Pay Versus Performance, 55134-55197 [2022-18771]

Download as PDF 55134 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 232, and 240 [Release Nos. 34–95607; File No. S7–07– 15] RIN 3235–AL00 Pay Versus Performance Securities and Exchange Commission. ACTION: Final rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is adopting amendments to implement Section 14(i) (‘‘Section 14(i)’’) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’), as added by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’). Section 14(i) directs the Commission to adopt rules requiring registrants to provide disclosure of pay versus performance. The disclosure is required in proxy or information statements in which executive compensation disclosure is required. The disclosure requirements do not apply to emerging growth companies, registered investment companies, or foreign private issuers. DATES: Effective date: This final rule is effective on October 11, 2022. Compliance date: Companies (other than emerging growth companies, registered investment companies, or foreign private issuers) must begin to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 of Regulation S–K (as defined below) disclosure for fiscal years ending on or after December 16, 2022. FOR FURTHER INFORMATION CONTACT: John Byrne, Special Counsel, Office of Small Business Policy, at (202) 551–3460, Division of Corporation Finance. SUPPLEMENTARY INFORMATION: The Commission is adopting an amendment to add new paragraph (v) to 17 CFR 229.402 (‘‘Item 402 of Regulation S–K’’); and amending 17 CFR 232.405 (‘‘Item 405 of Regulation S–T’’), 17 CFR 240.14a-101 (‘‘Schedule 14A’’), and 17 CFR 240.14c-101 (‘‘Schedule 14C’’), each under the Exchange Act. khammond on DSKJM1Z7X2PROD with RULES3 SUMMARY: Table of Contents I. Introduction A. Background B. Overview of Final Amendments II. Discussion of Final Amendments A. New Item 402(v) of Regulation S–K 1. Application and Operation of Item 402(v) of Regulation S–K VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 i. Proposed Amendments ii. Comments iii. Final Amendments 2. Format and Location of Disclosure i. Proposed Amendments ii. Comments iii. Final Amendments B. Executives Covered 1. Proposed Amendments 2. Comments 3. Final Amendments C. Determination of Executive Compensation Actually Paid 1. Deduction of Change in Actuarial Present Value and Addition of Actuarially Determined Service Cost and Prior Service Cost i. Proposed Amendments ii. Comments iii. Final Amendments 2. Inclusion of Above-Market or Preferential Earnings on Deferred Compensation That Is Not Tax Qualified i. Proposed Amendments ii. Comments iii. Final Amendments 3. Equity Awards i. Proposed Amendments ii. Comments iii. Final Amendments D. Measures of Performance 1. Requirement To Disclose TSR and Peer Group TSR i. Proposed Amendments ii. Comments iii. Final Amendments 2. Requirement To Disclose Net Income i. Amendments Considered in the Reopening Release ii. Comments iii. Final Amendments 3. Tabular List of the Registrant’s ‘‘Most Important’’ Performance Measures i. Amendments Considered in the Reopening Release ii. Comments iii. Final Amendments 4. Requirement To Disclose a CompanySelected Measure i. Amendments Considered in the Reopening Release ii. Comments iii. Final Amendments E. Time Period Covered 1. Proposed Amendments 2. Comments 3. Final Amendments F. Permitted Additional Pay-VersusPerformance Disclosure 1. Proposed Amendments 2. Comments 3. Final Amendments G. Required Disclosure for Smaller Reporting Companies 1. Proposed Amendments 2. Comments 3. Final Amendments III. Other Matters IV. Compliance Dates V. Economic Analysis A. Background B. Baseline 1. Affected Parties 2. Existing Disclosures and Analyses 3. Executive Compensation Practices C. Discussion of Economic Effects PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 1. Introduction 2. Benefits 3. Costs 4. Implementation Alternatives i. Registrants and Filings Subject to the Disclosure Requirement ii. General Disclosure Requirements iii. Compensation Measures iv. Performance Measures VI. Paperwork Reduction Act A. Background B. Summary of Comment Letters and Revisions to PRA Estimates C. Summary of Collection of Information Requirements D. Incremental and Aggregate Burden and Cost Estimates for the Final Amendments VII. Final Regulatory Flexibility Analysis A. Need For, and Objectives of, the Final Rules B. Significant Issues Raised by Public Comments C. Small Entities Subject to the Final Amendments D. Projected Reporting, Recordkeeping, and Other Compliance Requirements E. Agency Action To Minimize Effect on Small Entities Statutory Authority and Text of Amendments I. Introduction A. Background Section 953(a) of the Dodd-Frank Act 1 (‘‘Section 953(a)’’) added Section 14(i) 2 to the Exchange Act.3 Section 14(i) mandates that the Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders of the issuer a clear description of any compensation required to be disclosed by the issuer under Item 402 of Regulation S–K (or any successor thereto), including, for any issuer other than an emerging growth company, information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. Section 14(i) also states that an issuer may include a graphic representation of the information required to be disclosed. As a part of the Dodd-Frank Act legislative process, in a 2010 report, the Senate Committee on Banking, Housing and Urban Affairs stated that the disclosure required under Section 14(i) 1 Public Law 111–203, 124 Stat. 1376 (2010). U.S.C. 78n(i). 3 15 U.S.C. 78a et seq. Subsequent to the addition of Section 14(i) to the Exchange Act, Section 102(a)(2) of the Jumpstart Our Business Startups Act amended 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). 2 15 E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 ‘‘may take many forms.’’ 4 In addition, the report indicated that the relationship between executive pay and performance has become a ‘‘significant concern of shareholders,’’ and that the required disclosure should ‘‘add to corporate responsibility,’’ as registrants will be required to provide clearer executive pay disclosures.5 In 2015, the Commission proposed a new rule to implement Section 953(a) by creating a new requirement in Item 402 of Regulation S–K. The proposed new item would require a registrant to provide a clear description of (1) the relationship between executive compensation actually paid to the registrant’s named executive officers (‘‘NEOs’’) (including the registrant’s principal executive officer (or persons acting in a similar capacity during the last completed fiscal year) (‘‘PEO’’)) 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 registrant’s five most recently completed fiscal years.6 The comment period for the Proposing Release was reopened in 2022 to permit commenters to further analyze and comment upon the proposed rules in light of developments since the publication of the Proposing Release and our further consideration of the Section 953(a) mandate.7 In the Reopening Release, we stated that we were considering, and requested public comment on, certain additional disclosure requirements that may better implement the Section 953(a) mandate by providing investors with additional decision-relevant data.8 4 Report of the Senate Committee on Banking, Housing and Urban Affairs to accompany S. 3217, S. Rep. No. 111–176, at 135 (2010) (‘‘Senate Report’’). The report 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.’’ 5 Id. 6 See Pay Versus Performance, Release No. 34– 74835 (Apr. 29, 2015) [80 FR 26329 (May 7, 2015)] (‘‘Proposing Release’’). 7 This reopening of the comment period was set out in Reopening of Comment Period for Pay Versus Performance Release No. 34–94074 (Jan. 27, 2022) [87 FR 5939 (Feb. 2, 2022)] (‘‘Reopening Release’’). 8 A comment letter from two members of Congress raised concerns about the Reopening Release. See letter from Sen. Pat Toomey and Sen. Richard Shelby, dated Feb. 1, 2022 (‘‘Toomey/ Shelby’’). Specifically, the letter criticized the Commission for reopening the comment period on the Proposing Release and seeking comment on a number of regulatory alternatives without updating the cost-benefit analysis and analysis required by the Paperwork Reduction Act and the Regulatory Flexibility Act. The letter asserted that the approach VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 We believe the disclosure mandated by Section 953(a) is intended to provide investors with more transparent, readily comparable, and understandable disclosure of a registrant’s executive compensation, so that they may better assess a registrant’s executive compensation program when making voting decisions, for example when exercising their rights to cast advisory votes on executive compensation under Exchange Act Section 14A or electing directors.9 This belief is supported by the fact that 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.’’ 10 These included Section 951 of the Dodd-Frank Act, which enacted new Exchange Act Section 14A,11 and Section 953(b) of the DoddFrank Act. These provisions required, respectively, that, not less than every three years, a separate resolution be put to a non-binding shareholder vote to approve compensation of executives; 12 and that registrants provide disclosure of the ratio of the median annual total compensation of employees to the taken in the Reopening Release significantly impaired the public’s ability to comment thoughtfully on the proposals and was inconsistent with the Administrative Procedure Act. In response to these concerns, we note that the Reopening Release included a robust discussion of the additional disclosures under consideration and solicited comment on specific aspects of those disclosures. The Reopening Release also discussed the potential benefits and costs of the additional disclosures, including their impact on efficiency, competition and capital formation. Finally, the Reopening Release discussed how the additional disclosures might affect smaller registrants and solicited comment on approaches that would minimize the impact on smaller registrants, such as exempting smaller reporting companies from certain aspects of the additional disclosures. Given the discussion included in the Proposing Release and subsequent Reopening Release, we believe the final rules satisfy the requirements of the Administrative Procedure Act and other applicable statutes. Moreover, we received numerous comments from members of the public on the additional disclosures described in the Reopening Release, including comments on the economic effects of the additional disclosure, and we have considered those comments in adopting the final rules and made certain changes in response. 9 See generally Proposing Release at Section I. 10 Dodd-Frank Act, H.R. Rep. 111–157, at 827 (2010). 11 15 U.S.C. 78n–1. 12 Pursuant to the mandate in Section 14A of the Exchange Act, we adopted rules requiring a shareholder advisory vote to approve the compensation of a registrant’s 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 under Commission rules. See Shareholder Approval of Executive Compensation and Golden Parachute Compensation, Release No. 33–9178 (Jan. 25, 2011) [76 FR 6010] (Feb. 2, 2011). PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 55135 annual total compensation of the chief executive officer.13 We believe the disclosure mandated by Section 14(i) will allow investors to assess a registrant’s executive compensation actually paid relative to its financial performance more readily and at a lower cost than under the existing executive compensation disclosure regime. Under Item 402 of Regulation S–K, which specifies the information that must be included when the applicable form or schedule requires executive compensation disclosure, specific information regarding financial performance is already required, including in the Performance Graph in 17 CFR 229.201(e) (‘‘Item 201(e) of Regulation S–K’’), the Supplementary Financial Information in 17 CFR 229.302 (Item 302), and Management’s Discussion and Analysis of Financial Condition and Results of Operations in 17 CFR 220.303 (Item 303). In addition, Item 402 of Regulation S–K also requires detailed disclosure of executive compensation and principles-based disclosure requirements regarding the relationship between pay and performance.14 There is no single place, however, where issuers must provide investors with direct comparisons of an executive’s pay with their company’s performance, and specifically financial performance, particularly if investors are interested in that comparison over a timespan longer than the most recent reporting period. Existing disclosures generally provide the necessary components to make these comparisons, including data required for calculations that aid in these comparisons, but doing so may be time-consuming and costly. We believe this information is important to investors in evaluating executive compensation, and that disclosures about executive compensation may be 13 In 2015, we adopted rules to implement Section 953(b) of the Dodd-Frank Act. See Pay Ratio Disclosure, Release No. 33–9877 (Aug. 5, 2015) [80 FR 50103] (Aug. 18, 2015). 14 The Compensation Discussion and Analysis (‘‘CD&A’’) required by 17 CFR 229.402(b) (‘‘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 CFR 229.402(b)(1). With respect to performance, Item 402(b)(2) of Regulation S–K 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. 17 CFR 229.402(b)(2)(v) through (vii). E:\FR\FM\08SER3.SGM 08SER3 55136 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations most meaningful to investors when placed in the context of the company’s financial performance.15 Indeed, we are aware that certain third parties (e.g., proxy advisors or compensation consultants) perform such analyses and charge clients for access to the resulting data.16 Requiring registrants to compute and report this information will make this information equally accessible to all investors in a consistent manner. By specifically referencing disclosure of ‘‘information that shows the relationship between executive compensation actually paid and . . . financial performance of the issuer,’’ Section 14(i) calls for information that will supplement management’s discussion of material elements of executive compensation in the CD&A. In addition, we believe this disclosure will provide investors with important and decision-useful information for comparison purposes in one place when they evaluate a registrant’s executive compensation practices and policies, including for purposes of the shareholder advisory vote on executive compensation, votes on other compensation matters, director elections, or when making investment decisions.17 Section 14(i) did not expressly prescribe the manner in which issuers would disclose the required information and we have exercised our discretion to provide for a consistent format that we Value of initial fixed $100 investment based on: Compensation actually paid to PEO Total shareholder return Peer group total shareholder return * Net income [Companyselected measure] * (b) (c) (d) (e) (f) (g) (h) (i) ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... (a) Y1 ...................................................... Y2 ...................................................... Y3 ...................................................... Y4 * .................................................... Y5 * .................................................... 15 See infra Section V.C.2. infra Section V.B.2. 17 For example, academic researchers find that the salience and readability of disclosures about executive compensation affect say-on-pay votes. See, e.g., Danial Hemmings, Lynn Hodgkinson, & Gwion Williams, It’s OK to Pay Well, if You Write Well: The Effects of Remuneration Disclosure Readability, 47 J. Bus. Fin. & Accounting 547 (2020); and Reggy Hooghiemstra, Yu Flora Kuang, & Bo Qin, Does Obfuscating Excessive CEO Pay Work? The Influence of Remuneration Report Readability on Say-on-Pay Votes, 47 Accounting & Bus. Res. 695 (2017). 18 Item 201(e) of Regulation S–K sets forth the specific disclosure requirements for the issuer’s stock performance graph, which is required to be included in the annual report to security holders provided for by 17 CFR 240.14a–3 and 240.14c–3. The Item provides that cumulative TSR is calculated by dividing the sum of the cumulative 16 See khammond on DSKJM1Z7X2PROD with RULES3 The amendments add new 17 CFR 229.402(v) (‘‘Item 402(v) of Regulation S–K’’), which requires registrants to describe the relationship between the executive compensation actually paid by the registrant and the financial performance of the registrant over the time horizon of the disclosure. Item 402(v) of Regulation S–K requires disclosure of the cumulative TSR of the registrant (substantially as defined in Item 201(e) of Regulation S–K),18 the TSR of the registrant’s peer group, the registrant’s net income, and a measure chosen by the registrant and specific to the registrant (‘‘Company-Selected Measure’’) as the measures of financial performance. The final rules require the following tabular disclosures, with the asterisked items indicating portions of the final rules from which smaller reporting companies (‘‘SRCs’’) 19 are exempt: 20 Average compensation actually paid to non-PEO NEOs Year 19:00 Sep 07, 2022 B. Overview of Final Amendments Average summary compensation table total for non-PEO NEOs Summary compensation table total for PEO VerDate Sep<11>2014 considered in the Reopening Release, with some modifications to reflect public comment. As discussed in more detail below, the final rules require registrants to present disclosure that reflects the specific situation of the registrant with respect to pay-versusperformance, and while also providing pay-versus-performance disclosure that can be readily compared across registrants. believe furthers the statutory objectives of making pay-versus-performance data clear and easy for investors to evaluate. Standardizing the format and presentation of data, in particular quantitative metrics, to promote such ease of use requires incremental costs for issuers. We have elected not to pursue a wholly principles-based approach because, among other reasons, such a route would limit comparability across issuers and within issuers’ filings over time, as well as increasing the possibility that some issuers would choose to report only the most favorable information. In addition, as we describe more extensively below, the final rules require that issuers calculate the value of certain equity and pension awards in more detail than would have been required in the proposed rule. These changes, in our view, will result in disclosures that more accurately represent the time when the awards change in value, which is important for investors to be able to assess whether such changes correspond to company performance over the appropriate time period. We received many comment letters in response to the Proposing Release and the Reopening Release. After taking into consideration these public comments, we are adopting the proposed rules, together with certain of the supplemental disclosure requirements Jkt 256001 amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the registrant’s share price at the end and the beginning of the measurement period; by the share price at the beginning of the measurement period. 19 A ‘‘smaller reporting company’’ means, in the case of issuers required to file reports under Sections 13(a) or 15(d) of the Exchange Act, an issuer that is not an investment company, an assetbacked issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (1) had a public float of less than $250 million (as of the last business day of the issuer’s most recently completed second fiscal quarter); or (2) had annual revenues of less than $100 million (as of the most recently completed fiscal year for which audited financial statements are available) and either: (i) no public float (as of the last business day of the issuer’s most recently completed second fiscal quarter); or (ii) a public float of less than $700 million (as of the last business day of the issuer’s PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 most recently completed second fiscal quarter). 17 CFR 240.12b–2; and 17 CFR 229.10. Business development companies (‘‘BDCs’’), which are a type of closed-end investment company that is not registered under the Investment Company Act, do not fall within the SRC definition, and thus do not qualify for the scaled disclosures that we are adopting for SRCs. See infra Section II.G (discussing our considerations with respect to SRC disclosure requirements). 20 The title of column (i) of the table, ‘‘CompanySelected Measure,’’ would be replaced with the name of the registrant’s most important measure, and that column would include the numerically quantifiable performance of the issuer under such measure for each covered fiscal year. For example, if the Company-Selected Measure for the most recent fiscal year was total revenue, the company would title the column ‘‘Total Revenue’’ and disclose its quantified total revenue performance in each covered fiscal year. E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations In addition, registrants are required to use the information in the above table to provide clear descriptions of the relationships between compensation actually paid and three measures of financial performance, as follows: describe the relationship between (a) the executive compensation actually paid to the registrant’s PEO and (b) the average of the executive compensation actually paid to the registrant’s remaining NEOs to (i) the cumulative TSR of the registrant, (ii) the net income of the registrant, and (iii) the registrant’s Company-Selected Measure, in each case over the registrant’s five most recently completed fiscal years. Registrants are also required to provide a clear description of the relationship between the registrant’s TSR and the TSR of a peer group chosen by the registrant, also over the registrant’s five most recently completed fiscal years. Registrants have flexibility as to the format in which to present the descriptions of these relationships, whether graphical, narrative, or a combination of the two. Registrants will also have the flexibility to decide whether to group any of these relationship disclosures together when presenting their clear description disclosure, but any combined description of multiple relationships must be ‘‘clear.’’ SRCs will only be required to present such clear descriptions with respect to the measures they are required to include in the table and for their three, rather than five, most recently completed fiscal years. A registrant that is not an SRC also will be required to provide an unranked list of the most important financial performance measures used by the registrant to link executive compensation actually paid to the registrant’s NEOs during the last fiscal year to company performance. Although, as discussed below, registrants may include non-financial performance measures in this list, they must select the Company-Selected Measure from the financial performance measures included in this list, and it must be the financial performance measure that in the registrant’s assessment represents the most important performance measure (that is not otherwise required to be disclosed in the table) used by the registrant to link compensation actually paid to the registrant’s NEOs, for the most recently completed fiscal year, to company performance.21 21 Registrants that do not use any financial performance measures to link executive compensation actually paid to company VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 As discussed below, the final rules permit registrants to voluntarily provide supplemental measures of compensation or financial performance (in the table or in other disclosure), and other supplemental disclosures, so long as any such measure or disclosure is clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure.22 The final rules apply to all reporting companies except foreign private issuers, registered investment companies, and emerging growth companies (‘‘EGCs’’).23 As proposed, BDCs will be treated in the same manner as issuers other than registered investment companies and, therefore, be subject to the disclosure requirement of new Item 402(v) of Regulation S–K. II. Discussion of Final Amendments A. New Item 402(v) of Regulation S–K 1. Application and Operation of Item 402(v) of Regulation S–K i. Proposed Amendments We proposed including the payversus-performance disclosure in a new Item 402(v) of Regulation S–K, as 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. We proposed requiring registrants to include the Item 402(v) of Regulation S– K disclosure in any proxy or information statement for which disclosure under Item 402 of Regulation performance, or that only use measures already required to be disclosed in the table, would not be required to disclose a Company-Selected Measure or its relationship to executive compensation actually paid. 22 See infra Section II.F.3. 23 ‘‘Emerging growth company’’ means an issuer that had total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year. An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of: (i) the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933 [15 U.S.C. 77a et seq.]; (iii) the date on which such issuer has, during the previous three year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which such issuer is deemed to be a large accelerated filer. 17 CFR 240.12b–2. Section 102(a)(2) of the Jumpstart Our Business Startups Act amended Section 14(i) to exclude registrants that are EGCs from the pay-versus-performance disclosure requirements. Public Law 112–106, 126 Stat. 306 (2012). In accordance with this provision, the Commission did not propose to require EGCs to provide pay-versus-performance disclosure. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 55137 S–K is required.24 By including the requirement in Item 402 of Regulation S–K and requiring this disclosure in proxy statements on Schedule 14A and in information statements on Schedule 14C, shareholders would have available the pay-versus-performance disclosure, along with all other executive compensation disclosures called for by Item 402 of Regulation S–K, in circumstances in which shareholder action is to be taken with regard to executive compensation or an election of directors. Because 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, we proposed limiting the requirement to provide these disclosures to a registrant’s proxy or information statement, instead of in all filings where disclosure under Item 402 of Regulation S–K is required (which would also include a registrant’s Form 10–K 25 and Securities Act 26 registration statements). In addition, as proposed, the information would 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. ii. Comments Some commenters generally supported the proposed approach,27 with one noting that including the disclosure in proxy and information statements would provide ‘‘relevant information at a time when (a) it is most useful to shareowners and (b) shareowners are equipped to act on the information if they are so inclined.’’ 28 24 The disclosure called for under Item 402 of Regulation S–K is required under Item 8 of Schedule 14A, and Item 1 of Schedule 14C. Schedule 14C correlates with the items of 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)] (‘‘Section 14(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. 25 17 CFR 249.310. 26 15 U.S.C. 77a et seq. 27 See letters from Federal Home Loan Banks, dated July 2, 2015 (‘‘FHL Banks’’); Financial Services Roundtable, dated July 6, 2015 (‘‘FSR’’); and Ohio Public Employees Retirement System, dated July 6, 2015 (‘‘OPERS’’). Comment letters received in response to the Proposing Release and Reopening Release are available at https:// www.sec.gov/comments/s7-07-15/s70715.htm. 28 Letter from OPERS. E:\FR\FM\08SER3.SGM 08SER3 55138 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations One commenter suggested that the Commission limit the requirement to include the pay-versus-performance information to proxy statements only, noting that any other document could just make reference to the proxy statement; 29 while another commenter suggested the pay-versus-performance information ‘‘should be included in all materials/filings that discuss compensation.’’ 30 iii. Final Amendments As proposed, we are adopting the requirement to include the new Item 402(v) of Regulation S–K disclosure in any proxy or information statement for which disclosure under Item 402 of Regulation S–K is required. As noted by commenters 31 and in the Proposing Release, placing the pay-versusperformance information in proxy statements and information statements will provide shareholders with the payversus-performance disclosure (along with all other executive compensation disclosures called for by Item 402 of Regulation S–K) in circumstances in which shareholder action is to be taken with regard to an election of directors or executive compensation. We are not requiring the pay-versus-performance disclosure in other filings where disclosure under Item 402 of Regulation S–K is required, as we believe that, taken in context, the language of Section 14(i) calling for registrants to provide the disclosure ‘‘in any proxy or consent solicitation material for an annual meeting of the shareholders’’ suggests that the information was intended to be presented in conjunction with a shareholder vote. khammond on DSKJM1Z7X2PROD with RULES3 2. Format and Location of Disclosure i. Proposed Amendments Section 14(i) 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 proposed allowing registrants to decide where in the proxy or information statement to provide the required disclosure. Although the new disclosure item 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, the 29 See letter from Hermes Investment Management, dated July 7, 2015 (‘‘Hermes’’). 30 Letter from Regis Quirin, dated June 24, 2015 (‘‘Quirin’’). 31 See letters from FHL Banks and OPERS. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 Proposing Release indicated that it would be appropriate to provide flexibility for registrants in determining where in the proxy or information statement to provide the disclosure. We proposed requiring registrants to provide a standardized table containing the values of: • The total PEO compensation reported in the Summary Compensation Table; • The value of executive compensation actually paid to the PEO; • For NEOs (other than the PEO), the average total compensation reported in the Summary Compensation Table; • The value of the average executive compensation actually paid to the NEOs (other than the PEO); • The value of a fixed investment scaled by cumulative TSR, for the registrant; and • The value of a fixed investment scaled by cumulative TSR for the selected peer group. For the amounts disclosed as executive compensation actually paid, we proposed requiring footnote disclosure of the amounts that were deducted from, and added to, the Summary Compensation Table total compensation amounts to calculate the executive compensation actually paid,32 and footnote disclosure of vesting date valuation assumptions. Because the statute specifically references disclosure of the relationship between executive compensation actually paid and registrant’s financial performance, we proposed requiring registrants, using the values presented in the table, 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. The disclosure about the relationship would follow the table and could be described as a narrative, graphically, or a combination of the two. In the Reopening Release, we requested comment on requiring the tabular disclosure to include disclosure of income or loss before income tax expense,33 net income, and a CompanySelected Measure. We also requested comment on requiring registrants to provide a clear description of the relationship of each of these additional measures to executive compensation 32 See infra Section II.C (discussing the adjustments proposed to be made to the Summary Compensation Table total compensation to calculate executive compensation actually paid). 33 In the Reopening Release we used the term ‘‘pre-tax net income,’’ but are using the phrase ‘‘income or loss before income tax expense’’ in this release, to be consistent with the language in 17 CFR part 210 (‘‘Regulation S–X’’). PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 actually paid, but, consistent with the relationship descriptions proposed with respect to TSR and peer group TSR, allowing the registrant to choose the format used to present the relationship, such as a graphical or narrative description (or a combination of the two). We also proposed that the disclosure be provided in interactive data format using machine-readable eXtensible Business Reporting Language (‘‘XBRL’’). Specifically, the proposal would require registrants to tag separately the values disclosed in the required table, and to separately block-text tag the required relationship disclosure and the footnote disclosures.34 In the Reopening Release, we requested comment on whether we should require registrants also to tag specific data points (such as quantitative amounts) within the footnote disclosures that would be block-text tagged, and to use Inline XBRL rather than XBRL to tag their payversus-performance disclosure.35 ii. Comments Commenters were divided over whether we should require registrants to include the pay-versus-performance disclosure in the CD&A,36 or allow registrants to decide where in the proxy or information statement to provide the required disclosure, as proposed.37 34 Specifically, the proposed approach would require registrants to provide the interactive data 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; and 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. 35 Subsequent to the proposal, the Commission adopted rules replacing XBRL tagging requirements for registrant financial statements with Inline XBRL tagging requirements. Inline XBRL embeds the machine-readable tags in the human-readable document itself, rather than in a separate exhibit. See Inline XBRL Filing of Tagged Data, Release No. 33–10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]. In 2020, the Commission adopted rules requiring BDCs to tag their financial statements and certain prospectus disclosures in Inline XBRL. See Securities Offering Reform for Closed-End Investment Companies, Release No. IC–33836 (Apr. 8, 2020) [85 FR 33290 (June 1, 2020)]. The following year, the Commission required operating companies, BDCs, and non-interval registered closed-end funds to tag their filing fee exhibits on certain forms in Inline XBRL. See Filing Fee Disclosure and Payment Methods Modernization, Release No. 33–10997 (Oct. 13, 2021) [86 FR 70166 (Dec. 9, 2021)]. 36 See letters from California Public Employees Retirement System Investment Office, dated July 6, 2015 (‘‘CalPERS 2015’’); CFA Institute, dated July 6, 2015 (‘‘CFA’’); Farient Advisors LLC, dated July 6, 2015 (‘‘Farient’’); and Teachers Insurance Annuity Association of America, dated July 6, 2015 (‘‘TIAA’’). 37 See letters from Compensation Advisory Partners, dated July 2, 2015 (‘‘CAP’’); Celanese E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 Commenters in favor of allowing registrants to decide where to provide the disclosure argued that including the disclosure in the CD&A could cause confusion, as registrants do not necessarily consider the information included in the pay-versus-performance disclosure when making decisions about executive compensation. Those in favor of locating the disclosure in the CD&A stated that locating the disclosure alongside other executive compensation disclosure would make the disclosure easier to locate for investors and provide investors the ability to more easily assess the pay-versus-performance disclosure. Commenters were also divided on the proposal to require the disclosure in a tabular format. Some commenters generally supported the proposed tabular disclosure,38 while others opposed the tabular format, suggesting it was overly simplistic and would require significant supplemental disclosures.39 We received significant comment on the specific performance measures to be included in the table, as discussed in Section II.E below. With respect to the other information proposed to be provided in the tabular format, one commenter suggested dividing the table to separate the TSR disclosure from the compensation actually paid disclosure.40 In addition, some commenters opposed requiring disclosure of the total compensation from the Summary Compensation Table,41 with one stating that ‘‘including the SCT data would result in Corp., dated June 12, 2015 (‘‘Celanese’’); Frederic W. Cook & Co., dated June 24, 2015 (‘‘Cook’’); Steven Hall ad Partners, dated July 6, 2015 (‘‘Hall’’); and Pearl, Myers and Partners, dated July 6, 2015 (‘‘Pearl’’). See also letter from Axcelis Technologies, Inc., dated Jan. 31, 2022 (suggesting that pay and performance data for all companies should be made available on a new Commission website, rather than in individual registrant disclosures). 38 See letters from AllianceBernstein L.P., dated Mar. 4, 2022 (‘‘AB’’); As You Sow, dated July 2, 2015 (‘‘As You Sow 2015’’); CAP; Farient; Hermes; and OPERS. 39 See letters from Aspen Institute’s Business and Society Program, dated July 6, 2015 (‘‘Aspen’’); Celanese; Center on Executive Compensation, dated July 6, 2015 (‘‘CEC 2015’’); Corporate Governance Coalition for Investor Value, dated July 23, 2015 (‘‘Coalition’’); Honeywell International Inc., dated July 2, 2015 (‘‘Honeywell’’); International Bancshares Corp., dated June 29, 2015 (‘‘IBC 2015’’); McGuireWoods LLP and Brownstein Hyatt Farber Schreck, LLP, dated Mar. 4, 2022 (‘‘McGuireWoods’’); and National Association of Manufacturers, dated July 6, 2015 (‘‘NAM 2015’’). 40 See letter from AON Hewitt, dated July 6, 2015 (‘‘AON’’). 41 See letters from CEC 2015; Exxon Mobil Corp., dated June 23, 2015 (‘‘Exxon’’); Hall; McGuireWoods; Pay Governance LLC, dated June 30, 2015 (‘‘PG 2015’’); Pearl; Technical Compensation Advisors, dated July 6, 2015 (‘‘TCA 2015’’); and Technical Compensation Advisors, dated. Mar. 4, 2022 (‘‘TCA 2022’’). VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 redundancy, would add a second figure which is not representative of compensation actually paid, and could result in possible confusion to shareholders.’’ 42 However, other commenters supported the inclusion of the Summary Compensation Table total compensation figures,43 with one suggesting that including the Summary Compensation Table figures would help investors understand the pay-versusperformance disclosure alongside the Summary Compensation Table disclosure when evaluating a registrant’s annual compensation decisions,44 and another noting that the Summary Compensation Table figures ‘‘will help to clarify potential differences between reported compensation and compensation actually paid.’’ 45 A number of commenters suggested that we require or allow graphical disclosures. Some commenters suggested requiring graphical disclosure,46 while one specifically supported giving registrants the flexibility to choose whether to include graphical disclosure.47 A few of these commenters suggested requiring inclusion of the performance graph required in Item 201(e) of Regulation S– K, or a modified version of that graph.48 In addition, a few commenters suggested the Commission mandate formatting requirements for graphical 42 Letter from PG 2015. letters from American Federation of Labor and Congress of Industrial Organizations, dated June 30, 2015 (‘‘AFL–CIO 2015’’); CalPERS 2015; and CAP. 44 See letter from AFL–CIO 2015. 45 Letter from CAP. 46 See letters from AFL–CIO 2015 (stating that a graph would be especially useful if it disclosed (1) the change between executive compensation actually paid and the Summary Compensation Table figure and (2) the TSRs of both the registrant and a peer group over all five disclosure years); CalPERS 2015 (suggesting line graphs be required in addition to tabular and narrative disclosures); Council of Institutional Investors, dated June 25, 2015 (‘‘CII 2015’’) (suggesting the Commission require registrants to disclose, at a minimum, ‘‘a graph providing executive compensation actually paid and change in TSR on parallel axes and plotting compensation and TSR over the required time period’’); Corning Inc., dated June 12, 2015 (‘‘Corning’’) (suggesting requiring the graph included in Item 201(e) of Regulation S–K); OPERS (suggesting requiring a line graph, showing TSR coupled with a corresponding line showing the executive compensation as a group); and Shareholder Value Advisors, dated July 6, 2015 (‘‘SVA’’) (suggesting requiring the inclusion of a scatterplot). 47 See letter from Hall. 48 See letters from Allison Transmission Holdings, Inc., dated July 6, 2015 (‘‘Allison’’); and Corning. But see letters from CAP; Center for Capital Markets Competitiveness, dated June 30, 2015 (‘‘CCMC 2015’’); Davis Polk and Wardwell LLP, dated July 2, 2015 (‘‘Davis Polk 2015’’); and McGuireWoods (each opposing the inclusion of the performance graph). 43 See PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 55139 disclosure, if graphical disclosure is permitted.49 One commenter suggested that we replace the tabular disclosure requirement with a graphical disclosure requirement depicting TSR and compensation actually paid,50 while another commenter stated that a prescribed graphical format would facilitate comparability.51 One commenter generally supported the requirement to provide a clear description of the relationship between the measures disclosed in the table and executive compensation, stating that a ‘‘simple-to-understand approach would be particularly valuable to investors.’’ 52 Another commenter, who supported requiring disclosure only of one (or more) Company-Selected Measure(s), indicated that registrants should be required to provide a clear description of the relationship between the Company-Selected Measure(s) in the table and executive compensation.53 Commenters were divided on the proposed XBRL tagging requirement. Of the commenters who opposed the requirement,54 some made alternative suggestions such as only requiring block-tagging,55 only requiring tagging of the information in the table,56 delaying the implementation of the tagging requirement,57 or permitting but not requiring tagging.58 One commenter stated the Commission should proceed ‘‘cautiously’’ to ensure that the cost of tagging does not outweigh the benefits,59 while another suggested the Commission should provide data on how many investors use XBRL disclosures before implementing the requirement.60 However, a number of commenters supported the XBRL 49 See letters from Hermes and PG 2015. But see letter from Hall (recommending allowing registrants to choose their own graphical disclosure). 50 See letter from Meridian Compensation Partners, dated July 6, 2015 (‘‘Meridian’’). 51 See letter from OPERS. 52 See letter from Principles for Responsible Investment, dated Mar. 4, 2022 (‘‘PRI’’). 53 See letter from National Association of Manufacturers, dated Mar. 4, 2022 (‘‘NAM 2022’’). 54 See letters from CCMC 2015; CEC 2015; Celanese; Davis Polk 2015; Jon Faulkner, dated May 4, 2015 (‘‘Faulkner’’); FedEx Corp., dated July 6, 2015 (‘‘FedEx 2015’’); Hyster-Yale Materials Handling Inc., dated June 10, 2015 (‘‘Hyster-Yale’’); IBC 2015; McGuireWoods; NACCO Industries, Inc., dated June 9, 2015 (‘‘NACCO’’); Pearl; Society for Corporate Governance, dated Mar. 10, 2022 (‘‘SCG’’); and Society of Corporate Secretaries and Governance Professionals, dated July 7, 2015 (‘‘SCSGP’’). 55 See letter from Pearl. 56 See letters from Hyster-Yale and NACCO. 57 See letters from Mercer, dated July 6, 2015 (‘‘Mercer’’) and NACCO. 58 See letter from CII 2015. 59 See letter from National Investor Relations Institute, dated July 10, 2015 (‘‘NIRI 2015’’). 