
requires the Commission to undertake a regulatory flexibility analysis 
of all proposed amendments to determine the impact of such rulemaking 
on ``small entities.''
---------------------------------------------------------------------------

    \167\ 5 U.S.C. 601 et seq.
    \168\ 5 U.S.C. 553.
    \169\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Proposed Action

    The proposed amendments are designed to implement Exchange Act 
Section 14(i), which was added by Section 953(a) of the Dodd-Frank Act 
and would exempt certain reporting companies. Specifically, the 
proposed amendments would require registrants, other than emerging 
growth companies and foreign private issuers, to disclose in any proxy 
or information statement for which disclosure under Item 402 of 
Regulation S-K is required, the relationship between executive 
compensation actually paid to the NEOs and the financial performance of 
the registrant for the three most recently completed fiscal years, 
taking into account any change in the value of the shares of stock and 
dividends of the registrant and any distributions.

B. Legal Basis

    We are proposing the amendments pursuant to Section 953(a) of the 
Dodd-Frank Act and Sections 3(b), 14, 23(a) and 36 of the Exchange Act.

C. Small Entities Subject to the Proposed Amendments

    The proposed amendments would affect some companies that are small 
entities. For purposes of the RFA, under our rules, an issuer, other 
than an investment company,\170\ is a ``small business'' or ``small 
organization'' if it has total assets of $5 million or less as of the 
end of its most recent fiscal year and is engaged or proposing to 
engage in an offering of securities which does not exceed $5 
million.\171\ We estimate that there are approximately 428 issuers that 
may be considered small entities. The proposed amendments would affect 
small entities that have a class of securities that are registered 
under Section 12 of the Exchange Act. An investment company, including 
a business development company, is considered to be a ``small 
business'' if it, together with other investment companies in the same 
group of related investment companies, has net assets of $50 million or 
less as of the end of its most recent fiscal year.\172\ We believe that 
the proposal would affect some small entities that are business 
development companies who have a class of securities registered under 
Section 12 of the Exchange Act. We estimate that there are 
approximately five business development companies that may be 
considered small entities.\173\
---------------------------------------------------------------------------

    \170\ For purposes of the RFA, an investment company is a 
``small business'' or ``small organization'' that, together with 
other investment companies in the same group of related investment 
companies, has net assets of $50 million or less as of the end of 
its most recent fiscal year. [17 CFR 270.0-10].
    \171\ See Securities Act Rule 157 [17 CFR 230.157]; Exchange Act 
Rule 0-10(a) [17 CFR 240.0-10(a)].
    \172\ 17 CFR 270.0-10(a).
    \173\ We estimate that there are 13 business development 
companies that would be subject to the proposed amendment, five of 
which may be considered small entities for purposes of the RFA.
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D. Duplicative, Overlapping or Conflicting Federal Rules

    As noted above, much of the information required by the proposed

[[Page 26362]]

amendments is derived from information currently required to be 
reported under existing disclosure rules. Nevertheless, we believe that 
the repackaging of this information in the required pay-versus-
performance disclosure may allow shareholders to more quickly and 
easily process the information accurately and thereby lower the burden 
on shareholders, including shareholders of smaller entities, of 
evaluating executive compensation packages. We do not believe that the 
proposed amendments would conflict with other federal rules.

E. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposed amendments, we considered the following alternatives:
     Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     Clarifying, consolidating or simplifying compliance and 
reporting requirements under the rules for small entities;
     Use of performance rather than design standards; and
     Exempting small entities from all or part of the proposed 
amendments.
    The proposed amendments would require clear disclosure of 
prescribed measures of executive compensation actually paid and the 
company's financial performance and the relationship between these 
measures. All of the individual components needed to calculate 
executive compensation actually paid already must be reported under 
current disclosure rules, with the exception of the values to be 
included with respect to pension benefits and options. Given the 
straightforward nature of the proposed disclosure, we do not believe 
that it is necessary to exempt small entities from the proposed 
requirements. However, we have proposed scaled disclosure requirements 
for smaller reporting companies in an attempt to limit the compliance 
burden that would be imposed on such companies.\174\ Entities that are 
smaller reporting companies would be subject to the proposed 
amendments, but would provide only three years of disclosure, instead 
of the proposed five years for all other registrants. Also, the 
proposed amendments would require smaller reporting companies to 
disclose absolute TSR, but they would not be required to disclose peer 
group TSR. In addition, because the scaled compensation disclosure that 
applies to smaller reporting companies does not include pension plans, 
the pension plan adjustment would not apply to smaller reporting 
companies. To the extent that a small entity is a registrant, we 
believe that there are few, if any, small entities that do not qualify 
as smaller reporting companies because it is unlikely that an entity 
with total assets of $5 million or less would have a public float of 
$75 million or more. A small entity, therefore, would likely be subject 
to the scaled disclosure requirements described above that are proposed 
for smaller reporting companies. We believe this will minimize any 
adverse impact on these companies of providing new disclosures which 
they do not currently provide.
---------------------------------------------------------------------------

    \174\ A smaller reporting company is an issuer, other than 
certain classes of issuers (including an investment company), that 
had a public float of less than $75 million as of the end of its 
most recently completed second fiscal quarter, or in the case of an 
initial registration statement under the Securities Act or Exchange 
Act for the shares of its common equity, had a public float of less 
than $75 million as of a date within 30 days of the date of the 
filing of the registration statement. See Securities Act Rule 405 
[17 CFR 230.405]. In the case of an issuer whose public float was 
zero, an issuer could qualify as a smaller reporting company if it 
had annual revenues of less than $50 million during the most 
recently completed fiscal year for which audited financial 
statements are available.
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    With respect to compliance timetables, the proposed rules provide 
smaller reporting companies with transitional relief whereby such 
companies would be required to provide two years of data, instead of 
three, in the first proxy filing after the rules become effective, and 
three years of data in subsequent proxy filings. The proposed rules 
also provide smaller reporting companies with a phase-in of the 
requirement to provide the disclosure in XBRL format.
    Although the proposed amendments would require disclosure of 
prescribed measures of executive compensation actually paid and 
financial performance, they would permit issuers significant 
flexibility in presenting the relationship between these measures. For 
example, issuers, including small entities, could describe the 
relationship in narrative form or by means of a graph or chart. In this 
respect, the proposed amendments make use of both design and 
performance standards as a means of balancing the need for uniform 
disclosure across registrants with the desire to provide registrants 
with flexibility to describe their pay-versus-performance relationship 
in a format that is best suited to their particular circumstances.
    Commenters are asked to described the nature of any impact on small 
entities and provide empirical data to support the extent of the 
impact.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\175\ a rule is ``major'' if it has resulted, or is likely 
to result in:
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    \175\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the U.S. economy of $100 million or 
more;
     a major increase in costs or prices for consumers or 
individual industries; or
     significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether our proposal would be a ``major 
rule'' for purposes of the Small Business Regulatory Enforcement 
Fairness Act. We solicit comment and empirical data on:
     The potential effect on the U.S. economy on an annual 
basis;
     any potential increase in costs or prices for consumers or 
individual industries; and
     any potential effect on competition, investment, or 
innovation.

VIII. Statutory Authority and Text of Proposed Amendments

    We are proposing the amendments contained in this document under 
the authority set forth in Section 953(a) of the Dodd-Frank Act and 
Sections 3(b), 14, 23(a) and 36 of the Exchange Act.

List of Subjects in 17 CFR Parts 229 and 240

    Reporting and recordkeeping requirements; Securities.

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
1. The general authority citation for part 229 continues to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 
80a-37, 80a-38(a), 80a-39, 80b-11,

[[Page 26363]]

and 7201 et seq., and 18 U.S.C. 1350 unless otherwise noted.
* * * * *
0
2. Amend Sec.  229.402 by adding paragraph (v) to read as follows:


Sec.  229.402  Executive compensation.

* * * * *
    (v) Pay versus performance. (1) Provide the information specified 
in paragraph (v)(2) of this item for each of the registrant's last five 
completed fiscal years in the following tabular format:

                                                                 Pay Versus Performance
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Average summary
                                                                   compensation table   Average compensation
        Year          Summary compensation      Compensation        total for non-PEO      actually paid to     Total shareholder     Peer group total
                       table total for PEO  actually paid to PEO     named executive        non-PEO named            return          shareholder return
                                                                        officers         executive officers
(a)                                 (b)                   (c)                   (d)                   (e)                   (f)                   (g)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      ....................  ....................  ....................  ....................  ....................  ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (2) The Table shall include:
    (i) The fiscal year covered (column (a));
    (ii) The PEO's total compensation for the covered fiscal year as 
reported in the Summary Compensation Table pursuant to paragraph 
(c)(2)(x) of this Item, or paragraph (n)(2)(x) for smaller reporting 
companies (column (b)), and the average total compensation reported for 
the remaining named executive officers reported pursuant to those 
paragraphs (column (d));
    (iii) The executive compensation actually paid to the PEO (column 
(c)) and the average executive compensation actually paid to the 
remaining named executive officers (column (e)). If more than one 
person served as the registrant's PEO during a fiscal year, include in 
column (c) the aggregate compensation actually paid for the persons who 
served as PEO. For purposes of columns (c) and (e) of the table 
required by paragraph (v)(1) of this Item, executive compensation 
actually paid shall be the total compensation for the covered fiscal 
year for each named executive officer as provided in paragraph 
(c)(2)(x) of this Item, or paragraph (n)(2)(x) for smaller reporting 
companies, adjusted to:
    (A) Deduct the aggregate change in the actuarial present value of 
the named executive officer's accumulated benefit under all defined 
benefit and actuarial pension plans reported in the Summary 
Compensation Table in paragraph (c)(2)(viii)(A) of this Item;
    (B) Add the service cost under all defined benefit and actuarial 
pension plans reported in the Summary Compensation Table in paragraph 
(c)(2)(viii)(A) calculated as the actuarial present value of each named 
executive officer's benefit under all such plans attributable to 
services rendered during the covered fiscal year, consistent with 
``service cost'' as defined in FASB ASC Topic 715; and
    (C) Deduct the amounts reported in the Summary Compensation Table 
pursuant to paragraphs (c)(2)(v) and (vi) of this Item and add in their 
place the fair value on the vesting date of all stock awards, and all 
options awards, with or without tandem SARs (including awards that 
subsequently have been transferred), for which all applicable vesting 
conditions were satisfied during the covered fiscal year.
    (iv) For purposes of columns (f) and (g) of the table required by 
paragraph (v)(1) of this Item, for each year disclose the cumulative 
total shareholder return of the registrant (column (f)) and peer group 
cumulative total shareholder return (column (g)) calculated in the same 
manner, and over the same measurement period, as under Item 201(e) of 
Regulation S-K. The term ``measurement period'' shall be the period 
beginning at the ``measurement point'' established by the market close 
on the last trading day before the registrant's earliest fiscal year in 
the table, through and including the end of the registrant's last 
completed fiscal year. The closing price of the measurement point must 
be converted into a fixed investment, stated in dollars, in the 
registrant's stock (or in the stocks represented by the peer group). 
For each fiscal year, the amount included in the table shall be the 
cumulative total shareholder return as of the end of that year. The 
same methodology must be used in calculating both the registrant's 
total shareholder return and that of the peer group.
    (3) For each amount disclosed in columns (c) and (e) of the table 
required by paragraph (v)(1), disclose in a footnote to the table for 
the PEO and the average remaining named executive officer compensation 
each of the amounts deducted and added pursuant to paragraph 
(v)(2)(iii). For disclosure of the executive compensation actually paid 
to named executive officers other than the PEO, provide the amounts 
required under this paragraph as averages.
    (4) For the value of equity awards added pursuant to paragraph 
(v)(2)(iii)(C), disclose in a footnote to the table required by 
paragraph (v)(1) any assumption made in the valuation that differs 
materially from those disclosed pursuant to Instruction 1 to Item 
402(c)(2)(v) and (vi), or for smaller reporting companies, Instruction 
1 to Item 402(n)(2)(v) and (vi).
    (5) In proxy or information statements in which disclosure is 
required pursuant to this Item, use the information provided in the 
table required by paragraph (v)(1) to provide a clear description of 
the relationship between:
    (i) The executive compensation actually paid by the registrant to 
the PEO (column (c)) and the average of the executive compensation 
actually paid to the named executive officers other than the PEO 
(column (e)) listed in the Summary Compensation Table, and
    (ii) The cumulative total shareholder return of the registrant 
(column (f)), for each of the registrant's last five completed fiscal 
years. This description shall also include a comparison of the 
cumulative total shareholder return of the registrant (column (f)) and 
cumulative total shareholder return of the registrant's peer group 
(column (g)) over the same period.
    (6) The disclosure required to be provided pursuant to this 
paragraph (v) shall appear with, and in the same format as, the rest of 
the disclosure required to be provided pursuant to paragraph (v) and, 
in addition, shall be electronically formatted using the eXtensible 
Business Reporting Language (XBRL) in accordance with the EDGAR Filer 
Manual (17 CFR 232.11) as an exhibit to definitive Schedule 14A (17 CFR 
240.14a-101) or definitive Schedule 14C (17 CFR 240.14c-101). Each 
amount required to be disclosed in

[[Page 26364]]

the table pursuant to paragraph (v)(1) must be tagged separately. The 
disclosure required to be provided pursuant to paragraphs (v)(3) 
through (5) of this Item must be block-text tagged.