60 See letter from CCMC 2015. E:\FR\FM\08SER3.SGM 08SER3 55140 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations requirement,61 with one suggesting that tagging should be required for the actual metrics registrants use to determine executive compensation.62 In response to the Reopening Release request for comment regarding Inline XBRL, a number of commenters suggested requiring all registrants to use Inline XBRL to tag their pay-versusperformance disclosure, including the tagging of specific data points within the footnote disclosures that would be block-text tagged.63 One commenter directly opposed requiring the use of the Inline XBRL (as considered in the Reopening Release),64 while another commenter, who generally opposed an XBRL tagging requirement, stated that, if XBRL tagging is required, Inline XBRL tagging should be permitted.65 One commenter suggested the Commission give time for registrants to implement any XBRL requirements, due to the ‘‘stylized’’ nature of proxy statements, and that there may be a learning curve because registrant staff preparing the proxy statement may be different from the staff preparing documents that are subject to current tagging requirements.66 khammond on DSKJM1Z7X2PROD with RULES3 iii. Final Amendments The final rules provide registrants flexibility in determining where in the proxy or information statement to provide the disclosure required, as proposed. We believe, as noted in the Proposing Release and by some commenters, that mandating registrants to include the disclosure in the CD&A may cause confusion by suggesting that the registrant considered the pay-versusperformance relationship in its compensation decisions, which may or may not be the case. 61 See letters from AFL–CIO 2015; CalPERS 2015; Public Citizen, dated July 6, 2015 (‘‘Public Citizen 2015’’); and State Board of Administration of Florida, dated July 6, 2015 (‘‘SBA–FL’’). See also CII 2015 (agreeing with the Commission’s rationale for requiring tagging, and not opposing the Commission requiring XBRL tagging, but suggesting that ‘‘permitting, rather than requiring, registrants to tag data when registrant-specific extensions are necessary may be more appropriate’’). 62 See letter from AFL–CIO 2015. 63 See letters from Council of Institutional Investors, dated Feb. 24, 2022 (‘‘CII 2022’’); Steven Huddart, dated Mar. 4, 2022 (‘‘Huddart’’); International Corporate Governance Network, dated Mar. 4, 2022 (‘‘ICGN’’); and XBRL US, dated Mar. 4, 2022 (‘‘XBRL US’’). 64 See letter from Davis Polk and Wardwell LLP, dated Mar. 4, 2022 (‘‘Davis Polk 2022’’) (noting that, while the use of Inline XBRL ‘‘could increase the ability of investors to compare across filers, . . . the initial compliance costs, the quality and the extent of use of XBRL data by investors would not justify the cost of creating XBRL data in company filings,’’ and therefore specifically recommending not requiring the use of Inline XBRL). 65 See letter from McGuireWoods. 66 See letter from XBRL US. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 We are adopting the tabular disclosure format, as proposed, with the addition of two new financial performance measures—net income and the Company-Selected Measure—as considered in the Reopening Release. Each of these financial performance measures is discussed in more detail below.67 We are not persuaded by commenters who characterized the tabular disclosure requirement as overly simplistic. The simplicity of the tabular disclosure should allow investors to more easily understand and analyze the relationship between pay and performance. In addition, registrants can supplement the tabular disclosure, so long as any additional disclosure is clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure. We also believe the simplicity of the tabular disclosure matches the requirement in Section 14(i) that registrants provide a ‘‘clear description’’ of their pay-versusperformance, and, consistent with Section 14(i), will better allow investors to compare disclosures within companies over time and across companies, making the disclosure more useful. We are adopting the requirement to include the Summary Compensation Table total compensation amounts for the PEO and the average (i.e., mean) of the remaining NEOs, as proposed. Those amounts will appear in columns (c) and (e) of the Pay Versus Performance table, respectively. We believe including these figures as proposed will provide useful information to investors, especially as the ‘‘actually paid’’ figures are directly related to those figures. Requiring disclosure of the Summary Compensation Table measure of total compensation together with executive compensation actually paid will provide shareholders with disclosure of two measures in one single table and, we believe, will facilitate comparisons of the two measures of a registrant’s executive compensation to the registrant’s performance.68 For example, 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 67 See infra Sections II.D.1 (discussing TSR and peer group TSR); II.D.2 (discussing net income); and II.D.4 (discussing the Company-Selected Measure). 68 For example, placing the Summary Compensation Table and actually paid figures sideby-side may make it easier for investors to follow the footnote disclosures in which the registrant explains how compensation actually paid differs from the Summary Compensation Table amounts. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 Compensation Table measure of total compensation alongside executive compensation actually paid in the tabular disclosure. As proposed, the final rules will require registrants to provide footnote disclosure of the amounts that are deducted from, and added to, the Summary Compensation Table total compensation amounts reported in columns (c) and (e) to calculate the executive compensation actually paid amounts reported in columns (d) and (f), respectively. We believe any confusion created by the inclusion of the Summary Compensation Table totals in the table will be mitigated by this required footnote disclosure. As proposed, registrants must also provide a narrative, graphical, or combined narrative and graphical description of the relationships between executive compensation actually paid and the registrant’s TSR, and between the registrant’s TSR and peer group TSR. We believe the disclosure of the relationship between executive compensation actually paid and TSR will satisfy the language of Section 14(i) that registrants disclose the ‘‘relationship’’ between executive compensation and registrant performance. Further, as noted in the Proposing Release, we believe disclosure about the relationship between registrant TSR and peer group TSR 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.69 In light of the addition of two new performance measures to the table, we are also adopting a requirement that registrants provide a clear description of the relationships between executive compensation actually paid and net income, and between executive compensation actually paid and the Company-Selected Measure. These descriptions may also be provided in narrative, graphical, or combined narrative and graphical format. Since some of these measures and 69 Peer comparisons are a component companies often use to assess the performance of their executives. See, e.g., John Bizjak, Swaminathan Kalpathy, Zhichuan Frank Li, & Brian Young, The Choice of Peers for Relative Performance Evaluation in Executive Compensation, 26 Rev. Fin. __ (forthcoming 2022), available at https://papers.ssrn. com/sol3/papers.cfm?abstract_id=2833309 (finding that, in a sample of the largest 750 U.S. companies (by market capitalization), ‘‘over 50%’’ of companies in 2017 used performance awards based on performance relative to a peer group, ‘‘comprising approximately one-third of the value of total compensation’’). E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations relationships may be more important to some companies or investors than others, we believe including disclosure about each of these relationships will provide investors with a more complete picture of how pay relates to performance. We believe permitting, but not mandating, graphical disclosure is consistent with an acknowledgement in the Senate Report that there could be many ways to disclose the relationship between executive compensation and financial performance of the registrant,70 and the specific language of Section 14(i), which provides the payversus-performance disclosures ‘‘may’’ include graphic representations. We encourage registrants to present this disclosure in the format that most clearly provides information to investors about the relationships, based on the nature of each measure and how it is associated with executive compensation actually paid. As discussed in the Proposing Release, the required relationship disclosure could include, for example, a graph providing executive compensation actually paid and change in the financial performance measure(s) (TSR, net income, or Company-Selected Measure) on parallel axes and plotting compensation and such measure(s) over the required time period. Alternatively, the required relationship disclosure could include narrative or tabular disclosure showing the percentage change over each year of the required time period in both executive compensation actually paid and the financial performance measure(s) together with a brief discussion of how those changes are related. The required table, along with the required relationship disclosures, should provide investors with clear information from which to determine the relationship between executive compensation actually paid and some basic facets of registrant financial performance. In addition, although the presentation format used by different registrants to demonstrate the relationship between executive compensation actually paid and the financial performance measures included in the table pursuant to Item 402(v) of Regulation S–K may vary, these more variable descriptions may allow investors to understand more easily the registrant’s perspective on these required relationship disclosures. The final rules require registrants to separately tag each value disclosed in the table, block-text tag the footnote and relationship disclosure, and tag specific data points (such as quantitative 70 See supra note 4 and accompanying text. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 amounts) within the footnote disclosures, all in Inline XBRL. We recognize that, as noted by commenters,71 the requirement that registrants use Inline XBRL will increase costs for registrants. However, we believe these costs will be incremental, as registrants are subject to Inline XBRL tagging requirements for other Commission disclosures.72 In addition, we believe that requiring the data to be structured will lower the cost to investors of collecting this information, permit data to be analyzed more quickly, and facilitate comparisons among public companies, all of which justify the incremental cost to registrants. We also believe that the registrants who will be subject to the pay-versus-performance rule are familiar with Inline XBRL,73 and for that reason do not believe additional data about the complexity of Inline XBRL, or a phase-in period for the application of the requirement (other than as proposed for SRCs, as discussed below 74), are necessary. With respect to comments questioning the utility of a structured data language, we note that investors and market participants have gained experience with XBRL and Inline XBRL filings since the time of the Proposing Release, and that there is increased evidence that data in these formats is useful to investors.75 B. Executives Covered 1. Proposed Amendments Under the approach included in the Proposing Release, registrants other than SRCs would have been required to provide disclosure about ‘‘named executive officers,’’ as defined in 17 CFR 229.402(a)(3); 76 and SRCs would 71 See, e.g., letter from Davis Polk 2022. supra note 35 (noting that subsequent to issuing the Proposing Release, the Commission adopted rules replacing XBRL tagging requirements for registrant financial statements with Inline XBRL tagging requirements). See also Inline XBRL Filing of Tagged Data, Release No. 33–10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]. 73 See infra Section V.C.4.ii. 74 See infra Section II.G.iii. 75 See infra Section V.C.4.ii. 76 17 CFR 229.402(a)(3) defines the NEOs for whom Item 402 of Regulation S–K executive compensation is required as (1) all individuals serving as the registrant’s PEO during the last completed fiscal year, 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 of Regulation S–K disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the registrant at 72 See PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 55141 have been required to provide disclosure about ‘‘named executive officers,’’ as defined in 17 CFR 229.402(m).77 These are the executive officers for whom, under our current rules, compensation disclosure is required under Item 402 of Regulation S–K, including in the Summary Compensation Table and the other executive compensation disclosure requirements. Specifically, we proposed requiring registrants to separately disclose compensation information for the PEO, and as an average for the remaining NEOs. We also proposed that, if more than one person served as the PEO of the registrant in any year, the disclosure for those multiple PEOs would be aggregated for that year, because this reflects the total amount that was paid by the registrant for the services of a PEO. 2. Comments A number of commenters supported requiring Item 402(v) of Regulation S–K to cover both PEOs and NEOs.78 These commenters noted that requiring Item 402(v) of Regulation S–K to cover PEOs and NEOs would be consistent with the disclosure in the Summary Compensation Table,79 and what Congress intended; 80 and would provide investors with useful information about the registrant’s compensation practices more broadly.81 However, a number of other commenters suggested we limit the disclosure to PEOs.82 Such commenters the end of the last completed fiscal year. Because the pay-versus-performance disclosure was proposed as new paragraph (v) to Item 402 of Regulation S–K, the disclosure also would be required for the NEOs. 77 For SRCs, 17 CFR 229.402(m)(2) defines the NEOs for whom Item 402 of Regulation S–K executive compensation is required as (1) all individuals serving as the smaller reporting company’s PEO during the last completed fiscal year, 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 Item 402 of Regulation S–K 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. 78 See letters from CalPERS 2015; CII 2015; CFA; Hay Group, Inc., dated July 6, 2015 (‘‘Hay’’); David Hook, dated May 3, 2015 (‘‘Hook’’); OPERS; National Association of Corporate Directors, dated July 10, 2015 (‘‘NACD 2015’’); National Association of Corporate Directors, dated Mar. 10, 2022 (‘‘NACD 2022’’); and TIAA. 79 See letters from CalPERS 2015; CFA; and Hay. 80 See letter from CII 2015. 81 See letter from CII 2015; CFA; OPERS; and TIAA. 82 See letters from AON; BorgWarner Inc., dated Aug. 20, 2015 (‘‘BorgWarner’’); CAP; CEC 2015; E:\FR\FM\08SER3.SGM Continued 08SER3 55142 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 raised concerns about the inclusion of non-PEO NEOs, including that: NEO groups may vary considerably from year to year; 83 NEOs are more likely to have business-segment-based compensation, the performance of which might not be reflective of the registrant’s overall performance; 84 and not all NEOs are in positions to affect overall company performance.85 Commenters also stated that PEOs are under the most scrutiny from investors 86 and are the only executives comparable across companies; 87 and that requiring disclosure of non-PEO NEOs would create an increased reporting burden.88 In addition, one commenter expressed belief that Section 14(i) did not require the pay-versus-performance disclosures to include non-PEO NEOs.89 Commenters were generally opposed to the proposal’s approach of aggregating multiple PEOs for years when a registrant had more than one individual serve as PEO.90 These commenters proposed a number of alternatives to aggregation, including: allowing separate disclosure for each PEO; 91 only requiring aggregation for external successors; 92 only disclosing the compensation of the PEO serving at the end of the year (either annualized 93 or not 94); requiring disclosure of the outgoing PEO only; 95 only aggregating payments for services rendered as PEO; 96 requiring aggregated and disaggregated disclosures; 97 or excluding any disclosures in years where the registrant has multiple CCMC 2015; Celanese; Coalition; Corning; Davis Polk 2015; Exxon; FedEx 2015; FSR; Hall; Hodak Value Investors, dated July 2, 2015 (‘‘Hodak’’); Honeywell; Hyster-Yale; McGuireWoods; Mercer; NACCO; NIRI 2015; National Investor Relations Institute, dated Mar. 4, 2022 (‘‘NIRI 2022’’); Pearl; PNC Financial Services Group, dated July 6, 2015 (‘‘PNC’’); TCA 2015; TCA 2022; and WorldatWork, July 6, 2015 (‘‘WorldatWork’’). 83 See letters from CCMC 2015; CEC 2015; Exxon; FSR; Meridian; Pearl; and PNC. 84 See letters from Celanese; FSR; and PNC. 85 See letters from CCMC 2015 and Coalition. 86 See letters from CCMC 2015; CEC 2015; Corning; Davis Polk 2015; FSR; NIRI 2015; NIRI 2022; Pearl; PNC; TCA 2015; and WorldatWork. 87 See letter from TCA 2015. 88 See letters from Davis Polk 2015 and WorldatWork. 89 See letter from Coalition. 90 See letters from AFL–CIO 2015; BorgWarner; Business Roundtable, dated July 6, 2015 (‘‘BRT’’); CCMC 2015; Coalition; Celanese; FedEx 2015; FSR; Hall; Honeywell; IBC 2015; McGuireWoods; Mercer; PG 2015; Pearl; TCA 2015; and TCA 2022. 91 See letters from AFL–CIO 2015; BorgWarner; CCMC 2015; FedEx 2015; Honeywell; SCSGP; TCA 2015; and TIAA. 92 See letters from Cook and Pearl. 93 See letters from FSR and Mercer. 94 See letters from Mercer. 95 See letters from Hodak and PG 2015. 96 See letters from AON and SCSGP. 97 See letters from As You Sow 2015 and Hermes. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 PEOs.98 Additionally, a number of commenters opposed including signing and severance bonuses, either generally,99 or if the compensation of multiple PEOs were to be aggregated,100 while some other commenters more specifically stated that these bonuses were reasons not to aggregate PEO compensation.101 A few commenters also opposed using the average NEO compensation in the table,102 while others supported average NEO compensation.103 A number of other commenters did not expressly oppose the use of average NEO compensation, but stated that this type of disclosure would provide little investor insight,104 could confuse investors,105 or would limit comparability.106 Two commenters suggested requiring separate disclosure for each NEO.107 3. Final Amendments We are adopting requirements for registrants to disclose information pertaining to both NEOs and PEOs in their Item 402(v) of Regulation S–K disclosure, as proposed. As noted in the Proposing Release, Section 14(i) does not specify which executives must be included in the pay-versus-performance disclosure. While we are mindful of concerns raised by commenters that individual NEOs may be in positions less likely to affect overall company performance than the PEO, may have more varied performance measures driving their compensation (including because NEOs within a company have different roles), can vary from year to year, and are less comparable across registrants (with respect to compensation), we believe that Congress intended for the rules to provide disclosure about both PEOs and the remaining NEOs because Section 14(i) specifically refers to ‘‘compensation required to be disclosed by the issuer under [Item 402 of Regulation S–K],’’ and Item 402 requires disclosure of NEO compensation. Further, while we agree that investors are typically most interested in the compensation of the 98 See letter from McGuireWoods. letters from FedEx 2015 and SCSGP. 100 See letters from CCMC 2015; Celanese; and Davis Polk 2015. 101 See letters from FSR and Honeywell. 102 See letters from CEC 2015; Coalition; and Meridian. 103 See letters from NACD 2015 and Pearl (generally opposing the disclosure of NEO compensation, but stating that it should be aggregated if required to be disclosed). 104 See letter from Honeywell. 105 See letter from IBC 2015. 106 See letter from Meridian. 107 See letters from Loring, Wolcott & Coolidge, dated Mar. 4, 2022 (‘‘LWC’’) and OPERS. 99 See PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 PEO, as indicated by commenters,108 investors also are interested in how the incentives of NEOs relate to company performance, and our rationale of simplifying and reducing costs for investors who monitor executive performance therefore extends to NEOs. We are also adopting, as proposed, the requirement that registrants provide separate disclosure of the PEO’s compensation. We believe this is appropriate because, as noted by commenters, investors frequently have more interest in PEO compensation, PEOs are generally more comparable across companies, and PEOs are frequently in a position to impact performance more than any other NEO. Similarly, we are adopting as proposed a requirement to include an average of compensation for the remaining NEOs. We disagree with commenters that suggested that average NEO compensation would provide little investor insight, could confuse investors, or would limit comparability. Rather, we believe disclosure of the relationship of performance to average NEO compensation will be more meaningful to shareholders than individual or aggregate NEO compensation. Because a registrant’s individual NEOs may change from year to year, we believe that the disclosure of the average NEO compensation will make it easier for investors to compare the registrant’s pay-versus-performance disclosure over time. Further, we believe disclosure of compensation for all NEOs (consisting of the PEO, and the remaining NEOs in the aggregate) aligns with our understanding of the intent of Congress that all NEOs be included in the pay-versus-performance disclosure. In addition, we are adopting a requirement that registrants identify in footnote disclosure the individual NEOs whose compensation amounts are included in the average for each year, so that investors can consider whether changes in the average compensation reported from year to year were due to compositional changes in the included NEOs. We believe this will alleviate concerns raised by commenters that the aggregation of NEOs could confuse investors. Although some commenters opposed our proposal to require an average of NEO compensation and suggested that we instead require the disclosure of compensation for each of the NEOs as separate columns in the table, we believe that approach could result in a lengthy and potentially confusing table, due to the fact that in any year there are multiple NEOs and, as noted by several 108 See E:\FR\FM\08SER3.SGM supra note 86 and accompanying text. 08SER3 55143 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations commenters,109 there can be frequent turnover in a registrant’s NEOs from year to year. In addition, we are not permitting registrants to remove signing bonuses, severance bonuses, and other one-time payments from the amount of executive compensation actually paid, because, although those figures may not represent the executive’s compensation in a ‘typical’ year where no such payment is made, they do reflect amounts that are ‘‘actually paid’’ to the Year Y1 Y2 Y3 Y4 Y5 .................. .................. .................. .................. .................. executives. Even if such payments are not ordinarily recurring with respect to a particular executive, shareholders voting on executive compensation or directors may wish to take into account the company resources devoted to such payments in light of the company’s performance. In a change from the proposal, in response to comments, the final rules do not require aggregating the compensation of PEOs in years when a Summary compensation table total for first PEO Summary compensation table total for second PEO Compensation actually paid to first PEO Compensation actually paid to second PEO Average summary compensation table total for non-PEO NEOs Average compensation actually paid to nonPEO NEOs Total shareholder return Peer group total shareholder return Net income [Companyselected measure] (a) (b) (b) (c) (d) (e) (f) (g) (h) (i) N/A $ $ $ $ $ $ N/A N/A N/A N/A $ $ $ $ We believe including separate disclosure for each PEO, as recommended by some commenters,110 would address commenters’ concerns that aggregating PEO disclosure could lead to confusing or misleading disclosure.111 In the case of multiple PEOs in a single year, this approach would make the table itself slightly longer, but it would have the added benefit of distinguishing the compensation paid to separate PEOs both visually and in the structured data, instead of presenting a potentially confusing aggregated figure in the table and only having discussion of the separate PEOs in footnote and narrative disclosure. C. Determination of Executive Compensation Actually Paid We proposed that ‘‘executive compensation actually paid’’ under Item 402(v) of Regulation S–K would be total compensation as reported in the Summary Compensation Table, modified to adjust the amounts included for pension benefits and equity awards. In both the Proposing and Reopening Releases, we requested comment on the proposed approaches to calculating these amounts, and whether khammond on DSKJM1Z7X2PROD with RULES3 109 See supra note 83. supra note 91. 111 We note that a registrant may elect to provide additional information about its PEO or PEOs, such as the amount of time during the year each individual served as PEO, if the registrant believes that information would provide relevant context to investors. 112 See, e.g., letters from Allison; Celanese; CEC 2015; Cook; Coalition; Farient; Faulkner; FSR; Honeywell; NACCO; NACD 2015; NAM 2015; Pearl; 110 See VerDate Sep<11>2014 registrant had multiple PEOs. Instead, the final rules require that, in those years, registrants include separate Summary Compensation Table total compensation and executive compensation actually paid columns for each PEO. For example, the below table shows the disclosure that would be required when there were two PEOs in ‘‘Year 2’’: 19:00 Sep 07, 2022 Jkt 256001 $ $ N/A N/A N/A $ $ $ $ $ Value of initial fixed $100 investment based on: $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ the proposed definition appropriately captures the concept of ‘‘executive compensation actually paid,’’ and in the Proposing Release we offered an economic analysis of an alternative approach to calculating equity awards. We received significant comment, as discussed below, on the proposed approaches to calculating the amounts of pension benefits and equity awards to be included as ‘‘actually paid.’’ In addition, several commenters to the Proposing Release noted that the definition of compensation actually paid as proposed may result in some misalignment between the time period to which pay is attributed and the time period in which the associated performance is reported.112 After considering the statutory language and the comments received, we are adopting final rules for calculating the amounts reported for pension benefits and equity awards that are modifications of our proposed approach, including, as discussed further below, requiring equity awards to be revalued more frequently than as proposed. We believe that these approaches will more accurately reflect executive compensation actually paid, as required by Section 14(i), and mitigate commenter concerns about timing mismatches by more closely associating compensation with the period of the corresponding performance. Although 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. Because Congress was aware of the language of Item 402 at the time of the Dodd-Frank Act, and adopted text that did not mirror the language of that provision, 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 using as a starting point the total compensation that registrants already are required to report in the Summary Compensation Table and making adjustments to some of those figures is appropriate to give effect to the statutory language and reflect executive compensation that is ‘‘actually paid.’’ 113 Commenters generally agreed that adjustments to the Summary Compensation Table total Ross Stores, Inc. dated June 26, 2015 (‘‘Ross’’); SVA; SBA–FL; TIAA; TCA 2015; and WorldatWork. 113 A few commenters on the proposed rules sought clarity on the disclosure required in circumstances where a registrant recovers (or ‘‘claws back’’) any portion of an executive officer’s compensation. See letters from Hyster-Yale; IBC 2015; and NACCO. See also letters from BRT and NACD 2015 (noting that the proposed rules did not account for claw-backs). Consistent with the approach currently taken by registrants when reporting claw-backs in the Summary Compensation Table, when any portion of an executive officer’s compensation for a fiscal year that is included in the table is clawed back, the amounts of executive compensation disclosed in response to Item 402(v) as the Summary Compensation Table Total and as the Compensation Actually Paid initially reported for such year should be adjusted to reflect the effects of the clawback, with footnote disclosure of the amount(s) recovered, when applicable. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\08SER3.SGM 08SER3 55144 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations were appropriate to determine ‘‘executive compensation actually paid,’’ 114 noting that there are some items reportable in the Summary Compensation Table total that are not reflective of compensation ‘‘actually paid’’; 115 or more generally suggesting that the Summary Compensation Table total is not reflective of ‘‘executive compensation actually paid.’’ 116 1. Deduction of Change in Actuarial Present Value and Addition of Actuarially Determined Service Cost and Prior Service Cost khammond on DSKJM1Z7X2PROD with RULES3 i. Proposed Amendments We proposed requiring registrants to deduct the change in actuarial present value of all defined benefit and actuarial pension plans 117 from the Summary Compensation Table total compensation figure, and to add back the actuarially determined service cost for services rendered by the executive during the applicable year,118 when calculating executive compensation actually paid. We proposed removing the change in actuarial present value of these plans in order to avoid potential volatility associated with revaluing previously accumulated benefits with changes in actuarial inputs and assumptions. However, as discussed in the Proposing Release, we believed that including the service cost from the applicable year was appropriate because it more closely reflected compensation ‘‘actually paid’’ during that year, in that it could be seen 114 See, e.g., letters from AON; CAP; CEC 2015; Exxon; FedEx 2015; FSR; Hall; Honeywell; HysterYale; KPMG LLP, dated July 1, 2015 (‘‘KPMG’’); Meridian; NACCO; NACD 2015; PG 2015; Public Citizen 2015; SCSGP; SVA; TCA 2015; TCA 2022; TIAA; Towers Watson, dated July 6, 2015 (‘‘Towers’’); and WorldatWork. But see letter from IBC 2015 (stating that ‘‘the Summary Compensation Table already required by Regulation S–K is sufficient’’). 115 See letters from AON; CAP; CEC 2015; FedEx 2015; Hall; Honeywell; KPMG; Meridian; NACD 2015; Public Citizen 2015; SCSGP; SVA; TIAA; Towers; and WorldatWork. 116 See letters from CEC 2015; Exxon; FSR (stating that ‘‘Congress did not intend that compensation [actually paid] would be determined by reference to the Summary Compensation Table’’); Hall; HysterYale (suggesting an approach where companies are permitted to define ‘‘actually paid’’ independently, and then reconcile those amounts with the Summary Compensation Table totals); NACCO (same); PG 2015; SVA; TCA 2015; and TCA 2022. 117 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. 118 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. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 as an estimate of the value that would be set aside by the registrant to fund the benefits payable in retirement for the service provided during the applicable year. We also stated that we believed that using the actuarially determined service cost, instead of the Summary Compensation Table pension measure, may increase comparability across registrants of the amounts ‘‘actually paid’’ under both defined benefit and defined contribution plans. 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,119 which will also be included in computing compensation actually paid for purposes of the new disclosure. In the Reopening Release, we stated that some commenters had noticed challenges with using the pension service cost approach to determining the value of pension benefits ‘‘actually paid,’’ and requested comment on whether there is an alternative measure of the change in pension value attributable to the applicable fiscal year that is better representative of the amount of pension benefits ‘‘actually paid.’’ ii. Comments Some commenters generally supported limiting the pension benefits included in executive compensation actually paid to service cost.120 In addition, some commenters supported the proposed deduction of the change in actuarial present value of defined benefit and pension plans not attributable to the applicable year of service,121 or generally supported the Commission’s choice to exclude the value associated with actuarial assumptions.122 There were also a number of commenters who opposed the inclusion of pension service cost in executive compensation actually paid,123 noting it may remain subject to vesting conditions and may not ever actually be paid; 124 has assumptions built in that would prevent comparability across registrants or distort the figure; 125 is not presently calculated on a per participant 119 17 CFR 229.402(c)(2)(ix)(E). letters from Chris Barnard, dated June 24, 2015 (‘‘Barnard 2015’’); Chris Barnard, dated Mar. 2, 2022 (‘‘Barnard 2022’’); CAP; Hall; Exxon; and WorldatWork. 121 See letters from CAP; CEC 2015; Exxon; TIAA; and Towers. 122 See letter from NACD 2015. 123 See letters from AON; CCMC 2015; CEC 2015; Honeywell; IBC 2015; and NACCO. 124 See letters from Honeywell and Towers. 125 See letters CCMC 2015; IBC 2015; and Towers. 120 See PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 basis, so would add cost; 126 or generally that it does not equal compensation ‘‘actually paid.’’ 127 However, a number of commenters who opposed the inclusion of service cost noted their view that it would be a better representation of compensation ‘‘actually paid’’ than the current Summary Compensation Table figure.128 A few commenters suggested excluding changes in pension values entirely,129 while some others suggested that the registrant should have the option to exclude service cost, if the executive is not vested in the pension benefits.130 A number of commenters suggested other ways to include pension amounts in executive compensation actually paid. Some commenters recommended an approach requiring registrants to calculate the change in pension value to equal the actuarial present value of the benefit earned during the year,131 noting that it tracks the actual pattern of benefit increases resulting from pay increases and plan amendments,132 and links directly to the existing approach and assumptions used for the Summary Compensation Table.133 Another suggested multiplying the value of the pension increase during the year, net of any inflationary increase and contribution by the employee, by twenty.134 Some commenters requested clarification regarding the calculation of the service cost amount. Two commenters suggested alternatives to the application of FASB ASC Topic 126 See letters NACCO. letters CEC 2015. 128 See letters from AON; Honeywell; Pearl; and Towers. 129 See letters from Coalition; Honeywell; and Pearl (advocating a realized pay approach that would exclude all pension associated values). 130 See letters from AON (generally supporting the exclusion of all non-vested pension benefits); Hyster-Yale; and NACCO. 131 See letters from Mercer and Towers; see also letter from AON (suggesting the same, if pensions must be included in compensation actually paid). Other commenters recommended approaches similar to this approach. See letters from Barnard 2022 (recommending that we include the change in the actuarial present value of pension benefits over the applicable fiscal year using the same economic assumptions as used in the calculation at the start of the applicable fiscal year); Exxon (recommending that we include the portion of the currentlyreported change in pension values that is attributable to an additional year of service); and WorldatWork (same). 132 See letter from Mercer. 133 See letters from Mercer and Towers; see also letter from AON (suggesting the same, if pensions must be included in compensation actually paid). 134 See letter from Hermes (specifically suggesting the Commission follow the United Kingdom’s method of multiplying the value of the increase in annual pension benefit, net of any inflationary increase and contribution by the employee, by twenty). 127 See E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations 715,135 with one suggesting that the Commission instead clarify that the intended measurement is the change in pension values attributable to an additional year of service,136 and the other suggesting the Commission use the accumulated benefit obligation service cost or the change in present value of accrued benefits, using the same assumptions at the beginning and end of each year.137 Two commenters suggested the Commission eliminate the reference to the required use of future salary increases to estimate service cost, because it would require significant new data and reveal new information to investors,138 with one also suggesting the Commission clarify that the intended measurement is the change in pension values attributable to an additional year of service.139 Three commenters responded to our request for comment in the Reopening Release asking if there is an alternative measure of the change in pension value attributable to the applicable fiscal year that is better representative of the amount of pension benefits ‘‘actually paid.’’ One suggested that the ‘‘value of dollars set aside to provide a pension benefit to an executive’’ be disclosed.140 Another suggested that registrants should be required to disclose the khammond on DSKJM1Z7X2PROD with RULES3 Deduct (from Summary Compensation Table total):. Add back: ............................. Final Rules The aggregate change in the actuarial present value of all defined benefit and actuarial pension plans. The aggregate change in the actuarial present value of all defined benefit and actuarial pension plans. Service cost ..................................................................... The aggregate of: (1) Service cost; and (2) Prior service cost. 135 See letters from AON and Exxon. letter from Exxon. 137 See letter from AON (alternatively suggesting a third alternative of disclosing the present value, using year end assumptions, of the increase in accrued benefit during the year). 138 See letters from Towers and WorldatWork. 136 See 19:00 Sep 07, 2022 iii. Final Amendments With respect to pension compensation, we are adopting final rules largely as proposed with a modification in response to commenters’ suggestion to also include the value of plan amendments in the calculation of compensation actually paid. The final rules will require registrants to deduct from the Summary Compensation Table total the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans,143 and add back the aggregate of two components: (1) actuarially determined service cost for services rendered by the executive during the applicable year, as proposed (the ‘‘service cost’’); and (2) the entire cost of benefits granted in a plan amendment (or initiation) during the covered fiscal year that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or initiation (the ‘‘prior service cost’’), in each case, calculated in accordance with U.S. Generally Accepted Accounting Principles (‘‘U.S. GAAP’’).144 As noted above, 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. The change in actuarial present value 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 not reflected in the Summary Compensation Table and reported only in a footnote to column (h)), no amounts should be deducted for purposes of Item 402(v) of Regulation S–K. The below table shows the changes from the proposed rules to the final rules with respect to pension compensation (specific changes are bolded and italicized): Proposed Rules We believe that it is appropriate to include pension compensation in the calculation of compensation ‘‘actually paid.’’ The adopted approach in particular provides an appropriate measure for purposes of determining compensation ‘‘actually paid’’ during the applicable year because it reflects the benefits an executive may expect to receive based on additional service the executive provided during the year (or service cost), and it incorporates additional benefits attributable to changes in the pension contract between the executive and the company (or prior service cost). In many cases, this measure will approximate the value that would be set aside currently by the VerDate Sep<11>2014 ‘‘change in (increase) the actuarial present value of pension benefits over the applicable fiscal year using the same economic assumptions as used in the calculation at the start of the applicable fiscal year.’’ 141 The third stated that pension benefits should be fully excluded from the ‘‘actually paid’’ amount, but also stated that service cost was ‘‘far more representative of the compensation received’’ than the change in actual present value amount included in the Summary Compensation Table total.142 55145 Jkt 256001 registrant to fund the pension benefits payable upon retirement for the service provided, and any plan amendments made, during the applicable year. In addition, the inclusion of pension compensation is consistent with other compensation disclosure requirements, such as Item 402(c) of Regulation S–K. These same rationales apply whether or not the pension amounts are vested. Consistent with the equity compensation adjustment, the pension adjustment will be included even when unvested until an officer leaves the company. Another advantage to the approach we are adopting is that it is more closely associated with underlying information 139 See letter from WorldatWork. from ICGN. 141 Letter from Barnard 2022. 142 Letter from Aon Human Capital Solutions, dated Mar. 4, 2022 (‘‘Aon HCS’’). 143 As discussed below, smaller reporting companies would not need to deduct this amount 140 Letter PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 from the GAAP financial statements. In particular, the pension’s service cost and prior service cost, while not required to be reported separately and for a subset of employees, is computed in the process of calculating the aggregate service cost and prior service cost at the plan level. As a result, a registrant would not be required to collect significant new data or prepare a new calculation of the actuarial present value of the benefit earned during the year, but would rather calculate service cost and prior service cost for a subset of employees for which the underlying information is already available and subject to internal control over financial reporting. The direct or add the service cost because the Summary Compensation Table requirements for smaller reporting companies do not require disclosure of the change in actuarial present value. See infra Section II.G.3. 144 See FASB ASC Topic 715. E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 55146 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations relationship of this information to the amounts recognized in the audited financial statements may also provide an additional level of comfort to investors as to its accuracy and reliability. In addition, because this approach excludes changes that derive only from differences in the actuarial assumptions used to estimate the value of benefits already earned in prior periods, it will provide for a more meaningful comparison across registrants of the amounts ‘‘actually paid’’ under both defined benefit and defined contribution plans. Further, as noted above, commenters were generally more supportive of a service cost approach rather than an approach that would include the amount required to be disclosed in the Summary Compensation Table.145 One weakness in the proposed approach, identified by commenters,146 was that the service cost approach would not fully account for changes in the value of an executive’s expected benefit arising from plan amendments or initiations. Our modified approach as adopted addresses this concern by requiring that the registrant include, as a component of this item of compensation actually paid, the entire cost of benefits granted in a plan amendment (or initiation) that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or initiation. Such prior service cost information is part of the underlying information required to account for a defined-benefit plan under U.S. GAAP.147 For purposes of the final rules, ‘‘prior service cost’’ also refers to any credit arising from a reduction in benefits related to services rendered in prior periods as a result of a negative plan amendment. We acknowledge that including the prior service credit associated with such a negative plan amendment would result in a reduction of compensation actually paid. We believe that such an outcome would be consistent with the statutory objective of capturing compensation actually paid, because the reduction in the accrued benefit reflects a reduction in compensation in the same manner that an increase in the accrued benefit reflects an increase in compensation. Although one commenter also noted that service cost would exclude the costs related to unexpected compensation changes,148 we are not 145 See supra notes 120 and 128. 146 See letters from AON and Mercer; see also letters from AON; Towers; and WorldatWork. 147 See FASB ASC Topic 715. 148 See letter from Mercer. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 adopting a modification in this regard. Under U.S. GAAP,149 the effects on the projected benefit obligation of unexpected compensation changes (i.e., changes from the estimated future compensation levels used in measuring service cost) are recorded in actuarial gain or loss. In considering whether to add another component to the tabular pension measure related to actuarial gain or loss due to unexpected compensation changes, we determined that the benefits of isolating these items from other actuarial gains and losses did not merit the costs and complexities associated with calculating the additional adjustment. However, we note that information about compensation changes should still generally be discernible by investors, as such compensation amounts would be included as other components of the compensation disclosed in the Item 402(v) of Regulation S–K table. We are not persuaded that the other alternative approaches recommended by commenters 150 would more accurately reflect compensation ‘‘actually paid.’’ Although some of the suggested alternatives could more fully account for changes in compensation levels by reflecting unexpected increases in pay as well as plan amendments,151 we believe that the benefits discussed above with respect to the adopted approach, including its direct relationship to the values already calculated for the purpose of financial statement reporting, outweigh the potential benefits of the alternatives. Further, while we acknowledge there may be an additional cost to obtain the service cost and prior service cost information on a per participant basis, the other calculations suggested by commenters also would include additional costs since registrants are not currently performing those calculations in the manner suggested.152 In the case of commenters who suggested that we omit all pension cost amounts, we disagree that their suggested approach would be a reasonable interpretation of compensation ‘‘actually paid.’’ Although the approach we are adopting may not always perfectly reflect all potential changes in pension value, the resulting measure is considerably more accurate than a measure that treats the value of promised pension awards as 149 See 150 See FASB ASC Topic 715. supra notes 131–134 and accompanying zero when they may ultimately cost the registrant millions of dollars. We are also requiring that the calculation of ‘‘service cost’’ and ‘‘prior service cost’’ be consistent with the definitions provided under U.S. GAAP.153 As discussed above,154 we acknowledge that some commenters suggested alternatives to the U.S. GAAP definition; however, we believe that this definition is appropriate because it reflects the service cost amount included in the financial statements, and therefore is familiar to registrants. The final rules require the entire amount of prior service cost related to a plan amendment to be included in the pension measure rather than the amortized portion of prior service cost recognized as part of periodic pension cost under U.S. GAAP for the year. 2. Inclusion of Above-Market or Preferential Earnings on Deferred Compensation That Is Not Tax Qualified i. Proposed Amendments Consistent with Summary Compensation Table disclosure requirements, we proposed that the executive compensation actually paid would include above-market or preferential earnings on deferred compensation that is not tax qualified.155 ii. Comments Two commenters generally agreed with the proposed rules on disclosure of deferred compensation that is not tax qualified.156 Two other commenters recommended permitting registrants to exclude unvested amounts of deferred compensation that is not tax qualified.157 iii. Final Amendments We are adopting, as proposed, the requirement that executive compensation actually paid include above-market or preferential earnings on deferred compensation that is not tax qualified. We believe, as discussed in the Proposing Release, that excluding those amounts until their eventual payout would make the amount ‘‘actually paid’’ contingent on an NEO’s choice to withdraw or take a distribution from their account, rather than the registrant’s compensatory decision to pay the above-market return, which we do not believe would be an 153 See 154 See text. FASB ASC Topic 715. supra notes 131–134 and accompanying 151 See text. 152 See 155 These earnings are reported pursuant to 17 CFR 229.402(c)(2)(vii), or, for smaller reporting companies, 17 CFR 229.402(n)(2)(viii). 156 See letters from NACCO and TIAA. 157 See letters from Hyster-Yale and NACCO. infra Section V.C.4.iii. letters from AON; Barnard; Exxon; Hermes (suggesting multiplying the value of the pension increase during the year, net of any inflationary increase and contribution by the employee, by twenty); Mercer; Towers; and WorldatWork. PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations accurate representation of compensation ‘‘actually paid.’’ As with pension awards, these amounts may be viewed to approximate the value that would be set aside currently by the registrant to satisfy its obligations in the future. In addition, excluding those amounts would be inconsistent with the approach in the Summary Compensation Table, which requires disclosure of the underlying deferred amounts when earned.158 We believe that, to the extent the Summary Compensation Table approach aligns with the statutory ‘‘actually paid’’ language and purpose of the disclosure, we should minimize adjustments to the Summary Compensation Table figures, in order to make disclosures easier to understand for investors and easier to produce for registrants.159 To that end, we are also not permitting registrants to voluntarily exclude unvested amounts of deferred compensation that is not tax qualified, as we believe that could complicate investors’ understanding of the disclosure, and would limit the comparability of the ‘‘actually paid’’ amounts across different registrants.160 3. Equity Awards khammond on DSKJM1Z7X2PROD with RULES3 i. Proposed Amendments We proposed 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. In proposing this approach, we noted that an executive does not have an unconditional right to an equity award before vesting, and therefore unvested options or other equity awards may not be ‘‘actually paid’’ prior to the vesting conditions being satisfied, which can be viewed as representing payment by the registrant. In addition, we noted that using the vesting date fair value would incorporate changes in the value of the equity awards from the grant date to the vesting date, with that change being one of the key ways that pay is linked to registrant performance. With respect to the calculation of the vesting date fair value, we noted that the 158 See Instruction 1 to 17 CFR 229.402(c) and Instruction 1 to 17 CFR 229.402(n) (each providing that ‘‘[a]ny amounts deferred, whether pursuant to a plan established under section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), or otherwise, shall be included in the appropriate column for the fiscal year in which earned’’). 159 See letters from Hyster-Yale and NACCO (both stating that ‘‘[t]he fewer adjustments that are made to the SCT earnings, the easier the new proxy table will be for investors to understand and for companies to produce.’’). 160 See infra Section II.C.3.iii (discussing the general approach taken in the final rules with respect to unvested amounts of compensation). VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 vesting date fair value of stock awards is already disclosed (by registrants other than SRCs) in the Option Exercises and Stock Vested Table,161 and that the vesting date fair value of option awards can be calculated using existing models and methodologies. Specifically, the proposed approach would require (i) the amounts reported pursuant to 17 CFR 229.402(c)(2)(v) and (vi) to be deducted from Summary Compensation Table total, and (ii) the vesting date fair value of stock awards and options (with or without stock appreciation rights), each computed in accordance with the fair value guidance under U.S. GAAP,162 to be added. 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. In response to comments received on the Proposing Release (discussed below), we included a request for comment in the Reopening Release, noting commenters’ concerns that there was a potential misalignment between the time period to which pay is attributed and the time period in which the associated performance is reported, and asking if there were other approaches that would alleviate this misalignment, or if the inclusion of the additional measures considered in the Reopening Release would affect this misalignment. ii. Comments We received a number of comments on both the proposal to use fair value methodology to value equity awards in the calculation of executive compensation actually paid, and on the proposal to value such awards as of the vesting date. Some commenters supported the proposed fair value methodology.163 However, a number of commenters opposed the approach,164 noting that the calculation of fair value is time consuming and expensive, particularly when many separate fair value calculations would be required, as in the case of awards that are on a pro-rata vesting schedule or with multiple tranches in a given year; 165 few companies have familiarity with valuing options that have been outstanding for 161 See 17 CFR 229.402(g)(2)(v). FASB ASC Topic 718. 163 See letters from AFL–CIO 2015; CII 2015; The Predistribution Initiative and Responsible Asset Allocator Initiative, dated Mar. 4, 2022 (‘‘PDI’’); and TIAA. 164 See letters from BRT; CEC 2015; Celanese; Cook; FSR; Honeywell; Meridian; and PG 2015. 165 See letters from CAP; Cook; KPMG; and WorldatWork. 162 See PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 55147 several years; 166 the assumptions that are included in fair value calculations are company-specific and therefore would reduce comparability; 167 and that the fact that assumptions and projections are included in fair value calculations is inconsistent with the concept of ‘‘actually paid.’’ 168 As an alternative to fair value, a number of commenters suggested the Commission require options to be valued at their intrinsic value,169 or permit registrants to choose between disclosure of fair value and intrinsic value (with the nonchosen value being provided in footnote disclosure).170 These commenters argued that intrinsic value is easier and cheaper to calculate; 171 aligns with the value that the executives would receive upon immediate exercise; 172 and does not include the valuation assumptions that accompany the fair value methodology.173 Some commenters suggested that if the final rules did not use intrinsic value, they should instead use fair value with certain safe harbors or simplified assumptions that would reduce the effort required to compute the valuation.174 Some commenters supported valuing equity at the vesting date,175 stating that valuing equity at the vesting date will incorporate the grant date fair value and changes until vesting (which ‘‘represent a direct channel, and one of the primary means, through which pay is linked to 166 See letter from CAP. letter from IBC 2015. 168 See letters from CEC 2015; Meridian; and SCSGP. 169 See letters from CEC 2015 (supporting the use of intrinsic value if the Commission requires vesting date reporting); Celanese (supporting the use of intrinsic value if the Commission requires vesting date valuation); Coalition (supporting the use of intrinsic value if the commenter’s preferred principles-based approach to the pay-versusperformance disclosure was not adopted); Corning; Hall; Honeywell (supporting the use of intrinsic value if the commenter’s preferred principles-based approach to the pay-versus-performance disclosure was not adopted); Mercer; Meridian; Pearl (supporting the use of intrinsic value if the Commission does not adopt a realizable pay methodology) PG 2015; SCG; SCSGP; TCA 2015 (supporting the use of intrinsic value if the commenter’s preferred principles-based approach to the pay-versus-performance disclosure was not adopted); and WorldatWork. Many of these commenters had slightly different concepts of how options should be valued, but they all generally supported using intrinsic value, or the difference between the exercise price and the market price. 170 See letter from Hall. 171 See letters from Corning and Davis Polk 2015. 172 See letter from Corning. 173 See letter from Davis Polk 2015. 174 See letters from Mercer; TCA 2015 and TCA 2022. See also letter from Infinite Equity, dated Mar. 3, 2022 (‘‘Infinite’’) (suggesting that certain existing safe harbors should be acceptable for the new disclosures). 175 See letters from AFL–CIO 2015; CII 2015; Honeywell; PDI; and TIAA. 167 See E:\FR\FM\08SER3.SGM 08SER3 55148 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations registrant performance’’), but will not include post-vesting changes (which ‘‘generally reflect investment decisions made by the executive rather than compensation decisions made by the registrant’’); 176 will avoid ‘‘underestimating the actual compensation received by executives,’’ which could occur if grant date reporting was required; 177 and ‘‘better reflect[s] the value ultimately delivered to executives.’’ 178 Some commenters specifically opposed exercise date valuation,179 while others supported requiring the vesting date valuation of stock awards, but the exercise date valuation of options 180 or requiring the vesting date valuation of performancebased awards, but the grant date valuation of time-based awards.181 Some commenters opposed vesting date valuation,182 with one arguing that valuing options at vesting date would be misleading because executives do not generally include the option value in their income at the time of vesting.183 As alternatives, commenters suggested: valuing awards at the end of a multiyear period, such as a three-year period; 184 valuing equity at grant date but reversing the value at the vesting date for awards that fail to vest; 185 revaluing outstanding equity awards annually; 186 or revaluing all equity granted during a period at the end of the most recent completed fiscal year.187 A number of commenters opposed the reporting of equity as of the vesting date.188 Some of these commenters noted that vesting date reporting of equity would lead to a timing misalignment between actual performance and executive compensation actually paid, as the performance that ‘‘earned’’ the equity would have occurred between the grant 176 See letter from CII 2015. letter from PDI. 178 See letter from TIAA. 179 See letters from AFL–CIO 2015; CII 2015; and Honeywell. 180 See letters from Coalition (specifically recommending that compensation be deemed ‘‘actually paid’’ when reported on Form W–2 for income tax purposes, which they state would include vested stock awards and amounts received in connection with exercised options); Hall; and Mercer. 181 See letter from McGuireWoods. 182 See letters from Celanese; CCMC 2015; Cook; and NACD 2015. 183 See letter from Cook. 184 See letter from Farient. 185 See letter from SVA. 186 See letters from Hodak; Farient; Infinite; TCA 2015; and TCA 2022. 187 See letter from CAP; PG 2015; and PG 2022. 188 See letters from CAP; Celanese; CCMC 2015; Cook; FSR; McGuireWoods; NACCO; NACD 2015; NAM 2022; Ross; SVA; and TIAA. But see Hermes (expressly supporting vesting date reporting of equity). khammond on DSKJM1Z7X2PROD with RULES3 177 See VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 date and the vesting date, but only the total amounts of equity would be reported on the vesting date.189 However, two commenters, who acknowledged the misalignment, indicated that there was no other approach that would eliminate all misalignment.190 Several commenters requested clarifications about the proposed approach. A few commenters expressed that reporting equity on the vesting date creates uncertainty in application, and either sought clarification regarding the vesting date or the meaning of when ‘‘all applicable vesting conditions were satisfied.’’ 191 One commenter suggested that an award should be considered vested on the date the executive is able to monetize the award,192 while another suggested that awards should only be considered ‘‘actually paid’’ when restrictions on equity lapse, even if already vested.193 Two commenters also made suggestions that awards should be considered vested when the associated performance period is completed, even if the vesting of the award is still subject to board certification.194 Commenters suggested a number of alternatives to vesting date reporting of equity, including: grant date reporting; 195 exercise date reporting; 196 exercise date reporting of the equity’s intrinsic value; 197 principles-based reporting (i.e., allowing companies to make their own modifications to the reporting date); 198 reporting ‘‘in the fiscal year for which the compensation was considered as paid’’; 199 and annual reporting, starting in the grant year, of the year-end fair value of the award, with annual reporting of any change in the fair value until, and including, the year of vesting.200 Two commenters also suggested the Commission adopt the ‘‘2 189 See letters from CEC 2015; Celanese; CCMC 2015; Cook; Faulkner; FSR; Hyster-Yale; NACCO; PG 2015; Pearl; Ross; SBA–FL; SVA; TIAA; TCA 2015; and WorldatWork. 190 See letters from Aon HCS and Teamsters. 191 See letters from Cook; IBC 2015; Mercer; Pearl; and Towers. 192 See letters from Davis Polk 2015 and Davis Polk 2022. 193 See letter from CEC 2015. 194 See letters from Mercer and Towers. 195 See letters from CAP and NAM 2022. 196 See letters from CEC 2015; Coalition; and FSR. 197 Letter from Corning. 198 See letter from Hall. 199 See letter from TIAA. 200 See letters from Infinite; TCA 2015; and TCA 2022. Other commenters made similar suggestions that vary slightly from this suggestion, including by using intrinsic rather than fair value for options, measuring pay over an aggregate time horizon rather than presenting data broken out by year, and revaluing vested as well as unvested equity holdings. See letters from CAP; Farient; Hodak; PG 2015; and Pay Governance, dated Mar. 3, 2022 (‘‘PG 2022’’). PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 1⁄2 month rule,’’ under which equity vesting in the first two and one half months of the calendar year would be attributed to the prior year.201 One commenter stated that, because the proposed rules would move away from grant date fair value calculations for equity awards, it would be important that the disclosure include dividends paid on unvested equity or equivalents for a given year.202 A few commenters supported the proposed requirement that changes in the underlying assumptions for valuation that are materially different from those made in the financial statements as of the grant date must be disclosed, with one specifically supporting the proposed requirement,203 one supporting requiring any changes from the assumptions in the current financial statements to be disclosed,204 and two opposing the disclosure of changes in valuation assumptions.205 In response to a request for comment in the Reopening Release, one commenter indicated that the additional performance measures considered in the Reopening Release would not exacerbate the timing misalignment,206 while another stated the additional measures would not improve the misalignment.207 iii. Final Amendments After consideration of the comments received, we are modifying our approach to the treatment of equity awards in relation to the total compensation reported in the Summary Compensation Table. While the final amendments continue to use ‘‘fair value’’ as the measure of the amount of an equity award, which is consistent with accounting in the financial statements, we are adjusting the date on which the award is valued in response to comments, so that the first fair value disclosure is made in the year of grant, and changes in value of the award are reported from year to year until the award is vested.208 We believe this approach will better align the timing of the disclosure and valuation with when 201 See letters from Hyster-Yale and NACCO. letter from TIAA. 203 See letter from CII 2015. 204 See letter from Towers. 205 See letters from Davis Polk 2015 and McGuireWoods. 206 See letter from Aon HCS. 207 See letter from McGuireWoods. 208 This approach was discussed as an implementation alternative in the Proposing Release. See Proposing Release at Section IV.C.3.c. Two commenters specifically noted this implementation alternative and were supportive of its adoption. See letters from Infinite; TCA 2015; and TCA 2022. 202 See E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 the award is actually ‘‘earned’’ by the executive, resulting in disclosure that more clearly shows the relationship between executive compensation and the registrant’s performance. In particular, the proposed rules would have required the deduction of the equity award amounts reported in the Summary Compensation Table total and the addition of: • The vesting date fair value of stock awards and options (with or without stock appreciation rights), each computed in accordance with the fair value guidance under U.S. GAAP. The final rules also require the deduction of the equity award amounts reported in the Summary Compensation Table total; however, instead of the addition of the vesting date fair value of stock awards and options, the final rules require the addition (or subtraction, as applicable) of the following: • The year-end fair value of any equity awards granted in the covered fiscal year that are outstanding and unvested as of the end of the covered fiscal year; • The amount of change as of the end of the covered fiscal year (from the end of the prior fiscal year) in fair value of any awards granted in prior years that are outstanding and unvested as of the end of the covered fiscal year; • For awards that are granted and vest in the same covered fiscal year, the fair value as of the vesting date; 209 • For awards granted in prior years that vest in the covered fiscal year, the amount equal to the change as of the vesting date (from the end of the prior fiscal year) in fair value; • For awards granted in prior years that are determined to fail to meet the applicable vesting conditions during the covered fiscal year, a deduction for the amount equal to the fair value at the end of the prior fiscal year; 210 and • The dollar value of any dividends or other earnings paid on stock or option awards in the covered fiscal year prior to the vesting date that are not otherwise reflected in the fair value of such award or included in any other component of total compensation for the covered fiscal year. We believe fair value is an appropriate measure for compensation 209 There is no adjustment for awards that are granted and determined not to vest in the same covered fiscal year because those awards result in no compensation actually paid. 210 For any of an executive’s equity awards that are determined to fail to vest, a negative amount equal to the fair value at the end of the prior fiscal year would be included as part of the executive’s compensation actually paid as of the date the registrant determines the award will not vest. This negative amount takes the cumulative reported value of that award to $0 since it did not vest. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 ‘‘actually paid.’’ Although fair value calculations, like all accounting estimates, do involve some subjective assumptions, we do not agree with commenters that stated that the assumptions and projections included in fair value calculations render such amounts inconsistent with the concept of ‘‘actually paid.’’ 211 Fair value is an estimate of the amount by which an executive is compensated as a result of an award, and therefore represents a reasonable measure of that executive’s ‘‘actual pa[y].’’ Specifically, the fair value of an option is a widely-used measure to estimate the total value of the asset, including both its value if exercised immediately (‘‘intrinsic value’’) and the additional value created by the holder’s contractual right to exercise at some time in the future (‘‘time value’’ of the option). In our view it also represents a more accurate measure of actual pay than alternatives recommended by some commenters. We are not adopting the approach suggested by some commenters that we use other measures such as intrinsic value. Intrinsic value would ignore the option value inherent in exercisable awards prior to exercise, including the option value inherent in an option award that is at-the-money or out-of-themoney (i.e., the stock price is equal to or less than the strike price of the options), and therefore has zero intrinsic value. Intrinsic value (or any similar measure used to calculate compensation ‘‘actually paid’’) would also be a departure from the primary disclosures related to equity compensation, and the recognition and measurement of such compensation in the financial statements under U.S. GAAP, and we believe would not allow investors to as easily link and analyze ‘‘compensation actually paid’’ with the other information they are receiving about executive compensation. Further, in 2004, the accounting for stock-based compensation in U.S. GAAP was revised to require fair value accounting.212 In the revised accounting standard, it was noted that other equity instruments and the consideration the issuing entity receives in exchange for them are recognized in the financial statements based on the fair value of the instrument at the date issued. The fact that the equity instruments would be 211 See supra note 168 and accompanying text. FASB SFAS No. 123 (Revised 2004), Accounting for Stock-Based Compensation (‘‘FAS 123R’’), which was issued in December 2004 and superseded Accounting Bulletin Opinion No. 25, Accounting for Stock Issued to Employees, which was an intrinsic value approach to stock-based compensation. FAS 123R was codified in FASB ASC Topic 718. 212 See PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 55149 issued for goods or services rendered or to be performed did not seem to be a reason to measure the cost of the goods or services performed on a different basis. The standard further noted that most advocates of intrinsic value favored its use only at a grant date measurement, and noted that there are weaknesses in its use even in that case, such as treating most fixed share options as though they were a ‘‘free good.’’ 213 However, even at the grant date, employee services received in exchange for share options are not free and there is value in the employee services performed and the related stock and stock options received. Registrants and investors are already familiar with fair value calculations and the determination of the assumptions for such calculations through their use in existing Commission disclosure requirements as well as U.S. GAAP. For example, the Grants of Plan-Based Awards Table requires grant date fair value disclosure of each individual equity award granted during the last completed fiscal year.214 U.S. GAAP requires information about grant date fair value for equity awards, including the weighted-average grant-date fair value of awards that were granted, vested and forfeited during the year and a description of the significant assumptions used during the year to determine the fair value of share-based compensation awards.215 We do not agree with the suggestion from commenters that we consider an option or other award requiring exercise to be ‘‘actually paid’’ only upon its exercise, as we believe doing so would commingle the registrant’s compensatory decision with the executive’s investment decision about when to exercise and would allow executives to influence pay-versusperformance disclosure by controlling the fiscal year in which they receive the compensation. We additionally determined that year-over-year change in fair value better meets the statutory purposes than grant-date fair value, because valuing awards only at grant date fails to reflect increases in value to the executive after the grant date, during the period over which the compensation actually paid is earned. Even if yearover-year change in fair value is only a reasonable estimate, we believe it is far more accurate to include this estimate than to omit such increases in value entirely. 213 Id. 214 See 17 CFR 229.402(d)(2)(vii) and Instruction 8 to 17 CFR 229.402(d). 215 See FASB ASC Topic 718–10–50–2. E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 55150 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations We have changed the reporting and valuation date requirements from the Proposing Release to first require the year-end reporting and valuation of awards granted during the fiscal year and then the year-over-year change in fair value of such awards until the vesting date (or the date the registrant determines the award will not vest). We have made these changes to the reporting and valuation requirements to address commenters’ concerns about potential misalignment between the time period to which pay is attributed and the time period in which the associated performance is reported, and the degree to which this would affect the usefulness of the disclosure. We believe that, compared to the vesting date valuation approach included in the Proposing Release, the adopted approach will more effectively allow registrants to describe the relationship between compensation and registrant performance, as the reported amounts of compensation will annually adjust based on the registrant’s performance, among other things, in that year. In addition, we acknowledge commenters’ observation that comparability may be somewhat reduced by the assumptions that are included in fair value calculations, which, as noted by a commenter, may differ from issuer to issuer. Because investors are already familiar with fair value as the measurement approach for equity awards under U.S. GAAP, they are aware of the reduced comparability that may occur due to the use of different assumptions from issuer to issuer. However, we believe that the use of a consistent measurement approach to equity compensation in the Summary Compensation Table, the financial statements, and the calculation of compensation ‘‘actually paid,’’ along with the required disclosures about significant assumptions under U.S. GAAP in the final rules, allows for comparability with respect to an individual issuer’s disclosures from year to year. Further, as discussed in the Proposing Release,216 we believe that, overall, comparability regarding the awards included by registrants in the disclosure will be greater under the adopted approach than it would have been under the proposed approach, as volatility in executive compensation actually paid across the disclosure periods that is due simply to vesting patterns should decrease (as the amount of executive compensation actually paid will be adjusted each year as it is 216 See Proposing Release, Section IV.C.3.c (considering the adopted approach as an implementation alternative). VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 ‘‘earned’’ over the course of the vesting period).217 Investors will also be able to more easily understand the impact of performance on awards-based compensation over time, because under the final rules as adopted investors will be able to observe the amount by which the value of an executive’s compensation changes each year, rather than only observing the value of that compensation in the year an award vests. Furthermore, we believe that the adopted approach in the final rules is similar to the concept of realizable pay, recommended by some commenters, as it reflects an attempt to measure the change in value of an executive’s pay package after the grant date, as performance outcomes are experienced. This approach to unvested equity compensation is consistent with the treatment of other unvested elements of compensation under the final rules, such as unvested pension benefits and contributions to unvested defined contribution plans. In each case, the adopted approach reflects this compensation as it is earned rather than at vesting. We believe the consistent use of this approach should reduce misalignment between the timing of when compensation is earned and when it is reported, and allow the disclosure to more clearly represent the relationship of pay with performance over time. We also believe this revised approach for equity awards comports with the statutory term ‘‘executive compensation actually paid.’’ While non-vested amounts of compensation could be considered unpaid due to their contingent nature, over time the values reported in connection with a particular award will aggregate to its ultimate value upon vesting. Aligning the compensation reporting more closely with when the compensation changes in value also provides investors with a clearer picture of ‘‘the relationship between executive compensation actually paid and the financial performance of the issuer.’’ For example, where an award vests over a three-year period and the registrant’s financial performance is positive in the first of those two years and negative in the third, reporting the full value of the award only in the vesting year may give investors the misleading impression that the executive was not rewarded for positive performance in years one and two and was rewarded despite negative performance in year three. In addition, the required reporting of the year-overyear change in fair value of such awards 217 See PO 00000 supra note 210. Frm 00018 Fmt 4701 Sfmt 4700 until the vesting date (or a deduction for prior reported amounts as of the date the registrant determines the award will not vest) will account for any amounts that fail to vest; will address concerns, noted by commenters, that grant date reporting undervalues compensation ‘‘actually paid’’; and will not include those post-vesting changes that generally reflect the executives’ investment decisions, not compensation.218 We recognize that requiring fair value calculations for each equity award at a date other than the grant date may be burdensome for some issuers, as noted by some commenters,219 particularly those that have compensation programs with numerous and complex equity grants. However, in the final rules we are not adopting a safe harbor or simplified assumptions other than those generally accepted under U.S. GAAP, as suggested by some commenters.220 Since accounting for share-based compensation in U.S. GAAP was revised in 2004 to require fair value accounting,221 registrants have been accounting for equity compensation based on a fair value approach and must determine valuation assumptions every time a new award is granted. While commenters correctly noted that companies are not as familiar with the fair valuation of options after the grant date, U.S. GAAP requires the revaluation of an award when modified,222 so the concept of valuing a stock award before vesting is also not novel to registrants. As such, registrants are required to have internal controls and processes over the valuation of stock awards, including the assumptions used in determining fair value.223 We believe that registrants will likely rely upon the existing fair value 218 Not all post-vesting date changes reflect the executives’ investment decisions, as vested awards could remain subject to other restrictions (e.g., antihedging restrictions or holding requirements) that would limit the investment decisions available to an executive. 219 See, e.g., letters from CAP (stating that ‘‘a fair value calculation for previously granted stock options at the time of vesting, registrants will undoubtedly encounter many complications,’’ and noting that few companies have familiarity with valuing options that have been outstanding for several years); Cook (stating that ‘‘[c]alculating the fair value of stock options as of each vesting date will be a time-consuming and tedious process’’); KPMG (stating that ‘‘the vesting date fair value of share options will be more difficult for companies than determining the grant date fair value of those awards’’); and WorldatWork (describing the proposed vesting date fair value approach as ‘‘burdensome’’). 220 See supra note 174 and accompanying text. 221 See supra note 212 and accompanying text. 222 See FASB ASC Topic 718–20–35. 223 See also 17 CFR 240.13a–14, 13a–15, 15d–14 & 240.15d–15. E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations processes and internal controls for stock-based compensation, which should mitigate the concerns raised by commenters about assumptions. In addition, the option and contingentequity valuation models are welldeveloped and related software solutions are widely available, which will further mitigate those additional burdens and concerns related to valuation approach and related inputs. The final rules also require footnote disclosure of any valuation assumptions that materially differ from those disclosed at the time of grant, as in the proposal.224 The proposal did not specify how to disclose the valuation assumptions. Similar to U.S. GAAP, when multiple awards are being valued in a given year, a registrant may disclose a range of the assumptions used or a weighted-average amount for each assumption. In addition, the fact that certain institutional investors and third parties (often proxy advisors or compensation consultants) are already incorporating similar computations in their own pay for performance analyses,225 suggests that the adopted approach is already considered useful and operational by some investors. Further, we are also requiring the dollar value of any dividends or other earnings paid on stock or option awards in the covered fiscal year prior to the vesting date to be included in the amount of executive compensation actually paid, if such amounts are not reflected in the fair value of such award or included in any other component of total compensation for the covered fiscal year. As noted by a commenter, the payfor-performance disclosure should include dividends paid on unvested equity or equivalents ‘‘as a result of the move away from grant date fair value calculations for equity awards.’’ 226 Under the Summary Compensation Table total, any such amounts would be typically included in the grant date fair value, as no such dividends or earnings would have been paid on that date. However, if any dividends or other earnings are paid on stock or option awards over time, these amounts would decrease future fair value amounts. This decrease would not be reflective of a decrease in the amount ‘‘actually paid’’ to the executive, to the contrary, the amount of the decrease would reflect actual dividends or earnings paid to the executive prior to the valuation. We 224 For example, there may be a material difference in assumptions if the registrant has made changes to key assumptions that would have materially changed the grant date fair value if the assumption(s) applied as of grant date. 225 See infra Section V.B.2. 226 See letter from TIAA. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 believe these amounts are compensation ‘‘actually paid’’ and should be reflected in the disclosure. D. Measures of Performance 1. Requirement To Disclose TSR and Peer Group TSR i. Proposed Amendments We proposed requiring all registrants subject to the proposed rule to use TSR as the measure of financial performance of the registrant for purposes of the required disclosure. In addition, we proposed requiring registrants that are not SRCs to disclose peer group TSR, using either the same peer group used for purposes of Item 201(e) of Regulation S–K or a peer group used in the CD&A for purposes of disclosing registrants’ compensation benchmarking practices.227 ii. Comments Commenters were divided on the use of TSR as a required financial performance measure, with some commenters generally supportive,228 and some generally opposed.229 Additionally, some commenters opposed TSR being used as the sole measure of financial performance.230 Commenters in favor of including TSR as a required financial performance measure noted that TSR is wellunderstood by investors; 231 is widely used by companies in setting compensation; 232 is generally a fair representation of company performance; 233 will assist companies ‘‘in articulating and providing justification for their compensation 227 See 17 CFR 229.402(b)(xiv). letters from Americans for Financial Reform Educational Fund, dated Mar. 18, 2022 (‘‘AFREF’’); Barnard 2015; Barnard 2022; BlackRock, dated July 2, 2015 (‘‘BlackRock’’); CalPERS 2015; CAP; CFA; CII 2015; Farient; Hook; Infinite; OPERS; Public Citizen 2015; and TIAA. 229 See letters from American Securities Association, dated Mar. 14, 2022 (‘‘ASA’’); Aspen; Better Markets, dated Mar. 4, 2022 (‘‘Better Markets’’); CCMC 2015; CEC 2015; Coalition; Cook; Dimensional Fund Advisors LP, dated Mar. 3, 2022 (‘‘Dimensional’’); FedEx 2015; FSR; Hay; Honeywell; International Bancshares Corp., dated Mar. 3, 2022 (‘‘IBC 2022’’); McGuireWoods; NAM 2015; NAM 2022; NIRI 2015; NIRI 2022; and SBA– FL. 230 See letters from BorgWarner; BRT; Celanese; Hall; Honeywell; Hyster-Yale; IBC 2015; ICGN; Mercer; NACCO; NACD 2015; NACD 2022; PG 2015; Pearl; PNC; PDI; Judy Samuelson, dated Mar. 4, 2022 (‘‘Samuelson’’); SCG; SCSGP; Simpson Thacher & Bartlett, dated July 6, 2015 (‘‘Simpson Thacher’’); and WorldatWork. 231 See letters from Barnard 2015; Barnard 2022; CFA; and Farient. 232 See letters from Barnard 2015; Barnard 2022; BlackRock; CalPERS 2015; CFA; CII 2015; and Public Citizen 2015. 233 See letters from Barnard 2015; Barnard 2022; CII 2015; Farient; and OPERS. 228 See PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 55151 practices’’; 234 will increase comparability; 235 and reflects stock price fluctuations that regularly occur in response to publicly known information and company leadership.236 Commenters in favor of TSR also observed that requiring its disclosure is consistent with the language in Section 953(a) that the pay-versus-performance disclosure should ‘‘tak[e] into account any change in the value of the shares of stock and dividends of the issuer and any distributions.’’ 237 Commenters opposed to the use of TSR, generally or as the sole measure of performance, as well as a few commenters in favor of the use of TSR,238 noted that TSR has specific limitations, including: not necessarily being used by the subject company to determine compensation; 239 being an unreliable performance measure for thinly-traded stocks; 240 incentivizing short-term performance at the expense of investors’ long-term best interests 241 (which some commenters indicated could incentivize companies to incorporate strategies to inflate stock prices over the short term,242 or to engage in buybacks 243); requiring lengthy explanatory disclosures to explain any misalignments between compensation and TSR; 244 causing companies to adjust their compensation programs to more heavily rely on TSR; 245 being subject to fluctuations based on circumstances outside of the control of companies, industries, and executives; 246 and being affected by the 234 See letter from CalPERS 2015. letters from Barnard 2015; Barnard 2022; CAP; CII 2015; Hodak; and TIAA. 236 See letter from Infinite. 