Instructions to Item 402(v)

    1. Transitional relief. A registrant may provide the disclosure 
required by paragraph (v) for three years, instead of five years, in 
the first filing in which it provides this disclosure, and provide 
disclosure for an additional year in each of the two subsequent annual 
filings in which this disclosure is required.
    2. Repricings and other modifications. If at any time during the 
last completed fiscal year, the registrant has adjusted or amended the 
exercise price of previously vested options or SARs held by a named 
executive officer, whether through amendment, cancellation or 
replacement grants, or any other means, or otherwise has materially 
modified such awards, the registrant shall include in the compensation 
reported under paragraph (v)(2)(iii)(C) of this Item the incremental 
fair value, computed as the excess fair value of the modified award 
over the fair value of the original award upon vesting of the modified 
award. If the modified award is subject to multiple vesting dates, the 
registrant shall include in the compensation reported under paragraph 
(v)(2)(iii)(C) the pro rata incremental fair value paid at each vesting 
date.
    3. Fair value. Fair value amounts shall be computed in a manner 
consistent with the fair value measurement guidance in FASB ASC Topic 
718.
    4. Presentation. If more than one person served as the PEO of the 
registrant during the covered fiscal year, then the compensation for 
all persons who served as the PEO of the registrant for that year shall 
be aggregated.
    5. Exempted registrants. A registrant is not required to comply 
with paragraph (v) of this Item if it is an emerging growth company, as 
defined in Section 3(a) of the Exchange Act (15 U.S.C. 78c(a)).
    6. New registrants. Information for fiscal years prior to the last 
completed fiscal year will not be required if the registrant was not 
required to report pursuant to section 13(a) or 15(d) of the Exchange 
Act (15 U.S.C. 78m(a) or 78o(d)) at any time during that year.
    7. Peer group. For purposes of determining the total shareholder 
return of the registrant's peer group, the registrant shall use the 
same index or issuers used for purposes of Item 201(e)(1)(ii) or, if 
applicable, the companies it uses as a peer group for purposes of Item 
402(b). If the peer group is not a published industry or line-of-
business index, the identity of the issuers comprising the group must 
be disclosed. The returns of each component issuer of the group must be 
weighted according to the respective issuers' stock market 
capitalization at the beginning of each period for which a return is 
indicated.
    8. Smaller reporting companies. A registrant that qualifies as a 
``smaller reporting company,'' as defined by Sec.  229.10(f)(1), may 
provide the information required by paragraph (v) for three years, 
instead of five years. A smaller reporting company may provide the 
disclosure required by paragraph (v) for only two fiscal years in the 
first filing in which it provides this disclosure, and is not required 
to provide the disclosure required by paragraph (v)(5) with respect to 
the total shareholder return of its peer group. For purposes of 
paragraph (v)(2)(iii) of this Item with respect to smaller reporting 
companies, executive compensation actually paid shall be the total 
compensation for the covered fiscal year for each named executive 
officer as provided in paragraph (n)(2)(x) of this Item, adjusted to 
deduct the amounts reported in the Summary Compensation Table pursuant 
to paragraphs (n)(2)(v) and (vi) of this Item, and to add in their 
place the fair value on the vesting date of the amounts added in 
paragraph (v)(2)(iii)(C). Disclose in a footnote to the table required 
pursuant to paragraph (v)(1) for the PEO and average remaining named 
executive officer compensation the amounts deducted from, and added to, 
the Summary Compensation Table pursuant to this instruction. A smaller 
reporting company is required to comply with paragraph (v)(6) in the 
third filing in which it provides the disclosure required by paragraph 
(v).
    9. Incorporation by reference. The information in paragraph (v) of 
this Item will not be deemed to be incorporated by reference into any 
filing under the Securities Act or the Exchange Act, except to the 
extent that the registrant specifically incorporates it by reference.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
3. The authority citation for Part 240 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78m, 78n, 78n-1, 78o, 78o-4, 78o-
10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-
23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7210 et seq.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5521(e)(3); 18 U.S.C. 1350; and 
Pub. L. 111-203, 939A, 124 Stat. 1376, (2010), unless otherwise 
noted.
* * * * *
0
4. Amend Sec.  240.14a-101 by adding Item 25 to read as follows:


Sec.  240.14a-101  Schedule 14A. Information required in proxy 
statement.

Schedule 14A Information
* * * * *
    Item 25 Exhibits. Provide the information required to be disclosed 
by Item 402(v)(1) of Regulation S-K (17 CFR 229.402(v)(1)) in an 
exhibit to this Schedule 14A electronically formatted using the 
eXtensible Business Reporting Language (XBRL) interactive data 
standard.

    By the Commission.

    Dated: April 29, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-10429 Filed 5-6-15; 8:45 am]
 BILLING CODE 8011-01-P