237 See letters from AFREF; CAP; CII 2015; and Public Citizen 2015. 238 See letters from AFREF; CalPERS 2015; CFA; and CII 2015. 239 See letters from CCMC 2015 and Coalition. 240 See letters from Hyster-Yale and NACCO. 241 See letters from AFREF; ASA; BlackRock; BRT; CCMC 2015; CEC 2015; Coalition; FedEx 2015; FSR; Hall; IBC 2015; IBC 2022; Mercer; NACCO; NACD 2015; NAM 2015; NIRI 2015; Samuelson; SCG; Simpson Thacher; and WorldatWork. But see letter from OPERS (stating that the use of TSR alone is not likely to drive short-term decision-making). 242 See letters from Better Markets; IBC 2022; McGuireWoods; NACCO; Pearl; and PDI. 243 See letters from AFREF; Better Markets; PDI; and Samuelson. 244 See letters from Aspen; Celanese; Coalition; Exxon; Hyster-Yale; NACCO; NAM 2015; NIRI 2015; NIRI 2022; and PNC. 245 See letters from CEC 2015; CCMC 2015; Hall; Hay; Hermes; FSR; George S. Georgiev, dated Mar. 4, 2022 (‘‘Georgiev’’); McGuireWoods; Mercer; Pearl; PNC; SCSGP; Simpson Thacher; and WorldatWork. 246 See letters from AFL–CIO 2015; Aspen; CEC 2015; Dimensional; FSR; Hay; IBC 2015; IBC 2022; McGuireWoods; Mercer; NACCO; NIRI 2015; NIRI 2022; PDI; Pearl; Samuelson; and SBA–FL. 235 See E:\FR\FM\08SER3.SGM 08SER3 55152 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations granting and vesting of stock options.247 In response to these concerns, some commenters (including commenters in favor of using TSR 248), suggested permitting disclosure of other metrics alongside TSR.249 Other commenters generally stated that there was no single performance measure that would align with the compensation plan of every registrant, and therefore suggested adopting a principles-based approach, allowing companies to choose their own performance measures.250 Alternatively, a number of commenters suggested requiring registrants to disclose the actual metrics used in determining their executive compensation,251 or revising Item 402 of Regulation S–K to require disclosure of ‘‘all’’ metrics actually used to determine NEO incentive compensation.252 A number of commenters raised questions or made comments regarding the calculation of TSR. A few commenters suggested that TSR should be presented as a percentage change instead of an indexed dollar value.253 Others generally raised questions about the method used for calculating TSR,254 with some suggesting TSR should be calculated and disclosed as a one-year 247 See letter from IBC 2022. letters from CalPERS 2015; CAP; CFA; CII 2015; Farient; OPERS; and TIAA. 249 See letters from CalPERS 2015; CAP; CFA; CII 2015; Davis Polk 2015; Davis Polk 2022 (stating that TSR should be the only required measure, but that we should permit registrants to voluntarily disclose other measures, particularly ‘‘[g]iven the complexity and importance of long-term incentive compensation’’); Farient; Hall; Mercer; NIRI 2015; OPERS; Pearl; Sacred Heart University, dated July 7, 2015; Simpson Thacher; and TIAA. But see letter from IBC 2022 (stating, in response to the Reopening Release’s considered additional net income, income or loss before income tax expense, and Company-Selected Measure measures, that the inclusion of additional metrics does not fix the fact that the inclusion of TSR ‘‘overstates’’ the importance of TSR). 250 See letters from BRT; Celanese; Exxon; Hall; Hay; Hyster-Yale; McGuireWoods; NACCO; PNC; SCG; SCSGP; and Simpson Thacher. 251 See letters from AFL–CIO 2015; CCMC 2015; FedEx 2015; Hook (supporting the proposal, but stating ‘‘I would like to see the metrics for comparison include focus on longer-term performance’’); Public Citizen 2015 (specifically suggesting that the Commission ‘‘mandate a metric supplemental to the TSR of a company’s own choosing that it contends would capture long-term performance’’); and SBA–FL. 252 See letters from American Federation of Labor and Congress of Industrial Organizations, dated Mar. 2, 2022 (‘‘AFL–CIO 2022’’); AFREF; California Public Employees Retirement System Investment Office, dated Mar. 4, 2022 (‘‘CalPERS 2022’’); California State Teachers’ Retirement System, dated Mar. 2, 2022 (‘‘CalSTRS’’); CII 2022; Georgiev; ICGN; and International Brotherhood of Teamsters, dated Mar. 3, 2022 (‘‘Teamsters’’). 253 See letters from AON and Towers. 254 See letters from Anonymous, dated May 27, 2015; BorgWarner; CEC 2015; Cook; Hall; Honeywell; Mercer; PG 2015; Pearl; TCA 2015; and Towers. khammond on DSKJM1Z7X2PROD with RULES3 248 See VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 measure,255 others suggesting that TSR should be calculated as a rolling average,256 and a third group suggesting TSR be calculated as a cumulative average over the time period of the disclosure.257 Other commenters suggested that we permit registrants to decide the time period used to calculate their TSR.258 Commenters were also divided on our proposal to require registrants, other than SRCs, to disclose peer group TSR. Some commenters supported requiring the inclusion of peer group TSR,259 while others suggested peer group disclosure should be optional.260 A number of other commenters opposed the requirement to disclose peer group TSR,261 arguing peer group disclosure: is already disclosed in the performance graph required by Item 201(e) of 255 See letters from Cook; Infinite (suggesting that a one-year TSR would be consistent with Item 201(e) of Regulation S–K, but that also including three-year and five-year TSRs may provide helpful context); TCA 2015; TCA 2022; and Towers. But see letter from Farient (opposing the calculation of TSR as a year-over-year measurement). See also Davis Polk 2015 (stating that, if the Commission requires an annual TSR, we should permit registrants to also disclose a multi-year TSR, because compensation may be based on multi-year performance). 256 See letters from AFREF (supporting a ‘‘five year cumulative and rolling average’’); CEC 2015 (supporting the use of a three-year or five-year rolling average TSR); Honeywell (stating that a multi-year rolling TSR would be more meaningful); ICGN; NACD 2015 (recommending the Commission require a three-year or five-year TSR in addition to an annual TSR); and NACD 2022 (also recommending the Commission require a three-year or five-year TSR in addition to an annual TSR). But see letter from PG 2015 (noting that a five-year rolling TSR calculation would not be consistent with the Commissions intent). 257 See letters from Pearl (supporting a cumulative 5-year TSR measurement); PG 2015 (noting that a cumulative TSR would be consistent with the Commission’s intent, but could ‘‘complicate[ ] comparisons by causing the starting point for TSR measurement to change each year’’); and Teamsters. 258 See letters from BorgWarner; Davis Polk 2015; Davis Polk 2022 (suggesting that TSR should be calculated ‘‘in a manner that is consistent with the ways in which the compensation committee considers TSR in the pay setting process’’); Exxon (generally opposing the use of TSR, but stating that, if we require its use, we should allow registrants to choose the time period for measuring cumulative TSR that best suits them); and NIRI 2015; see also letter from Huddart (suggesting each component of the PEO’s compensation actually paid be associated with a requisite service period, and then requiring the calculation of TSR and peer group TSR over the requisite service period of the component of the PEO’s compensation having the largest dollar value in a given year). 259 See letters from As You Sow 2015; CalPERS 2015; OPERS; and TIAA. 260 See letters from AON and Hay. 261 See letters from ActiveAllocator Activist Capital Advisors L.P., dated Feb. 3, 2022; CCMC 2015; CEC 2015; Celanese; Cook; Davis Polk 2015; FSR; Georgiev; Hyster-Yale; IBC 2015; IBC 2022; LWC; McGuireWoods; Meridian; NACCO; NAM 2015; NIRI 2015; NIRI 2022; Pearl; PNC; SCG; SCSGP; TCA 2015; TCA 2022; and WorldatWork. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 Regulation S–K; 262 is beyond the mandate of the Dodd-Frank Act; 263 will confuse or mislead investors; 264 will be expensive and/or time-consuming for registrants to calculate; 265 is difficult for registrants to explain and would require lengthy disclosures; 266 is difficult to understand given that frequent changes in peer groups 267 and different market conditions or performance cycles affect different ‘‘peer’’ companies differently; 268 and creates issues relating to the difficulty for companies to find adequate peers, limiting the ability to make direct comparisons between registrants.269 A number of commenters also opposed requiring weighted peer group TSR (weighted by market capitalization), as used in Item 201(e) of Regulation S–K.270 In addition, one commenter suggested we permit multiple peer groups to be disclosed, if peer group TSR disclosure is required.271 Commenters generally supported allowing registrants to have flexibility in setting their peer groups for the payversus-performance disclosure. Commenters had various suggestions as to how to achieve this flexibility, including allowing registrants to choose any peer group referenced in the CD&A; 272 allowing the use of the peer group from either Item 201(e) of Regulation S–K or the CD&A; 273 or allowing registrants to choose a peer group other than the Item 201(e) of Regulation S–K or CD&A peer groups.274 These commenters generally supported requiring registrants to provide disclosure explaining the make-up of their peer group.275 One commenter, 262 See letters from Exxon; Georgiev; Pearl; PNC; SBA–FL; and TCA 2015. 263 See letters from BRT; CEC 2015; Celanese; Davis Polk 2015; Exxon; FSR; Hay; Meridian; Pearl; PNC; and WorldatWork. 264 See letters from CEC 2015; Celanese; Davis Polk 2015; Georgiev; Hay; Hyster-Yale; LWC; NACCO; and PNC. 265 See letters from Celanese; Hyster-Yale; and NACCO. 266 See letters from BRT; CCMC 2015 (also noting that registrants may face public liability for assumptions made regarding a peer’s performance); Davis Polk 2015 (similar); and SCSGP. 267 See letters from Hay; Hyster-Yale; and NACCO. 268 See letters CCMC 2015; Exxon; and Pearl. 269 See letters from Hay; Hyster-Yale; IBC 2015; FSR; NACCO; NAM 2015; and Pearl. 270 See letters from Allison; AON; Cook; Meridian; and Ross. 271 See letter from Pearl. 272 See letter from SCSGP. 273 See letter from Quirin. 274 See letters from Barnard 2015; Corning; and Towers (specifically supporting allowing registrants to use the peer group, if any, that is used in setting compensation). 275 See letters from Barnard 2015; Quirin; and SCSGP. E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations however, opposed giving flexibility to registrants in setting their peer groups, and instead suggested requiring that the peer group should be the same as the peer group used in benchmarking executive compensation.276 Commenters raised questions about the impact of a registrant changing its peer group. Some commenters advocated for requiring additional disclosure in the event that a registrant changes its peer group,277 including requiring the disclosure of comparative results of TSR for all peer groups used in the disclosed time period.278 Others questioned what impact the change of a peer group would have on cumulative TSR,279 with some commenters suggesting we only require disclosure of the current peer group.280 One commenter suggested that, if annual TSR is used, the peer group in place in the respective year of disclosure should be the peer group used to calculate the peer group TSR for that year of disclosure.281 khammond on DSKJM1Z7X2PROD with RULES3 iii. Final Amendments We are adopting the requirement, as proposed, that all registrants subject to the final rules use TSR, and that registrants (other than SRCs) use peer group TSR, as measures of performance. As noted in the Proposing Release, Section 14(i) does not mandate we require specific measures in the payversus-performance disclosure. However, the statute does provide that the disclosures should ‘‘tak[e] into account any change in the value of the shares of stock and dividends of the issuer and any distributions.’’ 282 While we recognize commenters’ concerns that TSR is not an equally useful measure for all registrants (as it is not necessarily used by all registrants to set compensation and is seen by some commenters to be an unreliable performance measure for thinly-traded stocks), is subject to fluctuations based on circumstances outside of the control of the registrant, and may be affected by the granting and vesting of stock options, we believe that TSR is consistent with that statutory language. In addition, we believe mandating a consistently calculated measure for all registrants will further the 276 See letter from AFL–CIO 2015; see also letter from As You Sow 2015 (stating that ‘‘ideally’’ all registrants would use the benchmarking peer group in their pay-versus-performance disclosure). 277 See letters from AFL–CIO 2015; Hermes; and SBA–FL. 278 See letter from Hermes. 279 See letters from Cook and Pearl. 280 See letters from Cook and Quirin. 281 See letter from Cook. 282 15 U.S.C. 78n(i). VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 comparability of the pay-versusperformance disclosures across registrants, as noted by some commenters.283 We acknowledge, as noted by some commenters, that some registrants may need to provide somewhat lengthy explanatory disclosures to explain any misalignments between compensation and TSR; however, we believe those disclosures are the types of disclosures intended by the language of Section 14(i), and will help investors understand the relationship between executive compensation actually paid and the registrant’s performance. We are not requiring registrants to disclose all measures they use to set executive compensation, as recommended by some commenters,284 because we believe such a requirement would be a significant change from the current executive compensation disclosure requirements, and would be more appropriately considered by the Commission in a broader context not related to the Section 953(a) mandate. In addition, as noted below,285 as with other mandated disclosures, registrants would be permitted to disclose additional measures of performance, so long as any additional disclosure is clearly identified as supplemental, not misleading and not presented with greater prominence than the required disclosure. While this does not provide registrants with the full flexibility of a principles based approach suggested by some commenters, we believe this ability to supplement the required disclosures will provide registrants with adequate discretion to provide sufficiently fulsome disclosure of the relationship between their performance and the compensation actually paid to their executives. We also believe that absolute company performance alone, as reflected in TSR, may not be a sufficient basis for comparison between companies, and that peer group TSR will provide investors with more comprehensive information for assessing whether the registrant’s performance was driven by factors common to its peers or instead by the registrant’s own strategy and other choices. The final rules require a registrant to disclose weighted peer group TSR (weighted according to the respective issuers’ stock market capitalization at the beginning of each period for which a return is indicated), using either the same peer group used for purposes of Item 201(e) of 283 See supra note 235. supra notes 251–252. 285 See infra Section II.F.3. 284 See PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 55153 Regulation S–K or a peer group used in the CD&A for purposes of disclosing registrants’ compensation benchmarking practices. If the peer group is not a published industry or line-of-business index, the identity of the issuers composing the group must be disclosed in a footnote. 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 this requirement by incorporation by reference to those filings. We believe this would avoid the potential for duplicative disclosure. Consistent with the approach taken in Item 201(e) of Regulation S–K, as proposed, if a registrant changes the peer group used in its pay-versus-performance disclosure from the one used in the previous fiscal year, it will only be required to include tabular disclosure of peer group TSR for that new peer group (for all years in the table), but must explain, in a footnote, the reason for the change, and compare the registrant’s TSR to that of both the old and the new group.286 Some commenters advocated for more disclosure when a peer group changes (including requiring the disclosure of comparative results of TSR for all peer groups used in the disclosed time period), while other commenters suggested we only require disclosure of the current peer group. We believe the adopted approach strikes the appropriate balance of providing investors information when a peer group changes, while also not requiring overcomplicated disclosure. In addition, as proposed, we are requiring weighted peer group TSR, as calculated under Item 201(e) of Regulation S–K, as registrants are already familiar with this calculation.287 In response to commenters’ questions about the calculation of TSR, we are clarifying the definition of ‘‘measurement period’’ in the final text of the rule. TSR will continue to be calculated on the same cumulative basis as is used in Item 201(e) of Regulation S–K, measured from 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 fiscal year for which TSR is being calculated (i.e., the TSR for the first year in the table will represent the TSR over that first year, the TSR for the second year will represent the cumulative TSR 286 See 17 CFR 229.402(v)(2)(iv). calculated weighted peer group TSR, the returns of each component issuer of the group must be weighted according to stock market capitalization at the beginning of each period for which a return is indicated. See Instruction 5 to Item 201(e) of Regulation S–K. 287 To E:\FR\FM\08SER3.SGM 08SER3 55154 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 over the first and the second years, etc.). We are also clarifying that both TSR and peer group TSR should be calculated based on a fixed investment of one hundred dollars at the measurement point. As noted by a commenter,288 the TSR presented in the stock performance graph includes a starting investment amount on the y-axis, from which the subsequent TSR amounts are calculated. As the final rules mandate a tabular not graphical disclosure of TSR, we are clarifying that the TSR amounts should be calculated based on an initial fixed investment of one hundred dollars, to clarify for investors what amount is used to calculate the TSR figures, and to standardize the disclosure across registrants. We are not requiring, as suggested by some commenters, that TSR be calculated as a percentage change instead of a dollar value; be disclosed as a one-year measure; be calculated as a rolling average; or be calculated based on a time period chosen by the registrant as we believe all of those approaches would depart from the existing approach used in Item 201(e) of Regulation S–K, and therefore could be burdensome to registrants and confusing to investors. Similarly, we believe that permitting registrants to choose their own criteria for calculating their TSR and peer group TSR for the pay-versus-performance disclosure could also lead to investor confusion. We disagree with commenters who raised concerns that peer group TSR would be confusing to investors, expensive to calculate, and hard to understand. Peer group TSR is already included in other disclosures, meaning both investors and registrants are generally familiar with it. While peer group TSR is not specifically included in Section 14(i), we believe it is a useful measure for evaluating a registrant’s performance, as noted by other commenters, and we are therefore using our discretionary authority to require this additional information to enhance the Dodd-Frank Act mandated disclosures. As we described above, peer group comparisons are often used by registrants’ compensation committees,289 and may help in determining whether a registrant’s performance was driven by factors common to its peers, which may have 288 See letter from CAP (noting that ‘‘TSR is indexed based on a $100 investment while compensation is reported in dollars so the scales are fundamentally different’’ and suggesting that ‘‘[t]he easiest solution would be to require companies to calculate compensation actually paid for 6 years, with the sixth year indexed to 100, similar to TSR in the stock performance graph’’). 289 See supra note 69 and accompanying text. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 been outside of the control of its executives. As discussed below,290 to address commenters’ concerns with respect to the proposal to use TSR and peer group TSR as the sole measures of performance (such as causing companies to adjust their compensation programs to more heavily rely on TSR), we are also requiring registrants to include net income and a CompanySelected Measure as performance measures in the tabular disclosure, and also permitting companies to voluntarily include additional measures of their choosing in the table, as suggested by some commenters.291 The inclusion of the Company-Selected Measure and the ability of registrants to voluntarily include additional measures may also address commenters’ concerns with respect to incentivizing short-term performance at the expense of shareholders’ long-term best interests. We believe these additional measures should help alleviate concerns expressed by some commenters that disclosing only TSR (for a registrant and its peer group) would put too much emphasis on that one measure. 2. Requirement To Disclose Net Income i. Amendments Considered in the Reopening Release In the Reopening Release, we requested comment on requiring registrants to disclose both income or loss before income tax expense and net income in their pay-versus-performance disclosure.292 We stated we were considering these two measures because in reflecting a registrant’s overall profits (net of costs and expenses), they could be additional important measures of company financial performance that may be relevant to investors in evaluating executive compensation, and could complement the market-based performance measures required in the Proposing Release (TSR and peer group TSR) by also providing accountingbased measures of financial performance. In addition, both net income and income or loss before income tax expense are measures that are familiar to registrants and investors, as both are generally required to be presented on the face of the Statement of Comprehensive Income by Regulation S–X. Net income is also a line item required by U.S. GAAP and 290 See infra Sections II.D.2; II.D.4; and II.F.3. supra note 249. 292 As discussed above, in this release, to be consistent with the language in Regulation S–X, we are using the phrase ‘‘income or loss before income tax expense’’ in lieu of the phrase ‘‘pre-tax net income,’’ which was used in the Reopening Release. See supra note 33. 291 See PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 International Financial Reporting Standards (‘‘IFRS’’) as issued by the International Accounting Standards Board. ii. Comments Commenters were divided over the potential inclusion of income or loss before income tax expense and net income. A number of commenters generally supported the inclusion of the measures as additional measures in the table; 293 noting that they will be useful to investors in assessing executive compensation; 294 will cause minimal compliance challenges, as they are already calculated by registrants; 295 and will increase comparability.296 However, other commenters opposed requiring registrants to disclose the measures,297 noting they are not relevant for or comparable across all companies 298 (particularly early stage companies and real estate investment trusts (‘‘REITs’’) 299); are not used by 293 See letters from As You Sow, dated Mar. 4, 2022 (‘‘As You Sow 2022’’); Better Markets; Better Markets, Institute for Policy Studies, Global Economy Project, and Public Citizen, dated Mar. 4, 2022 (‘‘Better Markets et al.’’); CalPERS 2022; CalSTRS; CII 2022; ICGN; Mark C, dated Feb. 21, 2022 (‘‘Mark C’’); PRI; Public Citizen, dated Mar. 4, 2022 (‘‘Public Citizen 2022’’); Teamsters; and Troop Inc., dated Feb. 17, 2022 (‘‘Troop’’). 294 See letters from As You Sow 2022; Better Markets; Better Markets et al.; CalPERS 2022; CalSTRS; CII 2022; ICGN (noting that net income ‘‘could be useful for companies that have a highly complex tax structure’’); PRI; Public Citizen 2022; Teamsters; and Troop. 295 See letter from Better Markets; Better Markets et al.; PRI; and Public Citizen 2022. 296 See letter from PRI. 297 See letters from AB; Aon HCS; ASA; Center on Executive Compensation, dated Mar. 4, 2022 (‘‘CEC 2022’’); Davis Polk 2022; Dimensional; FedEx Corp., dated Mar. 4, 2022; Georgiev; Infinite; Legal & General Investment, dated Mar. 3, 2022 (‘‘LGIM’’); McGuireWoods; Nareit, dated Mar. 4, 2022 (‘‘Nareit’’); NAM 2022; NIRI 2022; PG 2022; SCG; and TCA 2022. 298 See letters from AB; CEC 2022; Dimensional; Infinite; LGIM; Nareit; NIRI 2022; PG 2022; and SCG. 299 See letters from Dimensional (noting that changes to a company’s business plan (such as closing business lines, selling certain assets, or investing in research and development) could result in low or negative net income, ‘‘even though the strategies may ultimately pay off for shareholders over the long term’’); Infinite (noting that income or loss before income tax expense and net income ‘‘may not provide reliable insight into the results of management’s efforts at developmental or transitional stage companies’’); LGIM (noting that ‘‘different growth stages’’ of a company might necessitate it focusing on metrics other than income metrics); Nareit (stating that ‘‘[d]ue to certain features of the way REITs are organized and operated under [F]ederal tax law as well as certain features of U.S. GAAP,’’ income or loss before income tax expense and net income are not typically used by investors or management when evaluating the alignment of pay with performance for REITs); and NIRI 2022 (stating that income measures are ‘‘completely impractical as measures of financial performance for smaller companies that E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations many companies in setting executive compensation; 300 would be incomplete or misleading without appropriate context; 301 and can vary period over period due to one-time adjustments and events such that the relationship with pay would be distorted.302 Other commenters opposed the measures more generally, as non-company-specific measures, indicating their inclusion would ‘‘substantially lengthen’’ the payversus-performance disclosure, without providing specific insight into the registrant,303 would not address the shortcomings of TSR because they have similar weaknesses (such as encouraging short-termism or ‘‘overemphasiz[ing] financial performance’’),304 or would stifle innovation by encouraging more uniform compensation structures given the standardized disclosure across registrants.305 khammond on DSKJM1Z7X2PROD with RULES3 iii. Final Amendments We are adopting the final rules to require registrants to include net income in their tabular disclosure. As discussed above,306 registrants would also be required to provide a clear description of the relationship of net income to executive compensation actually paid, in narrative or graphical form, or a combination of the two. Although, as noted by some commenters, net income itself may not be frequently used by registrants directly in setting compensation, we believe that net income is closely related to other profitability measures that we believe, based on Commission staff experience, may be used by registrants in setting compensation, while also being widely understood and standardized, as a required disclosure item under Regulation S–X, U.S. GAAP, and IFRS. The inclusion of net income as an additional financial performance measure could complement the marketbased performance measure of TSR, and, to the extent that TSR does not (in the view of management) fully reflect a company’s performance, could help to provide investors more ready access to an additional key measure of the company’s recent financial performance. As noted in the Reopening Release, to the extent that net income are at a startup or early phase and not generating any net income under GAAP’’). 300 See letter from ASA; CEC 2022; and Davis Polk. 301 See letters from ICGN; Infinite; and PG 2022. 302 See letter from Dimensional Infinite; and PG 2022. 303 Letter from Aon HCS. 304 See letters from Georgiev; and McGuireWoods. 305 See letter from SCG. 306 See supra Section II.A.2.iii. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 would otherwise be considered by investors when evaluating the alignment of pay with performance, its inclusion in the table may lower the burden of analysis for those investors. We also believe that the standardized disclosure of net income could assist investors in generally understanding and analyzing the relationship between pay and performance. While, as noted by some commenters, net income may not be relevant for all registrants at all times,307 including it may allow investors to have a standard baseline from which to analyze a registrant’s payversus-performance disclosure. Moreover, by requiring a CompanySelected Measure and giving registrants the ability to disclose additional registrant-specific measures, we believe registrants can avoid concerns raised by commenters that financial performance would be overemphasized or disclosure overly standardized 308 by the required disclosure of net income. The final rules do not require disclosure of income or loss before income tax expense, as considered in the Reopening Release. Net income and income or loss before income tax expense are highly correlated,309 so we believe requiring both could lead to unnecessarily duplicative disclosure, which could have raised questions for investors trying to understand what, if any, meaningful differences there were between the measures. This potentially duplicative disclosure also would have required registrants to prepare additional relationship disclosure (about the relationship between income or loss before income tax and executive compensation actually paid), which would have created an additional burden on registrants, and may have been less clear for investors. By requiring only one of the two net income measures, we also partially address the concern that adding both net income and income or loss before income tax expense could ‘‘substantially lengthen’’ the pay-versus-performance disclosure. In addition, we believe net income may, based on statistics provided by a commenter, be used by significantly more companies in linking pay to performance than income or loss before income tax expense.310 307 See supra notes 298–300 and accompanying text. 308 See supra notes 304–305 and accompanying text. 309 Based on staff analysis of data from Compustat, net income and income or loss before income tax expense are roughly 95 percent correlated. 310 See letter from CEC 2022. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 55155 3. Tabular List of the Registrant’s ‘‘Most Important’’ Performance Measures i. Amendments Considered in the Reopening Release In the Reopening Release, we requested comment on requiring registrants to provide a ranked tabular list of the five 311 most important measures that they use to link executive compensation actually paid during the fiscal year to company performance, over the time horizon of the disclosure. We requested comment on the inclusion of such a ranked list, in part, in response to commenters who stated that the proposal should be revised to require disclosure of the quantitative metrics or key performance targets companies actually use to set executive pay.312 We noted that this disclosure, if required, would be supplemental to the existing CD&A disclosure, which requires registrants to disclose ‘‘all material elements of the compensation paid,’’ including, for example, which ‘‘specific items of corporate performance are taken into account in setting compensation policies and making compensation decisions,’’ but does not specifically mandate disclosure of the performance measures that determined the level of recent NEO compensation actually paid. We noted that, under the considered approach, registrants would be able to crossreference to existing disclosures elsewhere in the applicable disclosure document that describe the various processes and calculations that go into determining NEO compensation as it relates to these performance measures, if they elected to do so. ii. Comments A number of commenters supported the inclusion of a ranked list.313 Some of the commenters who supported the ranked list also suggested additional 311 The Reopening Release provided that, if the registrant considers fewer than five performance measures when it links executive compensation actually paid during the fiscal year to company performance, the registrant would be required to disclose only the number of measures it actually considers. 312 See, e.g., letters from AFL–CIO 2015; CII 2015; Public Citizen 2015; and SBA–FL. 313 See letters from As You Sow 2022; Better Markets; Better Markets et al.; CalSTRS; Ceres and Ceres Accelerator for Sustainable Capital Markets, dated Mar. 4, 2022 (‘‘Ceres’’); CII 2022; Dimensional; Infinite; ICGN; Mark C (stating that the list ‘‘would give investors greater transparency into [registrants’] policies as well as more tangible metrics by which to make their investment decisions’’); PRI; Public Citizen 2022; and Responsible Asset Allocator Initiative at New America, and The Predistribution Initiative, dated Mar. 3, 2022 (‘‘RAAI’’); see also letter from AFREF (supporting the ranked list as an alternative to not disclosing ‘all’ performance measures). E:\FR\FM\08SER3.SGM 08SER3 55156 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations disclosures to supplement the list itself, including requiring ‘‘clear description of the relationship between the measures and executive compensation,’’ 314 the metrics and methodology used to calculate the measures,315 and the ‘‘percentage of total compensation paid at the vesting date’’ with respect to each of the measures included in the list.316 In addition, some commenters supported requiring or permitting environmental, social and governance (‘‘ESG’’) metrics to be included in the ranked list.317 One commenter also specifically supported using a tabular format for the list, stating that it would help make company-to-company comparisons.318 A number of other commenters opposed the ranked list,319 with some indicating that its ranking requirement would be difficult to satisfy, as registrants do not rank their measures in the compensation setting process and measures can interact in determining pay in complex ways. Some commenters objected that the list oversimplifies the compensation setting process, particularly because there could be difficulty ranking multiple measures, which might be related or hold equal importance at any given time.320 Others indicated the list and associated clarifications and explanations would increase the length and complexity of disclosure and associated burdens with little or no corresponding benefit.321 In contrast, one commenter indicated that it was not aware of any additional costs to disclose the five most important performance measures, and that the disclosure of sensitive or competitive information should not be necessary to provide the list.322 One commenter suggested that the ranked list was beyond the scope of the Dodd-Frank Act mandate,323 and others noted that similar disclosure is already available in the CD&A.324 There were also a number of commenters who commented on the ‘‘most important’’ concept, which we considered applying both to the ranked 314 Letter from PRI. letter from ICGN. 316 Letter from Infinite. 317 See letters from As You Sow 2022; Better Markets; Ceres; PRI; Public Citizen 2022; and RAAI. 318 See letter from ICGN. 319 See letters from Aon HCS; ASA; CEC 2022; Davis Polk 2022; IBC 2022; McGuireWoods; NAM 2022; NIRI 2022; PG 2022; SCG; and TCA 2022. 320 See letters from Aon HCS; Davis Polk 2022; IBC 2022; LGIM; NAM 2022; and SCG. 321 See letters from Aon HCS; CEC 2022; Davis Polk 2022; and IBC 2022. 322 See letter from ICGN. 323 See letter from SCG. 324 See letters from CEC 2022; Davis Polk 2022; McGuireWoods; and SCG. khammond on DSKJM1Z7X2PROD with RULES3 315 See VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 list and the Company-Selected Measure (discussed below). Two commenters suggested that defining the ‘‘most important’’ measures would be burdensome for companies,325 particularly given that many companies overlap and interrelate the measures they use to set compensation. One commenter, who opposed the requirement to include a CompanySelected Measure, stated that, if a ‘‘most important’’ concept is included in the final rules, the Commission should not define ‘‘most important’’ on behalf of registrants.326 However, another commenter suggested that the Commission make explicit that the ‘‘most important’’ measures are those that drove the outcome of compensation payments, not those that were the most important in compensation decisionmaking.327 Some commenters suggested that the Commission clarify whether certain market-linked measures could be considered the ‘‘most important’’ measures,328 with one suggesting that companies should be able to select the measure they believe to be most important ‘‘regardless of whether that measure is one that it uses in a performance or market condition in the context of an incentive plan.’’ 329 One commenter suggested that the ‘‘most important’’ concept would be improved, ‘‘if the definition includes the registrant’s assessment that the measure will assist investors in better understanding how the registrant’s pay programs contribute to the company’s long-term shareholder return,’’ 330 while another suggested that the standard to evaluate ‘‘most important’’ should be ‘‘most useful’’ for the company.331 A number of commenters supported allowing the companies’ ‘‘most important’’ measures to be non-financial measures.332 Two commenters specifically commented on the time period over which the ‘‘most important’’ measures should be measured: one supported using the measure that was the ‘‘most important’’ over the time horizon of the disclosure,333 while the other suggested that the ‘‘most important’’ evaluation should be made annually.334 A few commenters were concerned that requiring companies to disclose a specific ‘‘most important’’ measure may lead companies to provide disclosure that highlights the measure that makes the company look the best.335 iii. Final Amendments The final rules require registrants provide a list of their most important financial performance measures used by the registrant to link executive compensation actually paid during the fiscal year to company performance (‘‘Tabular List’’), and permit registrants to include non-financial performance measures in the Tabular List if such measures are among their most important performance measures.336 However, in response to comments received on the Reopening Release, certain of the requirements for this list differ from the approach discussed in the Reopening Release. First, in response to comments, we are not requiring the Tabular List to be ranked. As noted by a number of commenters, numerically ranking measures may be difficult for companies, given the frequent interplay between different measures within a company’s compensation program. We believe an unranked list will provide investors with insights into companies’ executive compensation programs by still presenting them with the ‘‘most important’’ measures, while avoiding potentially burdensome calculations 333 See 325 See letters from Davis Polk 2022 and NAM 2022. 326 See letter from Davis Polk 2022. 327 See letter from Infinite. 328 See letters from Georgiev and Infinite. 329 Letter from Davis Polk 2022 (opposing the requirement to include a Company-Selected Measure, but stating that, if it is required, the measure should be able to be one that is not linked to a performance or market condition). See also Executive Compensation and Related Person Disclosure Release No. 33–8732A (Aug. 29, 2006) [71 FR 53158] at n. 167 (discussing the use of performance conditions and market conditions in equity incentive plans). 330 Letter from CII 2022. 331 See letter from ICGN. 332 See letters from AFREF; As You Sow 2022; Better Markets; CalSTRS; Ceres; CII 2022; Georgiev; PRI; and RAAI. See also letter from LWC (stating that companies should be required to discuss ESG metrics, and if ESG metrics are not used by the company, ‘‘the company should be required to explain why not’’). PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 letter from CII 2022. letter from Davis Polk 2022. 335 See letters from AFL–CIO 2022; AFREF; and Mark C. 336 See 17 CFR 229.402(v)(6). We are clarifying that the measures required to be included in the registrant’s list of its most important financial measures are ‘‘financial performance measures,’’ given that the language in Section 14(i) specifically references financial performance. For purposes of Item 402(v) of Regulation S–K, as adopted,’’financial performance measures’’ means measures that are determined and presented in accordance with the accounting principles used in preparing the issuer’s financial statements, any measures that are derived wholly or in part from such measures, and stock price and total shareholder return. A financial performance measure need not be presented within the financial statements or otherwise included in a filing with the Commission to be included in the Tabular List or be the Company-Selected Measure. See 17 CFR 229.402(v)(2)(vi). ‘‘Non-financial performance measures’’ are performance measures other than those that fall within the definition of financial performance measures. 334 See E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 and analysis that could be involved in specifically designating a first, second, third, etc. ‘‘most important’’ measure. We are not requiring registrants to provide the methodology used to calculate the measures included in the Tabular List. We believe such a requirement would be burdensome on registrants, particularly when the measures are already well understood by investors or otherwise disclosed. However, registrants should consider if such disclosure would be helpful to investors to understand the measures included in the Tabular List, or necessary to prevent the Tabular List disclosure from being confusing or misleading. Second, under the final rules, the ‘‘most important’’ determination is made on the basis of looking only to the most recently completed fiscal year, as opposed to ‘‘the time horizon of the disclosure,’’ as described in the Reopening Release. We believe this approach will alleviate commenters’ concerns that identifying the ‘‘most important’’ measures would be difficult, particularly when companies have overlapping or interrelating measures, by narrowing the universe of measures to be considered when selecting the ‘‘most important’’ to those used in the prior year (instead of the prior five years). In addition, we believe focusing the disclosure on the registrant’s ‘‘most recently completed fiscal year’’ will accommodate changes in compensation programs and in the compensation related to specific measures over time, and avoid situations where a registrant is disclosing measures that are no longer used in, or important to, its executive compensation program, but would still be ‘‘most important’’ based on the measure’s usage in prior years disclosed in the table. Finally, although the Reopening Release considered a list that would include the five most important measures, the final rules we are adopting require disclosure of at least three,337 and up to seven financial performance measures,338 and also 337 If the registrant considers fewer than three financial performance measures when it links executive compensation actually paid during the fiscal year to company performance, under the final rules and as considered in the Reopening Release, the registrant will be required to disclose only the number of measures it actually considers. Registrants that do not use any financial performance measures to link executive compensation actually paid to company performance would not be required to present a Tabular List. 338 Based on staff experience, the majority of companies use fewer than seven metrics, in total, in their incentive plans. See also, e.g., Meridian Compensation Partners, LLC, 2020 Trends and Developments in Executive Compensation (April VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 permit registrants to include nonfinancial performance measures in that list. We believe that providing registrants with flexibility in the number of measures they can include in the list may also lessen the difficulty, noted by commenters, of identifying a registrant’s ‘‘most important’’ measures. For example, a registrant with three, four, five, or six equally ‘‘most important’’ measures would not need to increase or decrease their ‘‘most important’’ measure disclosure to specifically disclose five measures. We acknowledge that, for certain issuers, this concern may still remain due to the minimum of three and limit of seven measures imposed by the final rules; however we are of the view that providing an upper bound for the list will reduce the risk of lengthy, overly complicated lists, which would fail to advance the statutory objective of providing clear and simple comparisons of pay with performance. In addition, we believe allowing an unlimited number of measures could in some cases result in misleading or confusing disclosures by obscuring which performance measures are principally driving compensation actually paid. As discussed in the Reopening Release, the final rules specify that measures required to be included in the Tabular List are financial performance measures that, in the registrant’s assessment, represent the most important financial performance measures used by the registrant to link compensation actually paid during the fiscal year to company performance. As discussed in the Reopening Release, we believe that a list of the measures that the registrant assesses to be the ‘‘most important’’ may enable investors to more easily assess which performance 30, 2020), available at https://www.meridiancp. com/wp-content/uploads/Meridian-2020-Trendsand-Developments-Survey-Final.pdf (‘‘Meridian 2020 Survey’’) (indicating that, while the measures used in long-term and annual incentive plans are often different, only 2% of 108 companies surveyed by Meridian used three or more performance measures in their long-term incentive plans or their annual incentive plans); and Aon plc, The Latest Trends in Incentive Plan Design as Firms Adjust Plans Amid Uncertainty (October 2020), available at https://humancapital.aon.com/insights/articles/ 2020/the-latest-trends-in-incentive-plan-design-asfirms-adjust-plans-amid-uncertainty (‘‘Aon 2020 Study’’) (surveying the CEO short- and long-term incentive plans at a sample of the S&P 500, across all industries, and finding that for short-term incentive plans, ‘‘[a]ll industries, excluding energy, reveal most companies use one to two metrics’’ and that ‘‘[a]cross all sectors of the S&P 500, companies, on average, use two metrics for long-term incentives’’). Given this, we believe a range of at least three and up to seven metrics should give almost all companies flexibility in listing their ‘‘most important’’ measures, even if they determine that all of their financial performance measures are the ‘‘most important.’’ PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 55157 measures actually have the most impact on compensation actually paid and make their own judgments as to whether that compensation appropriately incentivizes management. In addition, we believe this list will provide investors with helpful context for interpreting the pay-versus-performance disclosure, more generally, particularly when analyzing the other measures included in the table, by showing which (if any) of those measures are considered ‘‘important’’ by the registrant, in determining pay. While we recognize that some commenters supported permitting non-financial performance measures to be included in the list, the final rules specify that the only required disclosures in the Tabular List are ‘‘financial performance measures’’ given the ‘‘financial performance’’ language in Section 14(i). However, in response to commenters, the final rules provide that registrants have the option of including nonfinancial performance measures in the Tabular List. Registrants may do so only if such measures are included in their three to seven most important performance measures, and they have disclosed at least three (or fewer, if the registrant only uses fewer) most important financial performance measures. Regardless of whether registrants elect to disclose nonfinancial performance measures in their Tabular List, they still may only disclose a maximum of seven measures in the list. Under the final rules, registrants may disclose the Tabular List in three different ways.339 First, registrants may present one list with at least three, and up to seven, performance measures, which in the registrant’s assessment represent the most important performance measures used by the registrant to link compensation actually paid to the registrant’s NEOs, for the most recently completed fiscal year, to company performance, similar to the ranked list contemplated in the Reopening Release. Second, registrants may break up the Tabular List disclosure into two separate lists: one for the PEO and one for the remaining NEOs. Third, registrants may break up the Tabular List disclosure into separate lists for the PEO and each NEO. If the registrant elects to provide the Tabular List disclosure in multiple lists (the second or third options, described above), each list must include at least three,340 and 339 See 17 CFR 229.402(v)(6)(i). the registrant considers fewer than three financial performance measures when it links 340 If E:\FR\FM\08SER3.SGM Continued 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 55158 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations relationship between registrant performance and executive compensation, as the statute provides. Finally, as considered in the Proposing Release, under the final rules, registrants may cross-reference to other disclosures elsewhere in the applicable disclosure document that describe the registrant’s processes and calculations that go into determining NEO compensation as it relates to these performance measures, if they elect to do so. up to seven, financial performance measures. As in situations where a registrant elects to provide one Tabular List, registrants electing to provide the Tabular List disclosure in multiple lists may include non-financial performance measures in such lists if such measures are among their most important performance measures. Requiring the Tabular List to include measures related to both PEO and NEO compensation is consistent with the approach taken throughout Item 402(v) of Regulation S– K and we believe this consistency in disclosure will make the disclosure more readily understandable to investors. As noted above, commenters suggested that such a list was beyond the scope of the Dodd-Frank Act mandate, and that similar disclosure is already available in the CD&A.341 We believe the Tabular List would further the objectives of the Section 14(i) mandated disclosure, as it provides another avenue for investors to understand the relationship between executive compensation actually paid and the registrant’s financial performance. It is within our authority to specify the form and content of this disclosure as well as to require additional information to enhance the Dodd-Frank Act mandated disclosures. While it is possible that some registrants provide similar disclosure in the CD&A, we note that the CD&A requires disclosure of performance measures that are ‘‘material elements of the registrant’s compensation of named executive officers,’’ 342 not the ‘‘most important’’ measures used by the registrant to link executive compensation actually paid to company performance. There would be an overlap between those two disclosure requirements when the ‘‘most important’’ measures are also ‘‘material elements of the registrant’s compensation of named executive officers’’; however, they are not necessarily the same. Even in situations where the performance measures included in the Tabular List are already included in CD&A disclosure, we believe that the presentation of the measures in the Tabular List should allow investors to more readily understand what measures in the registrant’s view are the ‘‘most important’’ to its compensation program, and thus better understand the ii. Comments A number of commenters provided feedback on potential disclosure of a Company-Selected Measure, as discussed in the Reopening Release. Some commenters supported mandatory disclosure of a Company-Selected Measure,343 with one suggesting that the Company-Selected Measure (or Measures) should be the only mandated performance measure(s).344 One commenter, who generally favored compensation actually paid to the specific NEO (or group of NEOs) included in the list, during the fiscal year to company performance, the registrant will be required to disclose only the number of measures it actually considers. 341 See letters from CEC 2022; Davis Polk 2022; McGuireWoods; and SCG. 342 Item 402(b) of Regulation S–K. 343 See letters from As You Sow 2022; Better Markets; CalPERS 2022; CalSTRS; Dimensional; Georgiev; Infinite; ICGN; Nareit (specifically supporting the fact that it would provide REITs with flexibility to disclose a measure more relevant for them); PG 2022; PRI; RAAI; Teamsters; and Troop. 344 See letter from NAM 2022. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 4. Requirement To Disclose a CompanySelected Measure i. Amendments Considered in the Reopening Release The Reopening Release requested comment on requiring registrants to disclose a Company-Selected Measure— a measure that in the registrant’s assessment represents the most important performance measure (that is not already included in the table) used by the registrant to link executive compensation actually paid during the fiscal year to company performance, over the time horizon of the disclosure. We considered adding this requirement in order to both provide additional useful disclosure to investors regarding the measures the registrant actually used to set compensation, and to lessen the likelihood that the mandated measures in the tabular disclosure would misrepresent or provide an incomplete picture of how pay relates to performance. We believed that requiring disclosure of a Company-Selected Measure would not be overly burdensome on registrants, as, by definition, the Company-Selected Measure would be a measure already considered by registrants when making executive compensation determinations, and may already be discussed, in a different form, in the CD&A. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 requiring registrants to disclose ‘‘all’’ measures used by registrants in linking executive compensation paid to performance, suggested that the Company-Selected Measure should be limited to financial measures, to provide an ‘‘alternative’’ to TSR, and suggested that companies should be permitted to omit the Company-Selected Measure if they do not have a single measure used to assess financial performance for compensation purposes.345 Another commenter suggested requiring the disclosure of multiple CompanySelected Measures, such as three such measures, with corresponding peer group disclosure to prevent registrants from ‘‘cherry-pick[ing] measures.’’ 346 Other commenters suggested that the Company-Selected Measure should be based on the compensation paid to the PEO, not all of the NEOs.347 Some commenters suggested that the Company-Selected Measures be disclosed alongside the methodology used to calculate it,348 with two commenters specifically suggesting the Company-Selected Measure must be ‘‘auditable/assurable’’ 349 or accompanied by ‘‘an explanation of its calculation and a complete GAAP reconciliation, if possible.’’ 350 Two commenters specifically said that, if ESG metrics are used as CompanySelected Measures, additional information about the metrics used should be disclosed.351 A number of commenters opposed the mandatory inclusion of a CompanySelected Measure,352 stating that the idea that there is one ‘‘most important’’ measure ‘‘oversimplifies’’ the compensation setting process,353 and that different measures cannot be considered in ‘‘isolation.’’ 354 As discussed above, a number of commenters supported allowing the companies’ ‘‘most important’’ measures to be non-financial measures,355 with 345 See letter from Georgiev. from Dimensional; see also letter from Georgiev (suggesting registrants be permitted to include multiple Company-Selected Measures). 347 See letter from Davis Polk 2022 (opposing the mandatory disclosure of a Company-Selected Measure, but stating that, if it is required, it should be based on compensation paid to the PEO) and Infinite. 348 See letters from AFREF; CII 2022; and ICGN. 349 Letter from ICGN. 350 Letter from Teamsters. 351 See letters from Dimensional and PRI. 352 See letters from Aon HCS; ASA; CEC 2022; Davis Polk 2022; IBC 2022; McGuireWoods; and TCA 2022 (stating that the Company-Selected Measure should be ‘‘allow[ed] for,’’ while other prescribed measures should be eliminated). 353 Letter from IBC 2022. 354 Letter from CEC 2022. 355 See supra note 332. See also letter from Davis Polk 2022 (opposing the mandatory disclosure of a 346 Letter E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations some supportive of allowing nonfinancial measures to be a registrant’s Company-Selected Measure.356 Other commenters opposed either allowing non-financial measures to be included as Company-Selected Measures, indicating that doing so ‘‘would be at odds with both the language and intent of Section 953(a),’’ 357 or requiring or encouraging companies to incorporate ESG metrics in setting executive pay.358 Commenters were divided on whether Company-Selected Measures should be permitted to be changed from year to year, and if so, what disclosure should be required. One commenter was directly opposed to regular changes in the Company-Selected Measure, stating the measure should be required to remain the same for at least five years, in order to avoid companies rationalizing the ‘‘best’’ measure each year.359 Other commenters supported allowing annual changes to the Company-Selected Measure, so long as accompanying disclosure about the reason for the change or a period of disclosure of the ‘old’ and ‘new’ measures was provided.360 One commenter alternatively suggested that the Company-Selected Measure should be the ‘‘most important’’ measure over a given period, and not the ‘‘most important measure’’ for all five years in the table.361 One commenter suggested that, if the ‘‘most important’’ measure is already included in the tabular disclosure, the next-most important measure should be included as the Company-Selected Measure,362 while another commenter (who generally opposed the inclusion of the Company-Selected Measure) stated that, if it is a measure otherwise required to be disclosed in the table, the Company-Selected Measure should be able to be an already-included measure.363 iii. Final Amendments khammond on DSKJM1Z7X2PROD with RULES3 The final rules require registrants to disclose a Company-Selected Measure Company-Selected Measure, but stating that, if it is required, ‘‘it should be permitted to encompass factors other than measures that relate to financial performance’’). 356 See letters from AFREF; CII 2022; Ceres; and PRI. 357 See letter from Center for Capital Markets Competitiveness, dated Mar. 4, 2022. 358 See letter from Dimensional. 359 See letter from Better Markets et al. 360 See letters from CalPERS 2022; CII 2022; Davis Polk 2022 (opposing the mandatory disclosure of a Company-Selected Measure, but stating that, if it is required, it should allow for variability over different years); ICGN; and Troop. 361 See letter from PG 2022. 362 See letter from PDI. 363 See letter from Davis Polk 2022. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 in the table required under new 17 CFR 229.402(v)(1). The Company-Selected Measure must be a financial performance measure included in the Tabular List, which in the registrant’s assessment represents the most important performance measure (that is not otherwise required to be disclosed in the pay-versus-performance table required under new Item 402(v) of Regulation S–K) used by the registrant to link compensation actually paid to the registrant’s NEOs, for the most recently completed fiscal year, to company performance. If the registrant’s ‘‘most important’’ measure is already included in the tabular disclosure, the registrant would select its next-most important measure as its CompanySelected Measure. As discussed above,364 registrants would also be required to provide a clear description of the relationship of the CompanySelected Measure to executive compensation actually paid, in narrative or graphical form, or a combination of the two.365 We believe that providing a quantified Company-Selected Measure, along with the Tabular List, will provide investors with useful context for understanding the measures actually used by registrants in their compensation programs. In order to allow investors to understand the measure that is most important, we are only requiring registrants to provide one CompanySelected Measure. However, we recognize some registrants may have additional performance measures (including non-financial measures) that they believe are ‘‘important’’ measures and that could warrant quantified disclosure. We note that, under the Plain English principles (discussed below 366), registrants may provide additional performance measures as new columns in the table. However, such additional disclosures may not be misleading or obscure the required information, and the additional performance measures may not be presented with greater prominence than the required disclosure.367 If a registrant 364 See supra Section II.A.2.iii. 365 As with the Tabular List, we are also not requiring registrants to provide the methodology used to calculate the Company-Selected Measure. We believe such a requirement would be overly burdensome on registrants, particularly when the measure is already well understood by investors or otherwise disclosed. However, registrants should consider if such disclosure would be helpful to investors to understand the Company-Selected Measure, or necessary to prevent the CompanySelected Measure disclosure from being confusing or misleading. 366 See infra Section II.F.3. 367 Consistent with the Plain English principles, if a registrant elects to include multiple additional PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 55159 elects to provide any additional performance measures in the table, each additional measure must also be accompanied by a clear description of the relationship between executive compensation actually paid to the registrant’s PEO, and, on average, to the other NEOs, and that measure.368 We believe clarifying that registrants have the flexibility to include additional measures will, to some degree, alleviate concerns raised by some commenters in response to the Reopening Release that selecting one Company-Selected Measure was overly simplistic and did not reflect how companies actually approach their compensation programs, while also providing registrants the opportunity to provide context to the other mandatory measures disclosed in the table. As the Company-Selected Measure must be a measure included in the Tabular List,369 the determination of ‘‘most important’’ that registrants must use for selecting Company-Selected Measures is the same as the determination they must use for selecting required measures for the Tabular List (i.e., the ‘‘most important’’ determination is made based on the most recently completed fiscal year and the measures required to be disclosed are financial measures of performance). We are limiting the measures required to be included in the Tabular List (and to be included as the Company-Selected Measure) to financial performance measures given the statutory language referencing ‘‘the relationship between executive compensation actually paid and the financial performance of the issuer.’’ 370 We recognize that some registrants may consider one or more non-financial performance measures to be their most important measures for executive compensation purposes. In addition to the option under the final rules to include such measures in the Tabular list, under the Plain English principles, those registrants can supplement their mandatory pay-versusperformance disclosure with disclosure measures in the table, it should consider whether the addition of those measures modifies the disclosure in such a way that the disclosure becomes misleading, the required information in the table becomes obscured, or the additional measures are presented with greater prominence than the required disclosure. In addition, in situations where registrants elect to describe multiple measures because they believe multiple measures are equally the ‘‘most important,’’ they would still be required to select one CompanySelected Measure, but could provide explanatory disclosure, for example, about why additional measures are added and the reason that the Company-Selected Measure was selected. 368 See 17 CFR 229.402(v)(5). 369 See 17 CFR 229.402(v)(2)(vi). 370 15 U.S.C. 78n(i) (emphasis added). E:\FR\FM\08SER3.SGM 08SER3 55160 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations about those non-financial performance measures, as discussed below.371 The table will include the numerically quantifiable performance of the issuer under the Company-Selected Measure for each covered fiscal year. For example, if the Company-Selected Measure for the most recent fiscal year was total revenue, the company would disclose its quantified total revenue performance in each covered fiscal year. The Company-Selected Measure could change from one filing to the next, and we acknowledge that some commenters were concerned that registrants may change their Company-Selected Measure in order to present the relationship of pay to performance in a positive light.372 However, we believe limiting the Company-Selected Measure to compensation linked to performance for the most recently completed fiscal year will provide investors with visibility into the registrant’s current executive compensation program, and avoid situations in which the CompanySelected Measure is not a measure that is currently used by the registrant (i.e., when a measure is only the ‘‘most important’’ measure based on historical usage). In addition, as is the case for the Tabular List, we believe limiting the Company-Selected Measure to the most recent fiscal year will allow registrants to more easily calculate and assess which measure is the ‘‘most important.’’ Similarly to the Tabular List, we do not believe it would be appropriate to limit the Company-Selected Measure to a measure relating only to the PEO’s compensation, because our understanding is that Congress intended for the rules to provide disclosure about both PEOs and the remaining NEOs. We are not mandating that the methodology used to calculate the Company-Selected Measure be included in the registrant’s disclosure. However, as discussed above,373 registrants will be required to provide a narrative, graphical, or combined narrative and graphical description of the relationships between executive compensation actually paid to the PEO, and, on average, the other NEOs, and the Company-Selected Measure, and may cross-reference to other disclosures elsewhere in the applicable disclosure document that describe the processes khammond on DSKJM1Z7X2PROD with RULES3 371 See infra Section II.F.3. letters from Better Markets et al. (suggesting that the Company-Selected Measure should remain the same for five years to prevent firms from using a measure that best justifies compensation in a given year); see also letters from CalPERS 2022 (suggesting that if the CompanySelected Measure is changed, the prior and current Company-Selected Measures should both be reported for some period of time). 373 See supra Section II.A.2.iii. 372 See VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 and calculations that go into determining NEO compensation as it relates to the Company-Selected Measure, if they elected to do so. In addition, registrants are permitted to supplement their Company-Selected Measure disclosure, so long as any additional disclosure is clearly identified as supplemental, not misleading and not presented with greater prominence than the required disclosure. Further, we recognize that a registrant’s Company-Selected Measure, or additional measures included in the table, may be non-GAAP financial measures. Under existing CD&A requirements, if a company discloses a target level that applies a non-GAAP financial measure in its CD&A, the disclosure will not be subject to the general rules regarding disclosure of non-GAAP financial measures, but the company must disclose how the number is calculated from its audited financial statements.374 Because the disclosure required by the final rules is intended, among other things, to supplement the CD&A, we believe it is appropriate to treat non-GAAP financial measures provided under Item 402(v) of Regulation S–K consistently with the existing CD&A provisions. As a result, the final rules specify that disclosure of a measure that is not a financial measure under generally accepted accounting principles will not be subject to Regulation G and Item 10(e) of Regulation S–K; however, disclosure must be provided as to how the number is calculated from the registrant’s audited financial statements. E. Time Period Covered 1. Proposed Amendments We proposed requiring all registrants, other than SRCs, to provide the payversus-performance disclosure for the five most recently completed fiscal years, and requiring SRCs to provide disclosure for the three most recently completed fiscal years. We also proposed providing transition periods for registrants: SRCs would only be required to provide the Item 402(v) of Regulation S–K disclosure for the last two fiscal years in the first applicable filing after the rules became effective; and all other registrants would be required to provide the disclosure for three fiscal years, in the first applicable filing after the rules became effective, 374 See Instruction 5 to Item 402(b) of Regulation S–K. The general non-GAAP financial measure provisions are specified in Regulation G [17 CFR 244.100 through 102] (‘‘Regulation G’’) and Item 10(e) of Regulation S–K [17 CFR 229.10(e)] (‘‘Item 10(e) of Regulation S–K’’). PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 and to provide disclosure for an additional year in each of the two subsequent annual proxy filings where disclosure is required. The Proposing Release also provided that the pay-versus-performance disclosure would only need to be provided for years in which a registrant was a reporting company pursuant to Section 13(a) of the Exchange Act 375 or Section 15(d) of the Exchange Act 376 (‘‘Section 15(d)’’), consistent with the phase-in period for new reporting companies in their Summary Compensation Table disclosure.377 2. Comments Several commenters supported the proposed disclosure periods,378 while several others generally opposed them.379 Some commenters who opposed the proposed disclosure periods stated that the periods were too short to measure management’s performance; 380 while others argued the periods were too long, creating burdensome costs for registrants, and were inconsistent with other approaches taken in the proxy statement.381 Commenters suggested a number of different alternative time periods. Some commenters suggested permitting registrants to voluntarily disclose additional years in the tabular disclosure,382 while others opposed permitting additional years of disclosure.383 Some other commenters recommended the Commission use a three-year period,384 with some of those commenters noting that three-year periods will have less NEO turnover, meaning registrants will need to make less explanatory disclosure.385 One commenter suggested we only require the disclosure for one year.386 Another commenter suggested allowing registrants to set the time period 375 15 U.S.C. 78m(a). U.S.C. 78o(d). 377 See Instruction 1 to 17 CFR 229.402(c) and Instruction 1 to 17 CFR 229.402(n). 378 See letters from CII 2015; CFA; Farient; LWC; OPERS; Quirin; SVA; and TIAA. 379 See letters from AON; BorgWarner; CEC 2015; Celanese; Hay; Hyster-Yale; McGuireWoods; NACCO; PNC; SCG; and WorldatWork. 380 See Letters from Hyster-Yale and NACCO. 381 See letters from BorgWarner; Celanese; Hay; and WorldatWork. 382 See letters from CFA; NACD 2015; Andrea Pawliczek, dated Mar. 4, 2022; and Simpson Thacher. 383 See letters from Barnard 2015 and Quirin. 384 See letters from AON; Celanese; FSR; Hay; Honeywell; McGuireWoods; SCG; and WorldatWork; see also letters from Davis Polk 2015 and Davis Polk 2022 (each recommending a oneyear period, but suggesting a three-year period as an alternative to their suggestion). 385 See letters from AON and SCG. 386 See letters from Davis Polk 2015 and Davis Polk 2022. 376 15 E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations covered, with a minimum requirement, such as three years.387 Finally, one commenter did not propose a specific time period, but rather suggested the longer the period the better.388 Commenters were also divided on the suggested transition period. Some commenters supported the transition period,389 while one commenter opposed it.390 Others questioned whether there would be significant enough costs to justify applying a transition period.391 One commenter specifically supported a transition period for newly public companies.392 Commenters offered a few alternatives to the proposed transition period, including a one-year transition period, not requiring reporting until the anniversary of the effective date of the rule,393 and a longer transition period.394 khammond on DSKJM1Z7X2PROD with RULES3 3. Final Amendments We are adopting the time periods as proposed. We believe that requiring registrants, other than SRCs, to provide pay-versus-performance disclosure for a five year period will provide a meaningful period over which a relationship between annual measures of pay and performance over time can be evaluated. Further, we are requiring that the disclosure be in order beginning with the most recent fiscal year. We believe that requiring a shorter time period, for all registrants, may not provide investors with enough data to evaluate the pay-versus-performance relationship, while requiring a longer period may be overly burdensome to registrants. We also believe that the scaled disclosure requirement under which SRCs may elect to provide three years of pay-versus-performance disclosure will provide investors with an appropriate time horizon over which to observe a relationship between pay and performance, while also remaining consistent with the scaled-disclosure approach generally applied to SRCs under our executive compensation rules. While SRCs generally are only required to provide two years of executive compensation disclosure in filings with the Commission, because the final rules include a transition period that permits an existing SRC to provide two years of disclosure, instead of three, in the first applicable filing 387 See letter from Hall. letter from Hermes. 389 See letters from BRT; CFA; Hook; McGuireWoods; and TIAA. 390 See letter from Barnard 2015. 391 See letters from CII 2015 and Hermes. 392 See letter from Pearl. 393 See letters from BRT and NIRI 2015. 394 See letter from Pearl. 388 See VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 after the rules become effective, and three years of disclosure in subsequent filings, we do not believe requiring three years of pay-versus-performance data will be unduly burdensome on SRCs.395 We are also adopting the transition periods and the requirement that a registrant provide pay-versusperformance disclosure only for years that it was a reporting company pursuant to Section 13(a) or Section 15(d) of the Exchange Act, as proposed. We believe both of these provisions will mitigate concerns expressed by some commenters regarding the costs of the potential disclosure, while also, over time, providing investors with a meaningful way to evaluate a registrant’s period pay-versusperformance disclosure. In order to give companies adequate time to implement the new disclosures, we are providing that companies are required to comply with Item 402(v) of Regulation S–K in proxy and information statements that are required to include the Item 402 of Regulation S–K disclosure for fiscal years ending on or after December 16, 2022. With respect to some commenters’ suggestions that we should permit registrants to voluntarily provide additional years of disclosure, as noted below, under the Plain English principles, the final rules will permit registrants to provide additional years of disclosure, so long as doing so would not be misleading and would not obscure the required information. F. Permitted Additional Pay-VersusPerformance Disclosure 1. Proposed Amendments We proposed applying the Plain English principles in 17 CFR 240.13a– 20 and 17 CFR 240.15d–20 to the payversus-performance disclosures. We noted that, under those principles, registrants would be permitted to provide additional information beyond what is specifically required by the rules so long as the information is not misleading and would not obscure the required information. As discussed in the Proposing Release, we note 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 395 See infra Section II.G (discussing the required disclosures for SRCs). PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 55161 included information, and not misleading.’’ 396 2. Comments Some commenters supported applying the Plain English principles to the pay-versus-performance disclosure, noting that their application would be beneficial for both investors and the financial community.397 3. Final Amendments The final amendments allow registrants to provide additional payversus-performance information beyond what is specifically required by Item 402(v) of Regulation S–K, so long as doing so would not be misleading and would not obscure the required information. For example, registrants that are already providing voluntary pay-versus-performance disclosures may generally continue to provide such disclosures in their present format, or could include disclosure of long-term performance metrics measured over periods longer than a single fiscal year.398 Subject to these same principles, registrants will be permitted to include additional compensation and performance measures, or additional years of data, in the newly required table. Any supplemental measures of compensation or financial performance and other supplemental disclosures provided by registrants must be clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure. For example, depending on the facts and circumstances, a registrant could use a heading in the table indicating that the disclosure is supplemental, or include language in the text of its filing stating that the disclosure is supplemental. As noted above, to the extent additional performance measures are included in the table, these must also be accompanied by a clear description of their relationship to executive compensation actually paid to the PEO 396 See Executive Compensation and Related Person Disclosure, Release No. 33–8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 8, 2006)], at Section II.C.6. 397 See letters from McGuireWoods and PG 2015; see also letter from Hermes (supporting a ‘‘plain English’’ requirement for the pay-versusperformance disclosure, but questioning whether its application ‘‘can be mandated through regulation’’). 398 As noted above, the placement and presentation of the information required by the final rules relative to existing disclosures may not obscure the required disclosures, place the required disclosures in a less prominent position, or otherwise mislead or confuse investors. In addition, a registrant should consider whether retaining its existing pay-versus-performance disclosure would be duplicative of the disclosures required by the final rules, and, if so, it may need to consider mitigating any such duplication. E:\FR\FM\08SER3.SGM 08SER3 55162 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations and to the average such compensation of the other NEOs. As discussed in the Proposing Release, and noted by commenters, we believe applying the Plain English principles to the payversus-performance disclosure will facilitate investors’ understanding and decision-making with respect to the pay-versus-performance disclosure. G. Required Disclosure for Smaller Reporting Companies khammond on DSKJM1Z7X2PROD with RULES3 1. Proposed Amendments The Proposing Release would have required SRCs to provide disclosure under Item 402(v) of Regulation S–K, but the disclosure would be scaled for those companies, consistent with SRCs’ existing scaled executive compensation disclosure requirements. Specifically, as proposed, SRCs would: • Only be required to present three, instead of five, fiscal years of disclosure under new Item 402(v) of Regulation S– K; • Not be required to disclose amounts related to pensions for purposes of disclosing executive compensation actually paid; • Not be required to present peer group TSR; • Be permitted to provide two years of data, instead of three, in the first applicable filing after the rules became effective; and • Be required to provide disclosure in the prescribed table in XBRL format beginning in the third filing in which it provides-pay-versus performance disclosure. In the Reopening Release, the Commission indicated that it was considering requiring SRCs to disclose the income or loss before income tax expense and net income measures, but not the Company-Selected Measure or the list of their five most important measures. 2. Comments Some commenters supported fully exempting SRCs from the pay-versusperformance disclosure requirements, stating that the disclosure requirements would be disproportionally burdensome to SRCs; 399 executive disclosure issues are less acute at SRCs; 400 and TSR is a more problematic measure for SRCs due to the relative illiquidity and volatility of SRCs’ shares.401 One commenter suggested that the Commission exempt SRCs from the disclosure requirements for five years, so that the Commission could first analyze the impact of the 399 See letters from CCMC 2015; Mercer; Pearl; TCA 2015; and TCA 2022. 400 See letter from CCMC 2015. 401 See letters from Mercer and Pearl. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 disclosure requirements on larger registrants.402 Another commenter suggested that the pay-versusperformance disclosure be voluntary for SRCs.403 Other commenters stated that we should not exempt SRCs from the disclosure requirements.404 One commenter opposed to exempting SRCs indicated that a lack of transparency could have negative market effects for SRCs.405 In addition, one commenter specifically supported requiring SRCs to disclose income or loss before income tax expense, net income, the CompanySelected Measure, and the list of the five most important measures.406 With respect to the timing of the disclosure, one commenter, who supported SRCs being subject to the full pay-versus-performance disclosure requirement, suggested a one year ‘‘grace period.’’ 407 Another commenter suggested that SRCs provide five years of data, but that we provide SRCs with a three year transition period requiring two years of data in the first applicable filing after the rules became effective, and increasing until the fourth applicable filing after the rules become effective, when all five years of data would be required.408 As discussed above, a number of commenters supported requiring all registrants to use Inline XBRL to tag their pay-versus-performance disclosure,409 with one specifically stating that all filers are now familiar with Inline XBRL.410 On the other hand, one commenter specifically suggested, in response to the Proposing Release, that we exempt SRCs from any XBRL tagging requirement.411 3. Final Amendments We are adopting the scaled disclosure requirements for SRCs as described in the Proposing Release (and with respect to the net income measure, the Reopening Release). For the reasons noted above,412 we believe requiring SRCs to provide three instead of five years is appropriate, and is aligned with SRCs’ existing scaled executive compensation disclosure requirements. 402 See letters from NIRI 2015 and NIRI 2022. letter from ICGN. 404 See letters from AB; Better Markets; CalPERS 2015; CalSTRS; CII 2015; Eileen Morrell, dated Mar. 6, 2022 (‘‘Morrell’’); SBA–FL; and Troop. 405 See letter from CalPERS 2015. 406 See letter from CII 2022. 407 See letter from AB. 408 See letter from Hermes. 409 See letters from CII 2022; Huddart; ICGN; and XBRL US. 410 Letter from XBRL US. 411 See letter from Hay. 412 See supra Section II.E.3. 403 See PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 While the three-year period applicable for the disclosure is longer than what SRCs currently are required to disclose in the Summary Compensation Table, we believe the pay-versus-performance calculations, or the information required to make the calculations, for the additional year would generally be available in SRCs’ disclosures from prior years. We also believe that requiring SRCs to provide peer group TSR, a CompanySelected Measure, a Tabular List, or disclose amounts related to pensions would be unduly burdensome for SRCs, which, unlike larger registrants, are not otherwise required to present the TSR of a peer group or disclosure of how executive compensation relates to performance in a CD&A, and are subject to scaled compensation disclosure that does not include pension plans. Finally, we believe a transition period that would permit SRCs to provide two years of data, instead of three, in the first applicable filing after the rules become effective is appropriate, as is a phase-in period to allow SRCs to provide the required Inline XBRL data beginning in the third filing in which it provides payversus-performance disclosure, instead of the first. III. Other Matters If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. Pursuant to the Congressional Review Act,413 the Office of Information and Regulatory Affairs has designated these rules as not a ‘‘major rule,’’ as defined by 5 U.S.C. 804(2). IV. Compliance Dates In order to give companies adequate time to implement these disclosures, we are requiring registrants to begin complying with Item 402(v) of Regulation S–K in proxy and information statements that are required to include Item 402 disclosure for fiscal years ending on or after December 16, 2022. V. Economic Analysis A. Background We are adopting these final rules to satisfy the statutory mandate of Section 14(i). The Senate Report that accompanied the statute references shareholder interest in the relationship 413 5 E:\FR\FM\08SER3.SGM U.S.C. 801 et seq. 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 between executive pay and performance as well as the general benefits of transparency of executive pay practices.414 As discussed above, we believe that the statute is intended to provide further disclosures concerning a registrant’s executive compensation program for shareholders to consider when making related voting decisions, such as decisions with respect to the shareholder advisory vote on executive compensation, votes on other compensation matters, and director elections. The final rules require the disclosure of information that is largely already reported under current disclosure rules, but that is currently not computed or presented in the way the final rules will require. This repackaging of some of the information from existing disclosures into the required pay-versusperformance disclosure is intended to allow investors to more quickly or easily process the information accurately. The final rules require registrants to present the values of prescribed measures of executive compensation and financial performance for each of their five most recently completed fiscal years (three years for SRCs) in a standardized table in proxy or information statements in which executive compensation disclosure is required. Registrants will also be required to provide ‘‘clear descriptions’’ of the relationships between the compensation and performance measures in the table (and between TSR and peer group TSR), but will be allowed to choose the format used to present the relationships, such as graphical or narrative descriptions (or a combination of the two). The final rules will also allow registrants to supplement the required elements of the disclosure with additional measures or additional years of data, subject to certain restrictions. Registrants will be required to provide the disclosure in a structured data language using Inline XBRL. The final rules reflect several modifications relative to the proposed rules in response to comments received. For example, one area of significant comment on the Proposing Release was the proposal’s reliance on TSR (and, for registrants other than SRCs, peer group TSR) as the exclusive measure of 414 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 Senate Report supra note 4. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 financial performance used to present the relation of pay with performance.415 The Reopening Release discussed, solicited comment on, and analyzed the economic effects of some possible additional measures of financial performance that the Commission was considering requiring. The final rules introduce two of these additional measures to the table: net income and, for registrants other than SRCs, a Company-Selected Measure. In addition, the final rules require registrants other than SRCs to provide a Tabular List of the most important financial performance measures used to link executive compensation actually paid, for the most recent fiscal year, to company performance. The additions will broaden the picture of registrant performance presented in the disclosure, providing additional detail and context that could enhance the usefulness of the disclosure by certain registrants or for certain investors. The additions will also entail some additional compliance costs and could make it more difficult for investors to quickly review the disclosure. Many commenters to the Proposing Release also raised concerns that, under the proposed approach, the year to which company performance would be attributed and the year in which associated pay would be recognized would frequently be mismatched,416 which could significantly limit the usefulness of the proposed disclosure. To address these comments, the final rules require equity awards to be revalued more frequently than had been proposed in order to better align pay and any related performance, at the expense of somewhat greater costs to registrants of computing the prescribed measure of pay. We are mindful of the costs and benefits of the final rules. The discussion below addresses the economic effects of the final rules, including their anticipated costs and benefits, as well as the likely effects of the final rules on efficiency, competition, and capital formation.417 415 See supra notes 229 and 230. infra note 631. 417 Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] requires the Commission, when engaging in rulemaking where it is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. Further, Section 23(a)(2) of the Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when making rules under the Exchange Act, to consider the impact that the rules would have on competition, and prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the Exchange Act. 416 See PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 55163 The final rules 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 the final rules. B. Baseline To assess the economic impact of the final rules, 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. 1. Affected Parties We consider the impact of the final rules on investors and registrants (and their NEOs). The final rules will apply to all companies that are registered under Section 12 of the Exchange Act 418 (‘‘Section 12’’) and are therefore subject to the Federal proxy rules, except EGCs. The final rules will 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) of the Exchange Act 419 (‘‘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.420 418 15 U.S.C. 78l. U.S.C. 78l(g). 420 Registrants subject to the final rules will be required to make pay-versus-performance disclosure under Item 402(v) of Regulation S–K 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) of the Exchange Act [15 U.S.C. 78n(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 or bylaws, or otherwise imposed by law in the state of incorporation or stockexchange (if listed), not the Federal securities laws. For example, NYSE, NYSE American, and Nasdaq require the solicitation of proxies for annual meetings of shareholders. A Section 12(b) of the Exchange Act [15 U.S.C. 78l(b)] (‘‘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 Item 402(v) of Regulation S–K 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 419 15 E:\FR\FM\08SER3.SGM Continued 08SER3 55164 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations We estimate that approximately 4,530 registrants will be subject to the final rules, including approximately 1,860 SRCs.421 The proportion of SRCs among the affected registrants is expected to be similar to that which was reported at the time of the Proposing Release.422 Among all registrants subject to the Federal proxy rules, we estimate that there are approximately 1,275 EGCs, of which approximately 1,065 are also SRCs, none of which will be subject to the final rules.423 khammond on DSKJM1Z7X2PROD with RULES3 2. Existing Disclosures and Analyses The registrants that will be subject to the final rules must currently comply with Item 402 of Regulation S–K, which requires the disclosure of extensive information about the compensation of NEOs, and, except in the case of SRCs, with Item 201(e) of Regulation S–K, which requires graphical disclosure of registrant TSR and peer group TSR. They are also subject to financial statement and disclosure requirements under Regulation S–X. The underlying information necessary to provide the required pay-versus-performance disclosure is, with limited exceptions discussed below, already encompassed by these existing disclosure requirements. However, the existing 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 Item 402(v) of Regulation S–K due to the requirement to file and disseminate an information statement under Section 14(c). 421 These estimates are based on a review of calendar year 2021 EDGAR filings. The final rules will apply to BDCs to the extent they are internally managed (i.e., have named executive officers within the meaning of Item 402 of Regulation S–K) and are not EGCs. We estimate that there are approximately seven affected BDCs, which are included in the estimate of affected registrants. 422 Based on 2021 filings, SRCs represent about 41% (1,860 out of 4,530) of the affected issuers, while the Proposing Release reported that, based on 2013 filings, about 2,430 out of 6,075, or 40%, of the affected issuers were expected to be SRCs. See Proposing Release at 30. The Commission amended the smaller reporting company definition effective September 2018, with the effect of expanding the number of registrants that qualified as SRCs. See Amendments to the Smaller Reporting Company Definition, Release No. 33–10513 (June 28, 2018) [83 FR 31992 (July 10, 2018)]. However, EGCs are not subject to the final rules, and the number of EGCs subject to the Federal proxy rules, including SRCs that are also EGCs, has grown more than three-fold since the time of the Proposing Release (from about 360, as reported in the Proposing Release, to about 1,275 based on our review of 2021 filings), offsetting any increase in the proportion of SRCs subject to the final rules. 423 These estimates are based on a review of calendar year 2021 EDGAR filings. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 disclosures might not present the underlying information in a format that allows investors to readily assess the alignment of pay and performance. Under the final rules, the definition of executive compensation actually paid for a fiscal year is, generally,424 total compensation as reported in the Summary Compensation Table for that year (i) less the change in the actuarial present value of pension benefits,425 (ii) less the grant-date fair value of any stock and option awards granted during that year, (iii) plus the pension service cost for the year and, in the case of any plan amendments (or initiations), the associated prior service cost (or less any associated credit), and (iv) plus the change in fair value of outstanding and unvested stock and option awards during that year (or as of the vesting date or the date the registrant determines the award will not vest, if within the year) as well as the fair value of new stock and option awards granted during that year as of the end of the year (or as of the vesting date or the date the registrant determines the award will not vest, if within the year). Adjustments (i) and (iii) with respect to pension plans will not apply to SRCs because they are not otherwise required to disclose executive compensation related to pension plans. Under the baseline, investors generally should already have the required data to compute a reasonable estimate of executive compensation actually paid as defined in the final rules, even though registrants are not required to compute or disclose this measure. Specifically, under existing requirements of Item 402 of Regulation S–K, registrants must report, in the Summary Compensation Table, the value of total compensation and each of its components,426 including the aggregate grant-date fair value of equity awards and, for registrants other than SRCs, the total change (if positive) in 424 The required deductions and additions in computing executive compensation actually paid are provided in greater detail in Section II.C above. 425 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. 426 For registrants that are not SRCs, 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 dollar value of any non-equity incentive plan award earnings, 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. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 actuarial present value of pension benefits, for each NEO. The total compensation and amounts required to be subtracted from this total in the computation of executive compensation actually paid for each NEO, or adjustments (i) and (ii) referenced above, are thus already available in the Summary Compensation Table.427 The amounts that must be added back in this computation, or adjustments (iii) and (iv) referenced above, are not required to be directly reported under existing disclosure requirements, but can be estimated based on existing disclosures. In particular, Item 402 of Regulation S–K requires further disclosure about equity awards and pension plans, such as, for non-SRCs, the Grant of Plan-Based Awards Table and the Pension Benefits Table and the associated narrative and footnotes, which include the detailed terms of these components of compensation and certain valuation assumptions. Using these existing disclosures and other public data, it is possible for investors to make reasonable (though perhaps not identical) estimates of the annual and vesting-date fair values of outstanding stock and option grants. In fact, various third parties, such as proxy advisory service providers and compensation consultants, currently make similar computations using existing disclosures in order to construct alternative pay measures as part of the services they provide to certain investors and/or registrants.428 Market participants other 427 While the time period applicable for existing Item 402 of Regulation S–K disclosures (two years for SRCs and three years for other affected registrants) is shorter than will be required for the pay-versus-performance disclosure (three years for SRCs 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. New registrants would not be required to report data for years in which they were not reporting companies. 428 See, e.g., Institutional Shareholder Services, ISS United States Compensation Policies: Frequently Asked Questions (updated Dec. 17, 2021), available at https://www.issgovernance.com/ file/policy/active/americas/US-CompensationPolicies-FAQ.pdf (‘‘ISS FAQ’’) (describing their computation of ‘‘realizable pay’’ as ‘‘all nonincentive compensation paid [and] the value of equity or cash incentive awards earned or, if the award remains on-going, revalued at target level as of the end of the measurement period’’); Glass Lewis, Pay-for-Performance Methodology & FAQ (Oct. 2020), available at https:// www.glasslewis.com/wp-content/uploads/2020/10/ 2020-NA-Compensation-Overview-FAQs.pdf (‘‘Glass Lewis Methodology’’) (describing compensation computations in which the company ‘‘performs its own stock and option valuations and excludes any cash severance or changes in pension value’’); Equilar, Pay for Performance [Brochure] (Nov. 2020), available at https://www.equilar.com/ pay-for-performance (providing screenshots of the their pay for performance profile, which presents compensation computed in numerous different E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 than those providing actuarial services may have less experience with the computations required with respect to pension plans. However, it is still possible to compute an estimate of pension service cost for the year (plus the prior service cost, or credit, associated with any plan amendments or initiations) by using existing disclosures and public data to construct the required actuarial assumptions and computations.429 That said, these computations can be complex and investors would bear costs to make such computations or obtain them from third parties. Further, if investors or third parties were to estimate executive compensation actually paid based on existing disclosures, these estimates may differ from each other and from similar estimates made by registrants themselves. For example, because registrants are not currently required to disclose the equity valuation assumptions that they would apply at any time after the grant date (which may differ from the grant-date assumptions), investors may not know how the registrant would apply its discretion in choosing from a range of reasonable assumptions to compute fair values at these other dates.430 Estimates constructed by or on behalf of investors may also differ from registrant estimates if simplifications are made in order to more easily produce estimates for a large number of registrants.431 ways, including under multiple definitions of ‘‘realizable pay’’ that would require the revaluation of equity awards after the grant date). 429 While service costs associated with defined benefit plans are currently disclosed in financial statement footnotes, these costs are currently not disaggregated by individual. Pension plan benefit formulas and certain pension-related assumptions (such as discount rates) are currently disclosed in proxy statements or financial statement footnotes. Additional assumptions required to compute service costs, such as expectations with respect to retirement age, mortality, and future compensation growth, may not be reported or may differ for this purpose from assumptions presented in, or implied by, existing disclosures. While an outsider may not be as well positioned to estimate some of these required inputs as management, deriving reasonable assumptions should be possible based on broader population statistics and trends. 430 For SRCs, which are not required to provide the Grant of Plan-Based Awards Table and accompanying narrative and footnotes, investors may also not know all of the detailed terms of each equity award, which could affect the accuracy of fair value estimates constructed by, or on behalf of, investors. 431 See, e.g., Charlie Pontrelli (Equilar), Proxy Advisors and Pay Calculations (Sept. 29, 2019), Harv. L. F. on Corp. Governance Blog, available at https://corpgov.law.harvard.edu/2019/09/29/proxyadvisors-and-pay-calculations (noting that ‘‘it is important to carefully consider the details of the [alternative pay] calculation in order to avoid misleading conclusions,’’ and citing the example of a situation in which an alternative pay measure was VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 Information about registrant financial performance is readily available to investors under the baseline. The final rules require the disclosure of historical TSR, peer group TSR, and net income for up to five years. Disclosure of historical TSR and TSR of a particular peer group is already required under Item 201(e) of Regulation S–K: specifically, this item 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.432 The final rules allow registrants to choose to use either the peer group required under Item 201(e) of Regulation S–K or, if the registrant uses a peer group in benchmarking its compensation, the peer group disclosed in its CD&A in its pay versus performance disclosure. In the latter case, however, 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 SRCs are not required to comply with Item 201(e) of Regulation S–K or CD&A disclosure requirements and yet would still have to report their own TSR under the final rules, data about their returns is publicly available. The final rules do not require SRCs to present the TSR of a peer group. Finally, all of the affected registrants are currently required to disclose net income as part of their financial reports filed in Form 10–K, including three years of data for registrants other than SRCs, and two years of data for SRCs, with additional history generally available in previous filings. We expect that the quantitative disclosure of Company-Selected Measures called for in the new disclosures is also generally encompassed by existing financial statement disclosure requirements or voluntarily disclosed in existing proxy statements. However, if registrants do constructed using a different option valuation model than that used by a company in its disclosures). 432 Item 201(e) of Regulation S–K 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) of Regulation S–K disclosure would not be required, although payversus-performance disclosure would still be required in such years if action is to be taken with regard to executive compensation. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 55165 not already disclose historical quantitative data for these measures over the past five years, the required disclosure may provide new information relative to the baseline to the extent that any computations required to derive the value of these measures from reported financial data may not always be straightforward for investors to replicate. The disclosure of a Company-Selected Measure may also provide investors with new information in the form of any insight gained based on the registrant’s choice of which of the measures reported in the CD&A in this or previous years was deemed to be the most important with respect to the most recent fiscal year. While the bulk of the information about compensation and registrant performance to be included in the new disclosure is currently available to investors elsewhere, not all of this information is accessible for large-scale analysis under the baseline. Currently, every affected registrant is, or will soon be, subject to Inline XBRL tagging requirements for a subset of its other Commission disclosures, including the financial statements and financial statement footnotes.433 Thus, information that is already available from these sources—such as net income, some Company-Selected Measures or statistics used to compute these measures, and information in footnotes regarding inputs and assumptions used to compute pension liabilities and stock-based compensation expense—is already tagged and thus readily machine-readable. However, other information that will be reflected in the required pay-versus-performance disclosure, such as the compensation measures, as well as most of the information required to compute these measures, is not currently tagged,434 and could therefore become more readily available for analysis as a result of the final rules. For the affected registrants other than SRCs, Item 402 of Regulation S–K requires a description in the CD&A of how the registrant’s compensation policy relates pay to performance, if 433 See 17 CFR 229.601(b)(101) and 17 CFR 232.405 (for requirements related to tagging operating company and BDC financial statements (including footnotes and schedules), audit reports, and BDC prospectus disclosures, in Inline XBRL); 17 CFR 229.601(b)(104) and 17 CFR 232.406 (for requirements related to tagging cover page disclosures in Inline XBRL); and 17 CFR 229.601(b)(107) and 17 CFR 232.408 (for requirements related to tagging filing fee exhibit disclosures in Inline XBRL). 434 Information currently provided in response to Item 201(e) of Regulation S–K, Item 402 of Regulation S–K, or voluntarily in proxy statements is not currently required to be tagged. E:\FR\FM\08SER3.SGM 08SER3 55166 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 material to the registrant’s compensation policies and decisions. This description must include information about any performance targets that are a material element of a company’s executive compensation policies or decisions.435 While the final rules will newly require registrants other than SRCs to name the top three to seven most important performance measures used by the registrant to link NEO pay to performance in the most recent fiscal year, these registrants likely already disclose these measures in the CD&A under existing requirements. However, as in the case of the CompanySelected Measure, the Tabular List may provide new information relative to the baseline in the form of any insight gained based on the registrant’s choice of which of the measures reported in the CD&A were deemed to be the most important with respect to the last completed fiscal year. Registrants are not currently required to disclose, in a side-by-side fashion, or report the actual historical relationship between, any measures of executive compensation and registrant financial performance. As discussed in the Proposing Release, 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.436 Such voluntary disclosures remain a minority practice, with the rate of such disclosures declining somewhat since the time of the Proposing Release,437 and they remain highly varied.438 Whether or not 435 A registrant may omit target levels with respect to specific quantitative or qualitative performance-related factors involving confidential trade secrets or confidential commercial or financial information from the CD&A only if the disclosure of these target levels would result in competitive harm. See Instruction 4 to Item 402(b) of Regulation S–K. 436 See Proposing Release at 32. See also, e.g., letters from CAP; CEC 2015; Hall; and PG 2015. 437 In 2013, 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 their CD&A; in 2021, the same firm found that 24% of the 200 large public companies examined included disclosures comparing pay and performance. See Proposing Release at n. 120 and Meridian Compensation Partners, 2021 Corporate Governance & Incentive Design Survey (Fall 2021), available at https://www.meridiancp.com/wp-content/uploads/ 2021/09/Meridian-2021-Governance-and-DesignSurvey-2.pdf (‘‘Meridian 2021 Report’’). A different compensation consulting firm found in 2021 that 14.1% of the 100 large public companies examined included a pay for performance graph in their most recent proxy statements, down from 21.6% five years earlier. See Equilar, Preparing for Proxy Season 2022 (Nov. 2021), available at https:// info.equilar.com/preparing-for-proxy-season-2022report-request. 438 See, e.g., Meridian 2021 Report at 22. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 they directly disclose the relationship of pay with performance, some registrants disclose alternative measures of pay to demonstrate the variation in the value of pay after it is granted, but, again, this is a minority practice and the measures used vary.439 Thus, even when voluntary disclosures are provided, their comparability is limited, which can make them difficult for investors to use.440 Commenters and other observers have also raised concerns that registrants choose to present measures that make the alignment of pay and performance appear more favorable.441 Certain investors also have access to analyses of historical pay-versusperformance 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. Compared to voluntary disclosures by registrants, these thirdparty analyses are available for a larger number of registrants, and apply more consistent methodologies across registrants. However, this consistency has led to criticism that the analyses are not appropriately tailored to the circumstances of different kinds of registrants.442 Further, these analyses are only available to investors who pay for these services, and the computations and analytical approaches used vary across the third-party information 439 See, e.g., Meridian 2021 Report at 23 (stating that 24% of the 200 large registrants reviewed included ‘‘realized’’ or ‘‘realizable pay’’ disclosure, with 58% of these using ‘‘realizable pay’’). 440 See, e.g., Kosmas Papadopoulos & John Roe (ISS Analytics), Realizable Pay: Insights into Performance Alignment (Apr. 29, 2019), Harv. L. Sch. F. on Corp. Governance Blog, available at https://corpgov.law.harvard.edu/2019/04/29/ realizable-pay-insights-into-performancealignment/ (‘‘ISS Realizable Pay Article’’) (stating that ‘‘[d]ifferent companies and different compensation consultants arrived at different ways of calculating and presenting these alternative [pay] measures, making it very difficult for investors to systematically use these disclosures in the analysis of pay and performance—much to the frustration of investors and companies alike’’). See also, e.g., letters from As You Sow 2015; CAP; and Public Citizen 2015. 441 See, e.g., letters from AFREF (stating that ‘‘companies have chosen misleading metrics to justify excessive executive compensation in the past’’) and As You Sow 2015 (stating that ‘‘every company cherry-picks data that makes it appear in the best possible light’’); and Dave Michaels, Misleading CEO Pay-for-Performance Numbers Target of SEC, Bloomberg (Dec. 17, 2013), available at https://www.bloomberg.com/news/articles/201312-17/misleading-ceo-pay-for-performancenumbers-target-of-sec. 442 See, e.g., Compensia, The New ISS Pay-forPerformance Methodology—A Closer Look at the Gathering Storm (Jun. 12, 2017), available at https://compensia.com/the-new-iss-pay-forperformance-methodology-a-closer-look-at-thegathering-storm/. PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 providers.443 Some other investors generate their own pay-versusperformance analyses for the registrants in their portfolios, using a variety of approaches.444 Given the resources required, smaller investors, particularly retail investors, are the least likely, under the baseline, to subscribe to third party services or to do their own detailed pay-versus-performance computations for each of their holdings. As was the case at the time of the Proposing Release, there continues to be no consensus around the best approach to analyzing the alignment of pay and performance, and we do not have complete information about the approaches used by all investors. However, the varied statistics and analyses that we can observe 445 investors using may still shed some light on the type of information that they find to be useful for this purpose, particularly as many of the third-party analyses have evolved over time based on shareholder demand. For example, while many third party and shareholder analyses use a measure of pay based on grant date valuations of stock and options,446 potentially because this has historically been the most readily available measure,447 most of the recent 443 See, e.g., Glass Lewis Methodology and Institutional Shareholder Services, Pay-forPerformance Mechanics (Dec. 2021), available at https://www.issgovernance.com/file/policy/active/ americas/Pay-for-Performance-Mechanics.pdf (‘‘ISS Methodology’’), for the quantitative methodologies for evaluating pay and performance alignment used by two major proxy advisory firms. 444 See, e.g., disclosures about the evaluation of executive compensation by the California Public Employees Retirement System (‘‘CalPERS’’), available at https://www.calpers.ca.gov/docs/ executive-compensation-analysis-framework.pdf (‘‘CalPERS Methodology’’) (describing an analysis involving CEO realizable pay and TSR, in each case for the company as well as its peers); as compared to the corresponding disclosures by Northern Trust Asset Management, available at https:// www.northerntrust.com/content/dam/ northerntrust/pws/nt/documents/investmentmanagement/scorecard-methodology.pdf (‘‘Northern Trust Methodology’’) (describing an analysis involving the grant date value of CEO pay and nine unique fundamental performance indicators in addition to TSR, in all cases for the company as well as its peers). See also letter from BlackRock (providing detail on its say-on-pay analysis framework). 445 We note that the analyses that are disclosed in detail, and which we are therefore able to observe, are likely among the more sophisticated that are currently in use. 446 See, e.g., ISS FAQ; Northern Trust Methodology; and Glass Lewis, Understanding Glass Lewis’ Approach to Say on Pay Analysis, available at https://www.glasslewis.com/say-onpay/, (last accessed Jun. 29, 2022) (‘‘Glass Lewis Overview’’). 447 See, e.g., Mercer, The Role of Realized and Realizable Pay in Disclosure and Beyond (2014), available at Mercer LLC’s website (last accessed Aug. 9, 2022) (‘‘Mercer Realizable Pay Article’’) (stating that many investors ‘‘favor [the use of realized and realizable pay] as an appropriate way E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 analyses that we have observed also include a ‘‘realizable pay’’ measure.448 While there are various approaches to defining and computing ‘‘realizable pay,’’ it is generally intended to capture both pay that has been realized by an executive in the period as well as an updated value, to reflect actual company performance, of outstanding equity awards that could potentially be realized in the future.449 A recent survey by one proxy advisory firm found that 84 percent of investors support the use of an outcomes-based pay measure such as realizable pay in a quantitative pay-for-performance evaluation,450 further demonstrating investor demand for such computations. With respect to performance measures, the analyses by or on behalf of investors that we observe all use TSR as a primary measure of performance.451 However, most also supplement TSR with other measures of financial performance.452 For example, some of the performance measures presented by third parties as part of pay-forperformance analyses in recent years include operating cash flow growth; earnings per share growth; growth in to measure and analyze executive pay’’ but that ‘‘[w]hen shareholders assess their companies’ executive pay levels, they do so using the information most readily available, which includes the . . . summary compensation table and past performance’’). 448 See, e.g., letter from BlackRock; CalPERS Methodology; ISS FAQ; and Glass Lewis Overview. Beginning in 2020, Glass Lewis changed its compensation analytics partner, and may no longer be reporting realizable pay in its proxy research reports for the US market, though it does report a measure of realized pay; it is unclear to us whether this shift is temporary or permanent. See, e.g., Glass Lewis Sample Proxy Research Reports available at https://www.glasslewis.com/sample-proxy-papers (last accessed May 15, 2022) (including some samples for the US market that include realizable pay data and others that do not). See also Northern Trust Asset Management, Executive Compensation Guide for Proxy Voting and Engagements (Nov. 2018), available at https://cdn.northerntrust.com/ pws/nt/documents/investment-management/execcompensation-guide-digital.pdf (stating that companies should ‘‘showcase realized versus realizable pay, preferably over five annualized performance periods’’ in their disclosures, even though, per note 444 above, this shareholder focuses on grant date pay in its analysis of pay-forperformance alignment). 449 Definitions vary as to whether, for example, options are valued at fair value or intrinsic value and pay is realized when awards are vested or exercised. See, e.g., Mercer Realizable Pay Article and ISS Realizable Pay Article. 450 See Institutional Shareholder Services, 2017– 2018 Policy Application Survey: Summary of Results (Oct. 19, 2017), available at https:// www.issgovernance.com/file/policy/2017-2018Policy-Application-Survey-Results-Summary.pdf. 451 See, e.g., letter from BlackRock; CalPERS Methodology; Glass Lewis Methodology; ISS FAQ; and Northern Trust Methodology. 452 See, e.g., letter from Blackrock; Glass Lewis Methodology; ISS FAQ; and Northern Trust Methodology. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 earnings before interest, taxes, depreciation and amortization (‘‘EBITDA’’); return on equity; return on invested capital; return on assets; and various ratios and growth rates using ‘‘economic value added.’’ 453 The inclusion of these measures may demonstrate investors’ interest in additional measures of performance, particularly with respect to profitability, when considering compensation. Shareholder demand for such information is further supported by a recent survey by one proxy advisory firm, in which 84 percent of investors surveyed supported the continued reporting of some of the profitability measures listed above as part of the proxy advisory firm’s proxy research in the area of pay-for-performance.454 Overall, we have observed, and commenters have identified, an increasing sophistication in how investors are evaluating executive compensation disclosures 455 as well as an increasing refinement in how registrants are crafting these disclosures,456 particularly after about a decade of experience with ‘‘say-on-pay’’ votes. However, despite the significant amount of information about executive compensation disclosed by registrants under the baseline, investors have expressed some discontent with current disclosures. For example, commenters have indicated that existing disclosures can be challenging to review, in that investors find it difficult to collect or interpret the information in which they are interested.457 Commenters also 453 See, e.g., Glass Lewis Methodology (listing the following performance measures besides TSR: change in operating cash flow, earnings per share growth, return on equity, and return on assets, with ‘‘change in operating cash flow’’ replaced with ‘‘tangible book value per share growth’’ for companies in the Banks, Diversified Financials and Insurance sectors, and with ‘‘growth in funds from operations’’ for certain REITs); and ISS Methodology (listing the following performance measures besides TSR: EVA Margin, EVA Spread, EVA Momentum vs. Sales, EVA Momentum vs. Capital, return on equity, return on assets, return on invested capital, and EBITDA growth, with EBITDA growth replaced by cash flow growth in certain industries). ‘‘Economic value added’’ (or ‘‘EVA,’’ which is a registered trademark of Stern Value Management, Ltd) is equal to net operating profit after taxes, less a cost of capital charge. 454 See Institutional Shareholder Services, 2019 Global Policy Survey: Summary of Results (Sept. 11, 2019), available at https://www.issgovernance.com/ file/policy/2019-2020-iss-policy-survey-resultsreport.pdf. 455 See, e.g., letters from AFL–CIO 2022; IBC 2022; and PG 2022 (stating that ‘‘the SEC’s proposal, in contrast, appears to be out of step with these more sophisticated approaches of relating pay and performance’’). 456 See, e.g., letters from Blackrock; NIRI; Pearl; and SCG. 457 See, e.g., letters from AFL–CIO 2022; Better Markets et al.; Dimensional; Barbara S. Mortenson, dated May 30, 2015; Public Citizen; SVA; and PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 55167 highlighted shareholder concerns about the length and complexity of existing compensation disclosures.458 These disclosures have generally increased in length since the time of the Proposing Release.459 3. Executive Compensation Practices The structure of executive compensation, and how it varies across the affected registrants, will influence the effects of the final rules and how those effects will vary across registrants. For example, because the final rules require that equity awards and compensation related to pension plans be reflected differently than in the Summary Compensation Table, the prevalence and variation in usage and design of these items in executive compensation packages may affect the benefits of the disclosures as well as the burden involved in making the required calculations to provide the disclosures. Similarly, variation in the number and nature of performance metrics in executive compensation plans may also affect the variation in costs and benefits of the final rules across registrants. The final rules require that executive compensation actually paid include the annual change in fair value, through year-end or the vesting date, if earlier, of any outstanding stock and option awards. A majority of CEO direct compensation is delivered in the form of such equity awards, and their contribution to the total value of such compensation at the grant date has grown in recent years.460 The use of Teamsters. See also Council of Institutional Investors, CII Roundtable Report: Real Talk on Executive Compensation (March 27, 2018), available at https://www.cii.org/special_reports, at 10 (discussing concerns with the transparency of executive compensation). 458 See, e.g., letters from Allison; CCMC; and Ross. See also Stanford University, RR Donnelley & Equilar, 2015 Investor Survey: Deconstructing Proxy Statements—What Matters to Investors (Feb. 2015), available at https://www.sec.gov/comments/4-681/ 4681-3.pdf (‘‘Stanford 2015 Investor Survey’’). 459 See, e.g., Equilar, Preparing for Proxy Season 2020 (November 2019), available at https:// info.equilar.com/2019-0201-Proxy-Report-2020 (stating that the average CD&A length among the 100 large companies reviewed grew by almost 500 words from 2014 to 2017). Part of the increase in length of existing disclosures may be due to other regulatory mandates that have been adopted in the interim. See, e.g., Pay Ratio Disclosure, Release No. 33–9877 (Aug. 5, 2015) [80 FR 50103]; and Disclosure of Hedging by Employees, Officers and Directors, Release No. 33–10593 (Dec. 20, 2018) [84 FR 2402]. 460 See, e.g., Gallagher, CEO and Executive Compensation Practices Report: 2021 Edition (Oct. 2021), available at https://www.ajg.com/us/ executive-compensation-report-2021/ (‘‘Gallagher 2021 Study’’) (stating that the portion of total direct compensation represented by equity awards grew to 71% in 2020 from 65% in 2016 for CEOs of registrants in the Russell 3000 index). E:\FR\FM\08SER3.SGM 08SER3 55168 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations stock grants,461 and the frequency of such grants to the CEO, by some of the potentially affected registrants is reported in the table below.462 TABLE 1—USE OF EXECUTIVE STOCK GRANTS BY REGISTRANTS COVERED BY EXECUCOMP All firms in database Firms in Sample ....................................................................................................... Stock Grants to 2020 CEO: % of CEOs Granted Stock in 2020 .................................................................. Among subset of firms for which 2020 CEO was also CEO in 2019 and 2018: % of CEOs Granted Stock 0 out of Past 3 Years (2018–2020) ...................... % of CEOs Granted Stock 1 out of Past 3 Years (2018–2020) ...................... % of CEOs Granted Stock 2 out of Past 3 Years (2018–2020) ...................... % of CEOs Granted Stock 3 out of Past 3 Years (2018–2020) ...................... Stock Grants to Other 2020 NEOs: % of Firms that Granted Stock to Any NEO other than CEO in 2020 ............ Among Firms that Made Such Grants, Average Number of Other NEOs Granted Stock in 2020 .................................................................................. Per the first row of each panel of Table 1, roughly 80 to 90 percent of registrants, both large and small, make use of stock grants to CEOs and other NEOs in a given year. The last row of the first panel of Table 1 indicates that about two-thirds of registrants, and Firms in S&P 500 Firms in S&P MidCap 400 Firms in S&P SmallCap 600 1,694 497 393 580 81.0 87.5 85.0 82.2 11.2% 5.9% 16.6% 66.3% 8.7% 4.6% 14.2% 72.5% 8.3% 6.3% 19.1% 66.3% 11.7% 5.5% 16.3% 66.5% 86.8 92.6 90.3 88.4 4.2 4.0 3.9 3.9 slightly more among the largest registrants, make such grants to the CEO every year. The prevalence and frequency of stock grants have not changed markedly since the time of the Proposing Release.463 The use of option grants,464 and the frequency of such grants to the CEO, by some of the potentially affected registrants is reported in the table below.465 TABLE 2—USE OF EXECUTIVE STOCK OPTION GRANTS BY REGISTRANTS COVERED BY EXECUCOMP All firms in database khammond on DSKJM1Z7X2PROD with RULES3 Firms in Sample ....................................................................................................... Option Grants to 2020 CEO: % of CEOs Granted Options in 2020 ............................................................... Among subset of firms for which 2020 CEO was also CEO in 2019 and 2018: % of CEOs Granted Options 0 out of Past 3 Years (2018–2020) ................... % of CEOs Granted Options 1 out of Past 3 Years (2018–2020) ................... % of CEOs Granted Options 2 out of Past 3 Years (2018–2020) ................... % of CEOs Granted Options 3 out of Past 3 Years (2018–2020) ................... Option Grants to Other 2020 NEOs: % of Firms that Granted Options to Any NEO other than CEO in 2020 ......... Among Firms that Made Such Grants, Average Number of Other NEOs Granted Options in 2020 .............................................................................. Firms in S&P 500 Firms in S&P MidCap 400 Firms in S&P SmallCap 600 1,694 497 393 580 22.4 31.2 20.9 20.9 61.5 13.0 14.7 10.8 50.4 12.3 20.7 16.6 59.8 15.8 14.5 9.9 67.7 12.4 10.6 9.3 31.2 42.1 28.5 29.1 3.1 3.3 3.1 2.8 Per the first row of the first panel of Table 2, roughly 30 percent of the largest registrants, and about 20 percent of smaller registrants, grant options to their CEOs in a given year. This represents a significant drop, of greater than half, in the use of options to incentivize CEOs across all categories since the time of the Proposing Release.466 The decline in option grants to CEOs has largely been offset by an increase in the number and size of performance-contingent stock grants,467 marking the continuation of a trend also discussed in the Proposing Release.468 Per the first row of the second panel of Table 2, the granting of options to any other NEO is a bit more prevalent, with 461 Throughout this release, the term ‘‘stock grant’’ or ‘‘stock award’’ is used to refer to the award of instruments such as common stock, restricted stock, restricted stock units, phantom stock, phantom stock units, common stock equivalent units or any other similar instruments that do not have option-like features. 462 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 requested by Execucomp clients. 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 ‘‘PEO’’ used in this release and in the final rules. 463 See Proposing Release at Table 1. 464 Throughout this release, the term ‘‘option’’ is used to refer to instruments such as stock options, stock appreciation rights and similar instruments with option-like features. 465 See supra note 462. 466 See Proposing Release at Table 2, reporting that 64.1%, 49.0%, and 43.1% of S&P 500, S&P MidCap 400, and S&P SmallCap 600 constituents respectively granted options to their CEO in 2012. 467 See, e.g., Pay Governance, S&P 500 CEO Compensation Increase Trends (Jan. 13, 2021), available at https://www.paygovernance.com/ viewpoints/s-p-500-ceo-compensation-increasetrends-4; and Gallagher, CEO and Executive Compensation Practices Report: 2020 Edition (February 2021), available at https://www.ajg.com/ us/news-and-insights/2021/feb/ceo-executivecompensation-practices-report-2020/. 468 See Proposing Release at n. 133 and the accompanying text (discussing the increased prevalence of performance-contingent equity grants). VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations roughly 40 percent of the largest and about 30 percent of smaller registrants using such grants in a given year, but these rates have also dropped significantly since the time of the Proposing Release.469 In contrast to stock grants, option grants are also less frequent; per the last row of the first panel of Table 2, about 10 to 15 percent of registrants grant options to the CEO every year. Because the final rules require the valuation of equity awards annually until the time of vesting, we have also considered the variation in vesting schedules. Equity awards may be subject to time-based or performancebased vesting, or a combination of the two. Awards with time-based vesting may vest in full at the end of their vesting period (‘‘cliff vesting’’) or in increments over the period of vesting (‘‘graded vesting’’). Market practices regarding vesting schedules have remained relatively consistent since the time of the Proposing Release.470 We estimate that about 45 percent of stock grants are subject to time-based vesting, though this has declined slightly (by about three percentage points) since the time of the Proposing Release with the growth in reliance on performancecontingent stock.471 Of the time-vesting stock awards, roughly one-third have cliff-vesting schedules while the vast majority of the remaining have graded vesting in annual increments.472 For the stock awards that vest based on achieving performance conditions (approximately 55 percent of stock awards), the vast majority have cliffvesting schedules.473 Approximately ten percent of awards with performancebased vesting also have an additional 55169 time-based vesting period at the end of the performance period.474 For option awards, the vast majority have timebased, graded vesting in annual increments.475 Given the decline in option awards (which tend to have graded vesting schedules) and the increasing prevalence of performancecontingent stock (which tends to cliffvest) discussed above, there has been a corresponding increase in cliff-vesting overall.476 For affected registrants other than SRCs, compensation related to pension plans is also measured differently in executive compensation actually paid, as reported under the final rules, than it is in the Summary Compensation Table. The use of pension plans and the years of credited service at some of the potentially affected registrants are reported in the table below.477 TABLE 3—USE OF PENSION PLANS BY REGISTRANTS COVERED BY EXECUCOMP All firms in database Firms in Sample ....................................................................................................... 2020 Pension Plans: % of CEOs with Pension Plans ........................................................................ Among Firms with CEO Plans, Median Years of Credited Service in Pension Plan ...................................................................................................................... % Firms with Pension Plans for any NEO other than CEO .................................... Among Firms with Other NEO Plans, Average Number of Other NEOs with Pension Plans ............................................................................................................. There has been a decrease of about ten percentage points in the prevalence of pension plans for CEOs or other NEOs since the time of the Proposing Release.478 Per Table 3, such pension plans, and, for those with pension plans, a higher number of years of creditable service, remain more common among larger registrants. For the affected registrants other than SRCs, the final rules require that executive compensation actually paid include only the service cost for the year (and any prior service cost, or credit, associated with plan amendments or initiations), a value which is not currently required to be reported at this disaggregated level and which will 469 See Proposing Release at Table 2. Proposing Release at 35 for additional estimates with respect to vesting structures at and prior to the time of the Proposing Release based on third-party studies. We were unable to obtain updated third-party studies, but have instead provided statistics based on staff analysis of available data. These statistics are largely consistent with the estimates presented in the Proposing Release. 471 This estimate is based on staff analysis of data about equity grants by 1,100 large registrants from 2018 to 2020 (or, for estimates around the time of khammond on DSKJM1Z7X2PROD with RULES3 470 See VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 Firms in S&P 500 Firms in S&P MidCap 400 Firms in S&P SmallCap 600 1,694 497 393 580 22.5 36.4 24.4 14.3 19.3 29.0 21.5 45.7 17.6 29.5 16.9 19.1 2.8 2.9 2.7 2.5 usually differ from the total change in actuarial value of pension benefits included 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 earned 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 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. Besides the decreased prevalence of option awards and pension plans, and the increased reliance on performance contingent-stock awards, there have also been changes since the time of the Proposing Release in the performance metrics used by registrants in their incentive plans. For example, as noted in the Reopening Release, there appears to have been a decline in the use of TSR as the sole metric used in long-term the Proposing Release, from 2012 to 2015) from the ISS IncentiveLab Database. 472 Id. About 95% of the awards with graded vesting vest in annual increments. Results are similar if we compute such an estimate around the time of the Proposing Release. 473 See supra note 471. About 85% (about 80% around the time of the Proposing Release) of the awards with performance-based vesting cliff-vest. 474 See supra note 471. Results are similar if we compute such an estimate around the time of the Proposing Release. 475 See supra note 471. About 95% of the option grants have time-based vesting, of which about 85% have graded vesting, of which about 95% vest in annual increments. Results are similar if we compute such estimates around the time of the Proposing Release. 476 See supra note 471. At the time of the Proposing Release, roughly 45% of new equity awards cliff-vested; this rate has now increased to about 55%. 477 See supra note 462. 478 See Proposing Release at Table 3. PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\08SER3.SGM 08SER3 55170 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 incentive plans, in those cases where the awards’ vesting or quantities are contingent on one or more performance metrics.479 Among large companies, most use one to three financial metrics in their CEO’s long-term incentive plan, with two metrics being the most common number.480 The most commonly used metric among these companies is still TSR, followed by profitability measures (particularly measures of operating income), and then scaled profitability measures (such as return on equity or return on invested capital).481 Commenters pointed out that the metrics used are often nonGAAP financial measures.482 Some commenters indicated that another recent change in compensation practices has been an increased linkage of pay to ESG performance.483 Our research confirms that this appears to be a growing practice, but that consideration of ESG metrics does not often seem to be tied to specific quantitative goals and that ESG metrics 479 See, e.g., Meridian 2020 Survey (summarizing responses to a survey from 108 companies, and discussing, among other developments, a decline in the use of TSR as the sole performance metric in long-term incentive plans, from 47% in 2016 to 30% in 2020, and the recent use by some companies of TSR as a modifier to results initially determined by one or more other financial metrics). However, as a result of the difficulty in setting absolute or accounting performance targets given recent uncertainty due to, e.g., the COVID–19 pandemic, some market participants predict at least a temporary increase in the reliance on relative TSR as a performance metric. See, e.g., Aon 2020 Study. 480 See, e.g., Meridian Compensation Partners, LLC, 2021 Trends and Developments in Executive Compensation (April 30, 2020), available at https:// www.meridiancp.com/insights/2021-meridiantrends-and-developments-survey/ (‘‘Meridian 2021 Survey’’) (summarizing responses to a survey from 309 large companies, and indicating that 35%, 51%, and 12% of the respondents used one, two, and three metrics respectively in long-term incentive plans); and Aon 2020 Study (presenting, in Figure 8, the number of metrics used in the CEO’s longterm incentive plan among S&P 500 companies, broken down by industry, with an average of two metrics used in every industry). 481 See, e.g., Meridian 2021 Survey (summarizing responses to a survey from 309 large companies, and indicating that TSR is the most commonly used long-term incentive performance metric, with use reported by 60% of the respondents); and Aon 2020 Study (indicating, in Figure 9, that TSR is the most commonly used metric in the CEO’s long-term incentive plan among S&P 500 companies in most industries, where the use of TSR ranges from 22% to 61% of companies depending on the industry). Even when TSR is not used as an explicit performance metric, we note that these incentives are usually delivered in the form of stock awards, whose value will vary with the stock price. 482 See, e.g., letters from As You Sow 2022; CII 2022; IBC 2022; Nareit; Pawliczek; and Teamsters. See also Nicholas Guest, S.P. Kothari, and Robert Pozen, Why Do Large Positive Non-GAAP Earnings Adjustments Predict Abnormally High CEO Pay? Acct. Rev. (forthcoming 2022), available at https:// doi.org/10.2308/TAR-2019-0003. 483 See, e.g., letters from Aon HCS; CII 2022; Georgiev; and Infinite. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 are generally used in short-term incentive plans.484 These plans, such as annual bonus programs, generally make up a significantly smaller portion of total executive pay as compared to longterm incentive plans.485 As in the case of metrics for long-term incentive plans, among large companies, most use one to three financial metrics in their CEO’s short-term incentive plan, with two financial metrics being the most common.486 The most commonly used metric among these companies is profitability (particularly measures of operating income), followed by revenues, and then measures of cash flow.487 It is also common to include business unit performance goals and non-financial metrics, such as measures of individual performance, strategic goals, or ESG metrics.488 There may be overlap in the measures used in executive’s short-term incentive plans and those used in their long-term incentive plans, but more often than not these metrics are different.489 There is no consensus in the market on the number of metrics that should be used in designing executive compensation, with some advocating for 484 See, e.g., Meridian Compensation Partners, LLC, 2021 Study on Environmental, Social and Governance Metrics in Incentive Plans (Oct. 7, 2021), available at https://www.meridiancp.com/ wp-content/uploads/2021/10/Meridian-2021-ESGSurvey.pdf (reporting the results of a review of the proxy statements of 315 large U.S. companies for the use of ESG metrics in incentive plans). 485 See, e.g., Gallagher 2021 Study (reporting, in Figure 1.4, that for Russell 3000 companies in the year 2020, long term incentives represented 71% of the value of total direct compensation to CEOs, compared to 17% of such value being attributed to annual bonuses). 486 See, e.g., Meridian 2021 Survey (summarizing responses to a survey from 309 large companies, and indicating that 37%, 46%, and 11% of the respondents used one, two, and three financial metrics respectively in short-term incentive plans); and Aon 2020 Study (presenting, in Figure 1, the number of financial metrics used in the CEO’s short-term incentive plan among S&P 500 companies, broken down by industry, with an average of two metrics used in every industry except Energy, with an average of three metrics, and Real Estate, with an average of one metric). 487 See, e.g., Meridian 2021 Survey and Aon 2020 Study. 488 Id. 489 See, e.g., Pearl Meyer & Partners, LLC, Overlap of Executive Incentive Plan Performance Measures: Is the Concern Warranted? (December 2019), available at https://www.pearlmeyer.com/overlapexecutive-incentive-plan-performance-measuresconcern-warranted.pdf. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 the use of more metrics 490 and others advocating for fewer.491 Overall, it is clear that the structure of executive compensation continues to evolve, as noted by commenters,492 and further changes may be on the horizon. For example, recent tax law changes 493 and concerns about the complexity and effectiveness of performance-contingent stock awards 494 could encourage registrants to reduce their reliance on such awards. Uncertainty in the wake of the COVID–19 pandemic 495 and lower say-on-pay approval 496 at large companies in recent years, as compared to previous years, could also drive changes in compensation structure, 490 See, e.g., letter from Better Markets 2022 (stating that any issuer using less than five performance metrics is ‘‘likely focusing NEO performance on too small a group of metrics’’); and Radhakrishnan Gopalan, John Horn, and Todd Milbourn, Comp Targets That Work, Harvard Bus. Rev., Sept. 2017, at 102, available at https://hbr.org/ 2017/09/comp-targets-that-work (indicating that using too few metrics can ‘‘create opportunities to manage to the targets’’ and suggesting that companies use multiple metrics that are not too closely correlated). 491 See, e.g., Norges Bank Investment Management, CEO Remuneration Position Paper (Apr. 7, 2017), available at https://www.nbim.no/ en/the-fund/responsible-investment/our-votingrecords/position-papers/ceo-remuneration (stating that shares awarded to a CEO should not be subject to any performance conditions, which ‘‘are often ineffective and may result in unbalanced outcomes’’); and Council of Institutional Investors, Policies on Executive Compensation (Sept. 17, 2019), available at https://www.cii.org/files/ ciicorporategovernancepolicies/20190918New ExecCompPolicies.pdf (‘‘CII 2019 Policies’’) (criticizing the ‘‘numerous and wide-ranging’’ metrics that contribute to the complexity of performance-based pay). 492 See, e.g., letters from CEC 2022; Davis Polk; and SCG. 493 See IRS Notice 2018–68, 2018–36 I.R.B. 418 (regarding, among other things, the revision to Section 162(m) that removed the exception for qualified performance-based compensation in determining the amount of remuneration for any covered employee that would not be deductible by a registrant for tax purposes). See also Kevin Murphy & Michael Jensen, The Politics of Pay: The Unintended Consequences of Regulating Executive Compensation, 3 J. L. Fin. & Acct. 189 (2018) (stating that amendments to Section 162(m) passed in 2017 would reduce or eliminate negative consequences of this rule, such as the ‘‘recent (and ill-advised) escalation of performance-share plans’’). However, recent studies have generally not found evidence of significant changes in compensation structure in reaction to this change in tax law. See infra note 596. 494 See, e.g., Marc Hodak, Are Performance Shares Shareholder Friendly? 31 J. App. Corp. Fin., No. 3, 126 (Summer 2019); and CII 2019 Policies. 495 See, e.g., Pay Governance, The COVID–19 Pandemic’s Fleeting and Lasting Impact on Executive Compensation (Apr. 2022), available at https://www.paygovernance.com/viewpoints/thecovid-19-pandemics-fleeting-and-lasting-impact-onexecutive-compensation. 496 See, e.g., Semler Brossy, 2022 Say on Pay & Proxy Results (May 26, 2022), available at https:// semlerbrossy.com/insights/2022-say-on-pay-report/ (documenting a decline in say-on-pay voting support at S&P 500 companies in 2021 and 2022 relative to previous years). E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations though it remains difficult to predict whether these factors will have lasting effects and what such effects are likely to be. khammond on DSKJM1Z7X2PROD with RULES3 C. Discussion of Economic Effects The final rules require registrants to present, in one location, information that for the most part is disclosed in various other locations (and using different computations) under existing rules, and to tag the new disclosure using a machine-readable data language (Inline XBRL). The anticipated benefits and costs of the final rules are therefore driven by the impact that this additional format for presenting information may have on investors and registrants, rather than by the disclosure of new underlying informational content that investors could not already access or that would require registrants to collect significant new data. The economic benefits and costs of the final rules, including impacts on efficiency, competition and capital formation, are discussed below. We also discuss the relative benefits and costs of significant, reasonable alternatives to the implementation choices reflected in the final rules. 1. Introduction As discussed in the Proposing Release, compensating executive officers with pay that varies with registrant performance may encourage executive officers, through financial incentives, to exert effort and make decisions that create shareholder value. However, there are also potential negative consequences 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 projects if they are unwilling to take the chance that the project 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 497 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 497 Some argue that optimal compensation would maximize broader stakeholder value, not just the value of shareholders, while others respond that long-term shareholder value incorporates effects on other stakeholders. See, e.g., letter from TCA 2022. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 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 remains mixed as to whether prevailing compensation structures are optimal, are too closely linked to company performance, or should be more sensitive to company performance.498 Thus, it is unclear whether changes that would more closely link executive pay with registrant performance than current compensation structures would have a positive, a negative, or no impact on shareholder value creation. 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.499 Even if the performance measure were not subject to such concerns, it could be difficult to match registrant performance with the associated executive actions and, perhaps, related 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 a registrant’s expected profits related to this executive performance (such as an investment or 498 See, e.g., Alex Edmans, Xavier Gabaix & Dirk Jenter, Executive Compensation: A Survey of Theory and Evidence, in Benjamin Hermalin & Michael Weisbach (eds.), Handbook Econ. Corp. Gov. (2017), at 383–539 (‘‘Edmans et al. 2017 Survey Paper’’) (summarizing theoretical and empirical research on executive compensation, including on its sensitivity to performance, and noting that the results are mixed, and that ‘‘[e]ven seemingly fundamental questions, such as the causal effect of pay on firm outcomes, . . . remain largely unanswered’’). For seminal studies presenting differing views, see, e.g., Alex Edmans & Xavier Gabaix, Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories. 15 Eur. Fin. MGMT (2009), at 486–496; Michael Jensen & Kevin Murphy, Performance Pay and Top-Management Incentives. 98 J. Pol. Econ 225 (1990); and Lucian Bebchuk & Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation, Harvard University Press (Oct. 2006). 499 See, e.g., Marianne Bertrand & Sendhil Mullainathan, Are CEOS Rewarded for Luck? The Ones Without Principals Are, 116 Q. J. of Econ. 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. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 55171 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 registrant, even though he or she may not commence employment and begin receiving compensation until the following year. The alignment of an executive’s financial incentives with registrant performance can also be difficult to evaluate without also considering holdings of vested equity which link an executive’s wealth accumulation to the performance of the company whether or not they were obtained as compensation.500 Such issues may lead to concerns with any standardized approach to presenting the relationship between pay and performance. Despite the uncertainty and challenges involved in evaluating the relation of pay with performance, payversus-performance alignment is likely important to investors. In fact, academic research concludes that the incentives created for executives through the linkage of their pay with registrant performance outcomes may be the most value-relevant feature of current executive compensation plans, beyond even the level of executive pay.501 Accordingly, investors may consider the optimality of pay-versus-performance alignment as part of their evaluation of executive compensation packages when making voting decisions relating to the compensation of the NEOs and the election of directors, as well as when making investment decisions.502 2. Benefits For the most part, the final rules require a different presentation of certain existing information rather than the disclosure of new underlying informational content. The primary benefits of the final rules relative to the 500 See, e.g., Kevin J. Murphy, Executive Compensation: Where We Are, and How We Got There, Handbook Econ. Fin., Volume 2 (George Constantinides, Milton Harris & Rene´ Stulz eds., 2013), at 211–356 (‘‘Murphy 2013 Study’’) (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). 501 See, e.g., Edmans et al. 2017 Survey Paper (stating that ‘‘[the] level of pay receives the most criticism, but usually amounts to only a small fraction of firm value. Badly structured incentives, on the other hand, can easily cause value losses that are orders of magnitudes larger.’’). 502 See, e.g., Stanford 2015 Investor Survey (stating 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). E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 55172 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations baseline will therefore depend on the extent to which the computations provided or the format used for the required disclosure makes it easier or less costly for investors to evaluate how executive compensation relates to registrant performance. As discussed above, investors currently have access to detailed information disclosed by registrants with respect to executive compensation and registrant financial performance, but some investors have expressed dissatisfaction with existing disclosures. Data from the currently required, standardized tables and accompanying information may require further computation and analysis before investors can evaluate actual historical pay-versus-performance alignment under the baseline. Also, voluntary disclosures that provide more direct measures of the historical pay-versusperformance relationship are provided by a minority of registrants and lack standardization and comparability, as discussed in the Baseline section above. The more standardized quantitative analyses of pay-versus-performance alignment provided by the major proxy advisory firms to their clients, as well as the analyses undertaken by certain large institutional investors on their own, demonstrate shareholder demand for additional computations regarding this relationship, beyond existing disclosures.503 Investors may therefore benefit from the final rules to the extent that the new presentation of data required by these final rules lowers their burden of analysis in evaluating the executive compensation policies of the affected registrants. If the repackaging of some of the information from existing disclosures into the required payversus-performance disclosure, and the Inline XBRL tagging of this disclosure, allows investors to more quickly or easily process the information accurately, the final rules may generate productive efficiencies by preventing duplicative analytical effort by investors. If the disclosure helps investors 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 final rules should make it much easier for an investor reviewing a proxy statement to relate registrant performance with concurrent changes in the value of compensation, because the amount disclosed as executive compensation actually paid will more 503 See, e.g., supra notes 443 and 444. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 closely track these changes than currently required compensation disclosure. Further, for a number of reasons, the disclosure required under the final rules is expected to be significantly more comparable across registrants and across time than existing required disclosures in the CD&A regarding how pay relates to performance as well as current voluntary pay-versus-performance disclosures. This enhanced comparability will likely enable more efficient processing of the information. For example, the consistent tabular format will likely make the information easier to find, and standardization of the measures of pay, TSR, and net income will allow investors to understand what these measures represent without having to examine varying definitions used by different registrants. In addition, prescribing particular measures of pay and performance reduces the ability of registrants to only include measures that lead to more favorable pay-versus-performance disclosures, which, in turn, would reduce their utility and comparability. The specific definition of executive compensation actually paid under the final rules also enhances the comparability of the disclosures, as discussed in more detail below, as it treats similar economic situations relatively consistently, allowing investors to more easily evaluate the disclosure in the context of the disclosure of other registrants. Some commenters agreed that such disclosures may reduce the time, effort, and/or cost required to review proxy statements,504 with several noting that the proposed disclosure could be used by investors to more easily review disclosures to identify which registrants’ compensation arrangements they should investigate in greater detail.505 Also, many commenters supported the importance of the consistency and comparability of the disclosures.506 On the other hand, a number of commenters indicated that meaningful comparability of pay-versusperformance disclosure is not feasible or not desirable given, for example, the degree of variation in the circumstances of registrants and the vast, differing array of considerations that go into their 504 See, e.g., letters from Farient; Hermes; LGIM; OPERS; SVA; and TIAA. 505 See, e.g., letters from Hermes and OPERS. 506 See, e.g., letters from American Tower; As You Sow 2015; Barnard 2015; Barnard 2022; CalSTRS; CAP; CFA; CII 2015; Farient; Hermes; Hook; KPMG; OPERS; PDI; PRI; Quirin; Teamsters; and TIAA. PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 compensation programs.507 We acknowledge that perfect comparability may be impossible to achieve, and that some registrants may choose to supplement the required disclosures to better communicate their specific situation. However, compensation and performance, and their alignment, also cannot be properly evaluated in a vacuum. Broader economic conditions and the labor market for executive talent have significant effects on the appropriate level and performancesensitivity of pay.508 Pay-versusperformance disclosures that can be compared across registrants should facilitate investors’ consideration of these factors. Registrants already have substantial flexibility to provide tailored disclosures in proxy statements with respect to the relation of pay with performance. However, as discussed above, many investors are obtaining standardized third-party analyses of pay-versus-performance across different registrants, or constructing their own, which demonstrates demand for more consistent, comparable disclosure. Some commenters indicated that, whether or not comparability is desirable, the proposed amendments would not actually provide disclosures that could be compared across registrants.509 These commenters stated that the proposed disclosure would not be comparable because, for example, equity granting and vesting practices vary across registrants,510 valuation assumptions may vary across registrants,511 and there is no single way to uniformly measure performance across different registrants.512 We expect that the revised definition of executive compensation actually paid will increase the comparability of this measure across registrants with different compensation structures. In particular, for outstanding equity awards between their grant and vesting date, the change in value reported as part of this measure for a particular year is equal to the change in fair value during that particular year, and therefore may be associated with performance during the same year. This is true regardless of the grant and vesting patterns, such that similar economic exposure for 507 See, e.g., letters from BorgWarner; Celanese; Exxon; FSR; NAM 2015; NIRI 2015; SCG; SCSGP; and Simpson Thacher. 508 See, e.g., Edmans et al. 2017 Survey Paper. 509 See, e.g., letters from Celanese; Hodak; Honeywell; IBC 2015; SCSGP; and Simpson Thacher. 510 See, e.g., letters from Celanese; Hodak; SCSGP; and Simpson Thacher. 511 See, e.g., letters from IBC 2015 and Simpson Thacher. 512 See, e.g., letters from Celanese and Honeywell. E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations executives across different registrants should be reflected more similarly than under the proposed amendments, even when the formal structure differs. With respect to the concern about the lack of comparability of performance measures, several commenters agreed with our view that, despite certain concerns discussed below, TSR is the most comparable financial performance measure available.513 Given that TSR is nonetheless an imperfect measure, the inclusion of peer group TSR, net income, and at least one CompanySelected Measure may provide useful context for investors when comparing the disclosed performance across registrants. Finally, with respect to the concern about varying valuation assumptions, the disclosure of equity award valuation assumptions when they differ materially from the disclosures of assumptions as of the grant date may help investors to identify if a particular registrant’s approach to these assumptions appears to be an outlier. Overall, as noted above, perfect comparability is difficult to achieve. However, the final rules are intended to provide some basic standardized elements that can be more easily reviewed and compared across registrants. At the same time, they also include more tailored elements that may better reflect registrants’ individual circumstances, such as additional registrant-specific context, significant latitude in how registrants describe the relationships between the measures in the prescribed table, and the option of supplemental disclosures in case, in the registrant’s view, additional detail or clarifications would be helpful. The overall size of the potential benefit to investors depends on the extent to which the required disclosure approximates or contributes to any of the calculations and analyses that investors would choose to perform in order to process the existing disclosures. That is, the benefits of consistency and comparability will apply only to the extent that investors find the prescribed measures to be useful. While the specific extent of benefits is difficult to ascertain, commenters as well as our observations of current analyses by or on behalf of investors provide support that the disclosures are likely to be useful to investors. For example, the new measure of executive compensation actually paid will reflect new required computations (based on information in existing disclosures) that may be particularly relevant in the context of evaluating the 513 See, e.g., letters from Davis Polk 2022; Hodak; and TIAA. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 relationship of pay with performance. These computations may make information of interest to investors more readily available than it is under the baseline. Commenters indicating that investors would find the proposed measure of executive compensation actually paid to be useful generally cited potential benefits discussed in the Proposing Release, such as the fact that this measure would reflect the change in value of equity awards based on performance outcomes after they are granted,514 that it would focus on economic exposure due to compensation committee intent and not executives’ personal investment decisions,515 that it would reflect all elements of compensation for completeness and comparability,516 and that it would eliminate noise caused by the revaluation of pension benefits earned in prior periods.517 The revised definition of executive compensation actually paid preserves all of these features, while also mitigating concerns raised by a large number of commenters about a likely timing mismatch between the proposed measure of pay and the associated performance.518 By requiring the revaluation of equity awards every year, the revised measure significantly improves the degree of matching between the period to which a change in pay is ascribed and the period of the associated performance, which should make the measure substantially more useful for investors.519 The revised measure is also very similar to the concept of realizable pay, discussed above. A number of commenters indicated that a realizable pay measure would be particularly appropriate for evaluating the alignment of pay and performance.520 While definitions of realizable pay vary,521 514 See, e.g., letters from CII 2015; LGIM; Pawliczek; and TIAA. 515 See, e.g., letters from AFL–CIO 2015; CII 2015; Hall; OPERS; and Public Citizen. 516 See, e.g., letters from AFL–CIO 2015; Barnard 2015; Barnard 2022; and OPERS. 517 See, e.g., letters from Hall and TIAA. 518 See Section IV.C.4.iii below for more detail on these concerns. 519 See, e.g., letter from TIAA (noting that addressing the alignment issue ‘‘would greatly improve the clarity and value of the disclosure for investors’’). 520 See, e.g., letters from CEC 2015; Pearl; PG 2015; PG 2022; and SCSGP (citing the conclusions of a broader working group led by the Conference Board). Others recommended the adopted approach or other variations similar to realizable pay. See letters from CAP; Farient; Hodak; Infinite; TCA 2015; and TCA 2022. 521 Realizable pay generally reflects the end-ofperiod value of outstanding equity awards as well as the value of any cash and equity awards realized during the period, with a focus on equity awards that were granted within a particular horizon. Differences across definitions include whether PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 55173 they reflect, like executive compensation actually paid, an attempt to measure the change in value of an executive’s pay package—including outstanding awards that have not yet been realized—after the grant date, as performance outcomes are experienced. We believe that the increasing consideration of realizable pay (as computed by third parties) by investors when evaluating pay and performance alignment 522 is evidence that a measure with similar features,523 such as the adopted measure of executive compensation actually paid, is likely to be useful to investors in this context.524 Although investors could estimate executive compensation actually paid using existing disclosures, and may already be making similar estimates on their own or relying on third party estimates of related measures, they may benefit from these computations becoming readily available in the prescribed compensation measure. The newly disclosed computations could reduce duplicative analytical effort by replacing or validating related investor or third party estimates. In addition, some investors or third parties hired by investors may be interested in leveraging the disclosures to more easily compute slightly different pay measures, whether these are the measures they currently use under the baseline or refined versions of these measures that are more feasible to construct due to the availability of the new disclosures, or in using parts of the required computations for other purposes.525 In such cases they are outstanding options are valued at fair value or intrinsic (‘‘in-the-money’’) value, and whether the value of performance- or time-based awards is recognized when earned, when vested, or at the end of the period. See, e.g., ISS Realizable Pay Article. 522 See supra note 454. 523 Differences between realizable pay measures and the adopted definition of executive compensation actually paid and associated costs and benefits for this purpose are discussed in more detail in Section IV.C.4.iii below. 524 To the extent that some investors may be interested in considering the relationship of performance with a measure of pay that reflects the grant date 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. As discussed above, some of the existing pay-for-performance analyses by, or on behalf of, investors use such a measure, though most of the analyses that we observe also supplement this with a realizable pay measure. See supra notes 446 and 448. 525 See, e.g., letters from CII 2015 (stating that ‘‘[s]ophisticated investors will make different adjustments to the compensation information. . . they are given’’); and As You Sow 2015 (expressing interest in a cumulative measure of executive compensation actually paid, which we note could be constructed from the annual measures that will be disclosed). E:\FR\FM\08SER3.SGM 08SER3 55174 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 likely to benefit from the required footnote disclosure of the adjustments made to compute executive compensation actually paid and the disclosure of equity valuation assumptions, if materially different from the grant date assumptions. Also, requiring that the disclosure be provided in a structured data language may benefit investors interested in extracting and analyzing some or all of the data in the disclosure across a large number of filings. With respect to the performance information required in the new disclosures, 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. Commenters expressed a number of concerns with the use of TSR in particular in evaluating executive performance, such as its sensitivity to external factors outside of the control of executives,526 a possible emphasis on short-term performance,527 and the possibility of strategies that could artificially inflate TSR.528 However, we are not aware of, and commenters did not identify, any standard, singular measure that would be a uniformly better alternative, and some commenters noted that TSR would be a useful measure. In particular, commenters that indicated that investors would find TSR to be useful noted that it is the ultimate measure of corporate success and shareholder value creation 529 and it is widely comparable across registrants.530 We agree with these commenters that, despite its limitations, TSR is likely to be a useful measure in this context, particularly because it incorporates information about a variety of facets of registrant performance, including market expectations of the future impact of current executive actions, and it is responsible for a significant amount of the variation in compensation outcomes experienced by executives. Specifically, academic studies indicate that changes in the value of equity awards after the grant date, with the movement of stock 526 See, e.g., letters from AFL–CIO 2015; Aspen; CalPERS 2015; CEC 2015; Celanese; Dimensional; FSR; Hay; IBC 2015; IBC 2022; McGuireWoods; Mercer; NACCO; NIRI 2015; NIRI 2022; PDI; Pearl; Samuelson; and SBA–FL. 527 See, e.g., letters from AFREF; ASA; Blackrock; BRT 2015; CCMC 2015; CEC 2015; Coalition; FedEx 2015; FSR; Hall; IBC 2015; IBC 2022; Mercer; NACCO; NACD 2015; NAM 2015; NIRI 2015; Samuelson; SCG; Simpson Thacher; and WorldatWork. 528 See, e.g., letters from Better Markets; Hodak; IBC 2022; McGuireWoods; NACCO; Pearl; and PDI. 529 See, e.g., letters from AFL–CIO 2015; CII 2015; Farient; Hermes; Hodak; and OPERS. 530 See, e.g., letters from Barnard 2015; Barnard 2022; CII 2015; Davis Polk 2022; Hodak; and TIAA. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 prices, are the primary channel though which pay is linked to registrant performance.531 TSR is mechanically a significant determinant of executive pay outcomes, as it is the most commonly used metric in long-term incentive plans, and, more importantly, a majority of CEO compensation is awarded in the form of equity awards, whose value is closely tied to stock prices even when TSR is not explicitly used as a performance metric.532 Current market practices provide further evidence that TSR is likely to be useful to investors in this context: every investor and thirdparty analysis of pay-for-performance that we have observed incorporates TSR as a primary performance measure.533 However, even if TSR, despite the limitations noted above, is a particularly useful measure for the purpose of evaluating the relation of pay with registrant performance, it may not provide a complete picture of registrant performance. Further, relying solely on TSR to evaluate registrant and executive performance may even be misleading in certain situations, such as when expected outperformance is already reflected in the starting stock price,534 when a stock is thinly traded,535 or when market dynamics cause stock returns to become particularly disconnected from fundamental performance.536 The required disclosure of additional financial performance measures may help to address these concerns by broadening the picture of registrant performance presented in the disclosure, providing additional detail and context that could enhance the 531 See, e.g., Edmans et al. 2017 Survey Paper (presenting evidence that ‘‘the vast majority of executive incentives stem from revaluations of stock and option holdings, rather than changes in annual pay’’); and Murphy 2013 Study (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). See also letter from Hodak (stating that, for the average company, ‘‘upwards of 80 percent of the real variation in the value of pay would derive from unvested equity’’). 532 See Section IV.B.3 above. One commenter stated that the Proposing Release did not provide ‘‘any compelling evidence that [TSR] is a metric commonly used by companies to measure performance or in setting compensation.’’ See letter from CCMC 2015. Section IV.B.3 above provides more detail on the significant use of TSR as a performance metric as well as the heavy reliance on equity awards, whose value is closely tied to TSR, in compensating executives. However, as discussed in this section, there is also other evidence that TSR may be an appropriate measure for this purpose. 533 See supra note 451. 534 See, e.g., letters from Aspen and SCSGP. 535 See, e.g., letters from Hyster-Yale and NACCO. 536 See, e.g., letters from McGuireWoods and SCG (citing the recent ‘‘meme stocks’’ phenomenon as an example of massive fluctuations in stock price which have little to do with fundamental performance). PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 usefulness of the disclosure by certain registrants or for certain investors. For example, several investors commented that the inclusion of TSR of a peer group would enhance the comparability of TSR,537 perhaps by providing a benchmark for some of the market- or industry-wide factors that may affect performance at each registrant. Some commenters indicated that the required inclusion of a Company-Selected Measure and net income would provide a more complete picture of registrant performance.538 More specifically, commenters stated that a Company-Selected Measure would provide insight into the registrant’s perspective 539 and a facet of performance that is directly relevant for understanding compensation,540 and that net income would provide a more objective accounting benchmark that is not affected by items like non-GAAP adjustments 541 and stock buybacks.542 Similarly, some commenters indicated that including a list of the most important performance measures used by the registrant to link compensation actually paid to company performance would provide useful context or a more complete view of pay-for-performance programs,543 and may therefore help address concerns that the pay-versusperformance disclosure could otherwise ‘‘mislead’’ investors.544 Finally, to the extent registrants include additional supplemental measures of performance, commenters indicated they generally expect investors to benefit from an even more complete picture of performance.545 As discussed in the Baseline section above, all of the required performance information is generally already available in existing disclosures in annual reports or the CD&A of proxy statements. However, including this performance information in the payversus-performance disclosure may be useful to investors to the extent it limits the time they need to spend referring to other disclosures 546 in order to interpret 537 See, e.g., letters from OPERS and TIAA. e.g., with respect to the CompanySelected Measure, letters from Better Markets; CII 2022; and Dimensional; and with respect to net income, letters from CII 2022 and Teamsters. 539 See, e.g., letter from AFL–CIO 2022. 540 See, e.g., letters from CalPERS 2022; CalSTRS; and Infinite. 541 See, e.g., letters from As You Sow 2022 and Teamsters. 542 See, e.g., letters from Better Markets and CalSTRS. 543 See, e.g., letters from AFREF; Better Markets; and CII 2022. 544 See, e.g., letters from AFREF and CII 2022. 545 See, e.g., letters from AFL–CIO 2022; CalPERS 2015; CFA; CII 2022; and Hay. 546 See, e.g., letters from AFL–CIO 2022 (stating that shareholders must currently ‘‘comb through the 538 See, E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 the pay-versus-performance disclosure, or prevents some investors from overlooking important context about the broader performance or pay-forperformance programs of a registrant. The required description, in graphical or narrative form, of the relationship between pay and the performance measures in the prescribed table is not anticipated to provide significant additional information beyond the contents of the table, but if it presents this information effectively, it may help investors to more easily interpret the disclosure. If the required disclosure is useful to investors, the benefits are likely to vary across investors of different types. For example, it may be particularly beneficial to those investors who do not have access to third-party analyses, have fewer analytical resources, or are less adept at interpreting current disclosures on their own.547 That said, some such investors may limit their proxy statement review to items like a voluntarily-provided proxy summary section regardless of the existence of the new disclosure, in which case they are unlikely to benefit.548 Among investors with more resources or sophistication, some may benefit by being able to more quickly review proxy statements to determine which to investigate in more detail,549 and some may reduce their analytical burdens by relying on information from the new disclosure to replace, to validate, or to more easily construct the inputs for their existing analyses. To the extent third parties are able to similarly leverage information provided in the new disclosures in constructing their own quantitative analyses, they may pass on some of these benefits in the form of a lower cost or a more useful analysis to subscribing investors. On the other hand, some investors or the third parties they subscribe to may continue to independently construct their own narrative disclosure provided in the Compensation Discussion and Analysis and then separately match up the company’s actual performance from financial statements’’); and As You Sow 2015 (stating that they focus primarily on proxy statements from March to May, and would therefore support moving the Item 201(e) of Regulation S–K graph, which includes TSR and the TSR of a peer group, to the proxy statement from the annual report). 547 See, e.g., letters from OPERS and Teamsters. 548 See, e.g., letters from Axcelis and NIRI. See also Abt SRBI, Mandatory Disclosure Documents Telephone Survey, Commissioned by SEC’s Office of Investor Education and Advocacy (July 30, 2008), available at https://www.sec.gov/pdf/ disclosuredocs.pdf, at 38 (presenting survey evidence that, among individual investors that read proxy statements, 43% reported spending less than 10 minutes reading proxy statements). 549 See supra note 505. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 analyses without using any elements of the new disclosure; these investors are unlikely to benefit from the disclosure.550 For all of the investors that would benefit from the disclosures, they are likely to benefit the most in the case of (i) registrants with particularly complex compensation plans, and where the alignment of pay and performance may therefore be difficult to assess, and (ii) registrants that do not already provide useful pay-versusperformance disclosure on a voluntary basis. Overall, the direct benefits of the final rules hinge on the new disclosures being relatively easy to review and including the information investors are most interested in when evaluating the relation of pay with performance. Therefore, if the included measures are significantly different from those investors would collect or construct on their own in order to evaluate executive compensation, or if the disclosure is too long or complicated to review quickly, benefits to investors could be limited. Some commenters expressed such concerns, indicating that the proposed disclosures would be of minimal or no benefit to investors.551 However, as discussed above, there is evidence that the revised measure of executive compensation actually paid and TSR are similar to measures currently used by many investors in quantitative analyses of pay and performance alignment, which suggests that these elements of the new disclosure are likely to be at least somewhat useful to investors. It is less clear to what extent the overall effect of the additional required performance measures will be to enhance the utility of the new disclosures to investors, recognizing that the usefulness of these components may be reduced by their contribution to the overall length and complexity of the disclosures,552 which may make it difficult to quickly interpret the basic elements of the disclosures. Any supplemental explanations registrants include may further increase the length and complexity of the new disclosures.553 That said, the tabular disclosure of the underlying data will provide a degree of consistency and 550 See, e.g., letters from Axcelis; IBC 2015; and SCG. 551 See, e.g., letters from BRT 2015; CAP; Celanese; FedEx 2015; NAM 2015; and Pearl. 552 See, e.g., letters from CEC 2015; McGuireWoods; Meridian; and TCA 2022. 553 See, e.g., letters from Aon HCS; Aspen; CEC 2022; Celanese; Coalition; Exxon; Hyster-Yale; IBC 2022; NACCO; NAM 2015; NIRI 2015; NIRI 2022; and PNC. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 55175 comparability, which can aid investors in quickly processing the information. The final rules 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, 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),554 then benefits will arise to investors 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. The final rules could also indirectly benefit investors and registrants in the form of more optimal board composition, if, by virtue of the disclosure, shareholders make more informed voting decisions. The likelihood of such indirect effects is difficult to estimate because the ideal pay-versus-performance analysis, 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 disclosure is intended to facilitate investors’ consideration of the alignment between pay and performance when making related voting decisions. Several commenters indicated that they anticipated that the proposed amendments would therefore result in improvements in compensation and/or corporate governance.555 However, because the final rules do not require the disclosure of significant new underlying informational content, and given the high level of existing attention to pay practices—including increased engagement on these matters with institutional investors, and the sophisticated methods and processes that many investors and third parties have developed for evaluating pay—we believe that it is unlikely that the final rules will play a significant role in encouraging more optimal pay packages or corporate governance. We therefore believe that the final rules are likely to 554 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 shareholder value creation. 555 See, e.g., letters from Better Markets and Sacred Heart. E:\FR\FM\08SER3.SGM 08SER3 55176 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 have no material beneficial effects on competition or capital formation. Lastly, we note that the required payversus-performance disclosure will provide some incremental information relative to the underlying informational content already available to the public in other formats, but that the extent of this information is limited. For example, the valuation of equity awards such as options and performance-contingent stock involve certain assumptions and expectations, and registrants are not currently required to disclose valuation assumptions for most 556 such awards on dates other than the grant date. Vesting-date values currently are provided for stock awards in the Stock Vested and Options Exercised Table, but the applicable fair values at times before these dates, other than the grant date, and for options at all dates other than the grant date, are not separately presented by registrants. That said, for some awards, additional assumptions are not required to compute their fair values at these other dates. Specifically, for stock awards, such as restricted stock, that only have service-based conditions, the fair value would generally simply equal the stock price at the time. For stock with performancebased conditions other than market conditions, determining the fair value would involve a reassessment of the probable outcome with respect to the performance metrics involved, but registrants are also required to reassess these probable outcomes each period for the purpose of financial statement reporting, and associated footnotes should provide insight into the registrant’s evaluation to the extent the changes in estimates are material. Computing the fair value of other awards, such as options and stock with market-based conditions, after the grant date would likely require new assumptions. Using existing disclosures, investors can themselves make estimates of the fair values of options and stock with market-based conditions at dates beyond the grant date based on the disclosed terms of these awards, and by using publicly available data to make reasonable valuation assumptions.557 In 556 A minority of option-like awards may be classified as liability awards under FASB ASC Topic 718, because of, e.g., certain cash settlement features or conditions or other features that are indexed to conditions other than a market, performance, or service condition. In such cases, the entity is required to revalue the award at fair value each period and to adjust its cumulative cost in the financial statements, and the associated valuation assumptions would generally be available in financial statement footnote disclosures. 557 Such data might include financial statement footnote disclosures relating to significant assumptions made by the registrant in arriving at VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 contrast, a fair value estimate provided directly by the registrant would reflect its discretion in choosing a valuation methodology and estimating the inputs required, such as the expected option life and the expected volatility of the stock.558 The grant-date valuations provided by registrants already demonstrate, to some extent, how the registrants choose to apply their discretion in the valuation process.559 It is unclear to what extent investors would find information about what valuation assumptions registrants would apply at later dates, which would similarly reflect registrant discretion, to represent meaningful new information beyond what is available in existing disclosures (though investors may find the computations useful regardless of whether they reflect meaningful new information). With respect to pensions, while aggregate service costs are reported in financial statement disclosures, and pension plan terms and assumptions are disclosed in detail, registrants are not currently required to separately report the service cost, or prior service cost due to any plan amendments or initiations, that is associated with each individual NEO, so the disclosure of these costs may reveal marginal new information about actuarial assumptions specific to the estimation of service costs for these individuals, such as any embedded assumptions about future compensation levels. Additional potential sources of new information for investors include the Company-Selected Measure and the Tabular List. As discussed above, if registrants do not already disclose the historical outcomes for their CompanySelected Measure over the past five years, the disclosure may provide new 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. 558 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. 559 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 & Ron Kasznik, Do Firms Understate Stock-Based Compensation Expense Disclosed under SFAS 123? 11 Rev. Acc. Stud., No. 4, 429 (2006). Notably, when evaluating executive compensation, two major proxy advisory firms 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 Glass Lewis Methodology and ISS Methodology. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 information to the extent that any required adjustments or computations required to derive the value of these measures from reported financial data may not always be straightforward for investors to replicate. Finally, both the Company-Selected Measure and the Tabular List may provide new information in the form of any insight gained based on the registrant’s choice of which of the measures reported in the CD&A were deemed to be the most important with respect to the last completed fiscal year. Overall, the extent of new underlying informational content that could be made available in the disclosures is limited, and, while some investors may find the incremental information to be useful, it is unclear to what extent it would be meaningful to investors more broadly. We therefore believe that the potential benefits of the final rules derive primarily from the manner in which the information is presented rather than the disclosure of any significant new underlying informational content. The benefits of some specific implementation choices are discussed in more detail in the Implementation Alternatives section below. 3. Costs The primary costs of complying with the final rules reside largely with registrants and include the time and expense to make the required computations; to select the tailored components of the required disclosure; to design a format for the required descriptions and create these elements of the disclosure; to draft the footnotes and any supplementary disclosures that are deemed necessary; to apply Inline XBRL data tagging; and to ensure appropriate review, such as by management, in-house counsel, outside counsel and members of the board of directors. The costs will be mitigated by phasing in the time periods for the disclosure for both new and existing registrants, thereby limiting the computations required when first producing the disclosure, and providing scaled requirements and a phased-in tagging requirement for SRCs. In the Proposing Release, we indicated that we believed that the costs to registrants of complying with the proposed amendments likely would be relatively low, given that the required disclosures would not require the collection of any significant new information relative to the baseline and the required additional computations would be straightforward. Some commenters agreed that the compliance costs would be relatively low and/or E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 that the required computations would not be difficult.560 However, some other commenters indicated that the Proposing Release may not have fully accounted for the costs of the proposed disclosures,561 particularly with respect to the expense of producing new option valuations 562 and supplemental disclosures that would be required to prevent confusion.563 Also, we acknowledge that the compliance costs associated with the final rules will generally be higher than those that would have been associated with the approach set forth in the Proposing Release, given the revised definition of executive compensation actually paid and the disclosures with respect to additional performance measures that were not included in the proposal. We have, accordingly, revised our burden estimates for purposes of the Paperwork Reduction Act of 1995 564 (‘‘PRA’’), as discussed below and in Section VI of this release. However, we believe that, given that the disclosures require the collection of minimal new information, the overall compliance costs of the final rules should be modest. In particular, while some of the computations involved are more complex than simple arithmetic, existing models and established methodologies should aid in making the required calculations. For example, commenters indicated that the determination of pension service cost, disaggregated by executive, would require minimal effort by the actuaries who are already making the required computations to produce aggregate pension service cost for the financial statements.565 While there may be an incremental charge to obtain these estimates,566 or to make the required additional computations in the case of any plan amendments, we expect it to be low. The annual revaluation of restricted stock and performancecontingent stock should only require consideration of the prevailing stock price and any updates with respect to the probable outcome of performance conditions, which are already reassessed as of the end of each fiscal year for financial reporting purposes.567 560 See, e.g., letters from Aon HCS; Better Markets; Hodak; and Infinite. 561 See, e.g., letters from NAM 2015; Pearl; and TCA 2015. Some other commenters raised general concerns about the costs of the proposal. See, e.g., letters from CEC 2022; NIRI; and WorldatWork. 562 See, e.g., letter from Pearl. 563 See, e.g., letter from TCA 2015. 564 44 U.S.C. 3501 et seq. 565 See, e.g., letters from Mercer and Towers. 566 See, e.g., letters from AON and NACCO. 567 See FASB ASC Topic 718–10–30. See also letter from CAP. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 Finally, the annual revaluation of options (as well as any stock with market-based conditions) can generally be accomplished by reevaluating the appropriate inputs and entering these into the existing valuation models used to calculate currently disclosed values. Several commenters indicated that this process would be tedious and generate administrative burdens,568 and that the appropriate models as well as inputs may need to be reconsidered when revaluing option awards beyond the grant date.569 We acknowledge that the revaluation of options, which will be required more frequently under the final rules than under the proposal, will likely be the most computationally-intensive requirement of the final rules. However, a minority of registrants utilizes option awards in compensating NEOs, and we agree with several commenters who indicated that annual computations of fair value of outstanding equity awards would not be overly burdensome.570 Option valuation is a well-established discipline, and existing models and software,571 as well as reliance on thirdparty experts when necessary, should aid the registrants that grant options to their NEOs in making the required calculations. Further, on an ongoing basis, the value of executive compensation actually paid will only need to be computed for a single fiscal year at a time (and, given the phase-in of requirements, for three fiscal years at inception, or two fiscal years in the case of SRCs), limiting the total computations required in order to update the disclosure each year. Also, as discussed above, some investors, or third parties on behalf of investors, are currently making similar computations. While the required computations may represent a burden for registrants, they may reduce such duplicative efforts and place responsibility for the calculations in the hands of registrants, who are best positioned to produce them. Several commenters raised concerns about the extent of supplemental disclosure that would be required to clear up ‘‘misconceptions’’ that could result from the required elements of the proposed disclosure.572 While we expect that some registrants may choose 568 See, e.g., letters from Cook; KPMG; Pearl; and WorldatWork. 569 See, e.g., letters from CAP; TCA 2015; and TCA 2022. 570 See, e.g., letters from Hodak; Infinite; TCA 2015; and TCA 2022. 571 See, e.g., letters from Hodak and ICGN. 572 See, e.g., letters from CCMC 2022; CEC 2015; and FSR. See also letters from BlackRock; Celanese; Cook; Exxon; NAM 2015; NAM 2022; NIRI 2015; TCA 2015; and TCA 2022. PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 55177 to provide supplemental disclosure, such as to clarify the required disclosure, and that producing such disclosure will be associated with further compliance costs, we believe that the revised definition of executive compensation actually paid should reduce the need for clarifying disclosures because, relative to the proposed measure of pay, it is less likely to require the reporting of pay in a different period than the associated performance.573 Commenters to the Reopening Release also raised concerns about the cost to include the additional information with respect to performance measures contemplated in that release. The final rules include modifications that should limit these costs. For example, some commenters indicated that the inclusion of net income and income or loss before income tax expense would increase the length and/or cost of disclosure.574 The final rules require the inclusion of net income, but not income or loss before income tax expense, which should limit the size and costs of the associated disclosure. Similarly, some commenters indicated that the selection of a single Company-Selected Measure would be difficult 575 and result in substantial additional cost 576 to registrants, in part because of the prominence of this single measure and the resulting scrutiny required from board members and senior management, with input from outside advisors. The final rules require the inclusion of a Company-Selected Measure, but registrants will be permitted to include additional supplemental measures in the table, which may mitigate burdens in cases where it is difficult to isolate a single most important measure. Finally, some commenters indicated that the list of the top five most important performance measures contemplated in the Reopening Release would be difficult to produce,577 particularly because of the difficulty in ranking such measures, and that it would increase the length and complexity of disclosure 578 due to the additional explanations registrants might consider necessary for clarification. The final rules do not 573 See, e.g., letter from Cook (providing sample language that may have been required to address such a mismatch). 574 See, e.g., letters from FedEx 2022; McGuireWoods; NAM; and TCA 2022. 575 See, e.g., letters from Aon HCS; CEC 2022; Davis Polk 2022; LGIM; and NAM. 576 See, e.g., letter from Davis Polk 2022. 577 See, e.g., letters from ASA; Davis Polk 2022; LGIM; McGuireWoods; NAM 2022; and SCG. 578 See, e.g., letters from Aon HCS; CEC 2022; Davis Polk 2022; and IBC 2022. E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 55178 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations include a ranking requirement and allow a variable number (from three to seven) of the most important measures, which may make it easier for registrants to find a more natural break-point in isolating a group of the measures they consider to be most important. This additional flexibility may thereby also limit the amount of additional explanatory disclosure that registrants choose to provide. We also note that the number of relationships that the final rules will require registrants to describe in narrative or graphical form has increased to seven, for registrants other than SRCs, from the three that would have been required per the Proposing Release. For SRCs the number has increased from two to four. In particular, a registrant must describe the relationship of each required performance measure (TSR, net income, and, for non-SRCs, the CompanySelected Measure) with the PEO’s compensation actually paid as well as with the average such pay of the other NEOs, and (for non-SRCs) they must also describe the relationship of TSR to peer group TSR. We acknowledge that these additional requirements will increase compliance costs, but we expect that the descriptions can be scaled depending on their relevance to a particular registrant. For example, if TSR or net income have little correlation, or only a spurious correlation,579 with pay at a particular registrant, and is not a metric used in their compensation plans, a simple statement to this effect may suffice. Overall, the expansion of the disclosures with respect to performance measures will increase the compliance costs of the final rules relative to the requirements reflected in the Proposing Release, but, as discussed above, these disclosures may provide helpful context to investors. As discussed above, registrants will be required to file the pay-versusperformance disclosure in certain proxy or information statements. While much of the disclosure will 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 579 A spurious correlation, in the context of statistics and related fields, is an apparent association between two variables that occurs, e.g., by coincidence, and not because of a causal relationship. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 (‘‘Section 18’’).580 Several commenters indicated that this may increase the cost to registrants of the disclosures,581 because of the need for additional assurance and because of litigation risks. However, we note that Section 18 does not provide for strict liability with respect to ‘‘filed’’ information.582 Compliance costs associated with the final rules are likely to vary 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. Registrants that include these elements in their executive compensation plans are therefore expected to require more computations to produce the disclosure.583 This is particularly the case for registrants that use options, both because the required computations are more involved, as discussed above, and also because options tend to vest ratably over time,584 so registrants may need to track and value many different tranches of options in a given year. As shown in Tables 2 and 3 in the Baseline section above, the use of both options and pensions has declined since the time of the Proposing Release, but each still has a prevalence of roughly 20 percent among S&P 1500 CEOs (and 30 percent among their other NEOs). Overall, though, the registrants for whom the computations will be more burdensome—those with more complex compensation packages—are also generally those for which investors are expected to benefit most from the disclosure: in the absence of the disclosure, it is more difficult for investors to assess the alignment of pay and performance when compensation is more complex. Large companies are more likely than smaller ones to have pension plans and grant stock and option awards to executives.585 However, a significant fraction of mid-sized and smaller companies feature these components in 580 15 U.S.C. 78r. e.g., letters from Hodak; NAM 2015; and 581 See, SCSGP. 582 See Section 18. 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. 583 See, e.g., letter from Cook (discussing the preparation of five sample disclosures based on the proposed requirements, and finding that there was ‘‘considerably more time and effort required for companies that grant stock options and/or have pension plans’’). 584 See Section IV.B.3 above. 585 Id. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 their compensation plans as well.586 Thus, while the compliance costs are likely to be relatively low, these costs may be slightly more burdensome for those affected registrants that have complex compensation packages and yet are small enough that the costs of the disclosure are relatively more consequential in comparison to their size. That said, SRCs will be subject to scaled requirements consistent with their existing disclosure requirements, including fewer years of disclosure; no requirement to report peer group performance, a Company-Selected Measure, or a list of the most important performance measures; and the exclusion of items related to pension plans in computing executive compensation actually paid. SRCs are not currently required to comply with Item 201(e) of Regulation S–K, 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 PRA, as discussed in Section VI of this release, we estimate that the total incremental burden on all registrants of the final rules will be, annually, approximately 95,800 hours for internal company time, and about $12.8 million for the services of outside professionals. These estimates represent an increase in estimated burden hours per affected registrant of about 87 percent 587 (from 15 to 28 hours) for non-SRCs, and about 13 percent 588 (from 15 to 17 hours) for SRCs, relative to the estimates in the Proposing Release. As discussed above, these costs are expected to vary across registrants depending on the complexity of their compensation structures. Also, certain registrants—such as those whose executive compensation is not tied closely to TSR or net income—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. While the new disclosure requirements are intended to make it 586 Id. 587 The incremental burden hours per filing estimated for PRA purposes is 28 hours for nonSRCs, compared to an estimate of 15 hours in the Proposing Release, representing an increase of (28/ 15—1) or about 87%. 588 The incremental burden hours per filing estimated for PRA purposes is 17 hours for SRCs, compared to an estimate of 15 hours in the Proposing Release, representing an increase of (17/ 15—1) or about 13%. E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations easier for investors to assess the alignment of pay and performance, investors may instead bear increased information processing costs as a consequence of the final rules if they increase the length and complexity of existing disclosures without significantly adding to the ease of interpretation. Some commenters raised concerns that the proposed disclosures would result in such information overload.589 The likelihood and extent of such costs resulting from the final rules may be a function of the degree of supplementary disclosures registrants choose to provide, as well as the complexity of and variation in presentation formats. The risk of information overload may also be exacerbated by the required disclosures with respect to additional performance measures,590 which could provide helpful context for investors, or could end up complicating or obscuring the elements of the disclosure that would be most useful to investors. If the required disclosures complicate rather than facilitate the task of understanding executive pay policies, they may marginally decrease the informational efficiency of markets. The final rules could confuse investors about the optimality of pay practices if they bring attention to a particular relationship that might not be relevant, given the facts and circumstances of a particular registrant, in evaluating the alignment of pay and performance at that particular registrant.591 As discussed above, there are challenges in measuring pay-versusperformance alignment which are likely to impact any standardized approach to presenting this relationship. However, the required inclusion of additional context in the disclosure may help to mitigate potential confusion. For example, the inclusion of net income, a Company-Selected Measure, and a Tabular List could be helpful in limiting confusion stemming from differences in the timing of an executive’s accomplishments and when they may be reflected in TSR, to the extent that other performance measures may better align with executive performance in such cases. Further, including peer group TSR in the disclosure may help investors to identify when registrant TSR could be driven by market moves, sector opportunities, commodity prices, or other factors unrelated to managerial 589 See, e.g., letters from BlackRock; BRT 2015; CCMC 2015; CEC 2015; Meridian; and TCA 2015. 590 See supra notes 574 and 578. See also letters from BRT 2022 and IBC 2022. 591 See, e.g., letters from BlackRock; BorgWarner; CEC 2015; CCMC 2015; FSR; Honeywell; HysterYale; NACCO; and Ross. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 effort or skill. That said, the required disclosure may be less meaningful at a particular registrant if TSR, even relative to peers, is very different from the contribution of the given NEO to performance, or if the disclosed relationship between compensation and TSR does not (e.g., because of vested equity holdings that are not reflected in executive compensation actually paid) fully capture the economic relationship between the company’s performance and the financial rewards to the NEO. Similarly, the required net income disclosure may be less meaningful at registrants at which net income is not particularly relevant to understanding executive performance.592 As discussed in the Proposing Release, the potential for confusion is especially concerning given that the new disclosure may be of particular interest to less sophisticated investors, 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, as well as the ability of registrants to provide further explanatory disclosures. Some commenters agreed that this flexibility to supplement the disclosure would improve investors’ understanding or mitigate potential confusion.593 However, such clarifying disclosures may be more likely to be provided when the disclosure is perceived by the registrant to incorrectly indicate the misalignment of pay and performance than when the disclosure is perceived to incorrectly indicate strong alignment. Further, as noted by other commenters, less sophisticated investors may be unlikely to consider these supplemental disclosures.594 While some commenters were not convinced that a CompanySelected Measure or list of most important performance measures would help in such cases,595 it is possible that these additional required elements of the disclosure may help mitigate confusion by providing a mandatory, prominent indicator of the broader performance landscape in the specific context of a given registrant. 592 See, e.g., letters from Aon HCS; ASA; CEC 2022; Davis Polk 2022; Dimensional; FedEx 2022; IBC 2022; Nareit; NAM; NIRI 2022; PG 2022; and TCA 2022. 593 See, e.g., letters from CalPERS 2015; CAP; CFA; CII 2015; Farient; OPERS; and TIAA. 594 See, e.g., letters from Aspen; CEC 2015; Celanese; FSR; and NACCO. 595 See, e.g., letters from CCMC 2022; NAM 2022; and TCA 2022. PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 55179 The final rules could also lead to indirect costs if the required disclosures lead to changes in compensation packages that are not beneficial.596 Registrants may make changes to avoid disclosure that they perceive indicates the misalignment of pay and performance, whether that indication is valid or merely due to limitations of the standardized approach. 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,597 even in situations in which this would not be optimal.598 The inclusion of net income in the disclosure could mitigate this risk, or could instead encourage the use of net income as a performance metric in incentive programs, even when this is not beneficial.599 Commenters raised concerns that such pressures on compensation design could lead to compensation that incentivizes shorttermism and/or the inappropriate homogenization of compensation plans.600 If such changes are indirectly encouraged by the final rules, they may entail costs to registrants and their shareholders. As in the case of any shifts towards more optimal compensation structures, discussed in the Benefits section above, the resulting pay packages may represent either a benefit or a cost to the NEOs themselves depending on whether or not the less 596 See, e.g., letter from Brian Cadman, dated Feb. 18, 2022 (discussing the potential unintended consequences of regulation of executive compensation disclosures). We note, however, that the research cited in this letter focuses on changes in a prior period, before registrants were regularly holding say on pay votes and engaging as heavily with investors on compensation. In contrast, more recent regulatory changes have not always been as impactful as expected, perhaps because of the offsetting effect of this heightened investor engagement on pay structure. See, e.g., Lisa De Simone, Charles McClure & Bridget Stomberg, Examining the Effects of the TCJA on Executive Compensation (Apr. 15, 2022). Kelley School of Business Research Paper No. 19–28, available at https://ssrn.com/abstract=3400877 (finding no evidence that the repeal of a long-standing exception under Section 162(m) of the tax code that allowed companies to deduct executives’ qualified performance-based compensation in excess of $1 million reversed a related shift in executive compensation away from cash compensation and towards performance pay). 597 See, e.g., letters from CEC 2015; CCMC 2015; Hall; Hay; Hermes; Hodak; FSR; Georgiev; McGuireWoods; Mercer; Pearl; PNC; SCSGP; Simpson Thacher; and WorldatWork. 598 See supra notes 498 and 499 regarding academic studies that find that a stronger link between pay and stock price performance may not be optimal. See also letter from Aspen (highlighting research indicating that financial incentives in general may be problematic ‘‘when complex or creative mental tasks are required’’). 599 See, e.g., letters from NAM and SCG. 600 See, e.g., letters from CEC 2022; Georgiev; Hay; NAM; and SCG. E:\FR\FM\08SER3.SGM 08SER3 55180 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations optimal compensation structure, including the level of compensation as well as the risk exposure, is preferred by the executives. 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 investors, 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 final rules do not require the disclosure of significant new information, and given the high level of existing attention to pay practices—including the increased engagement on these matters with institutional investors, and the sophisticated methods and processes that many investors and third parties have developed for evaluating pay—we believe that it is unlikely that the final rules will play a significant role in encouraging sub-optimal pay practices.601 We therefore believe that the final rules likely will have no material detrimental effects on competition or capital formation. The costs of some specific implementation choices are discussed in more detail in the Implementation Alternatives section below. khammond on DSKJM1Z7X2PROD with RULES3 4. Implementation Alternatives In this section, we present significant implementation alternatives and a discussion of their benefits and costs relative to the implementation choices in the final rules. i. Registrants and Filings Subject to the Disclosure Requirement An alternative to the final rules would be to fully exempt SRCs from the disclosure requirement. Exempting SRCs generally would be consistent with the overall scaled disclosure requirements that apply to SRCs. While the final rules subject SRCs to scaled requirements in order to limit the incremental burdens such companies may face relative to other registrants, some such burdens remain. For example, SRCs are currently not required to disclose their TSR in annual reports, so they would face a higher burden than other registrants to calculate and include this measure in the pay-versus-performance disclosure. SRC pay-versus-performance disclosure, under the final rules, may also benefit investors to a lesser degree than that for other registrants, because the scaled requirements reduce the content and comparability of the disclosures. Also, in the absence of CD&A disclosure, 601 See supra note 596. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 investors will have less information with which to interpret pay-versusperformance disclosures from these registrants. As discussed above, some commenters agreed that SRC payversus-performance disclosure would generate greater burdens and/or lesser benefits than that for other registrants.602 On the other hand, it is possible that investors may particularly benefit from the required pay-versus-performance disclosure for SRCs, precisely because these registrants currently provide less extensive disclosure about compensation. For example, some investors may believe that the long-term performance of younger, high-growth companies may be highly sensitive to the design of executive compensation. Such investors may be particularly interested in compensation structures at SRCs but may find it difficult to assess these structures in the absence of CD&A disclosure for SRCs. These investors may benefit from SRC pay-versusperformance disclosures, even if these disclosures are not directly comparable with the disclosures of other affected registrants. Further, the data that SRCs do currently disclose is less likely to be available in aggregate form from data vendors that collect such data from the proxy statements of larger companies. Investors that are interested in comparing executive compensation across SRCs may particularly benefit from the data in the pay-versusperformance disclosure being tagged in Inline XBRL, to the extent this makes the data more accessible or increases the likelihood that more commercial databases expand their coverage to such registrants.603 Some commenters agreed that there may be particular governance concerns at SRCs 604 and that investors would benefit from pay-versusperformance disclosures by these registrants.605 The final rules permit SRCs to present fewer years of information in the disclosure; to not include peer group performance, a Company-Selected Measure, or a Tabular List; and to exclude items related to pension plans in computing executive compensation actually paid. While these scaled requirements may reduce the benefits of 602 See supra notes 405 to 407 and accompanying text. 603 See Y. Cong, H. Du & M.A. Vasarhelyi, Are XBRL Files Being Accessed? Evidence from the SEC EDGAR Log File Dataset, 32 J. Info. Sys. 3 (concluding that ‘‘small company investors not only access XBRL files but also prefer them to the nonXBRL files when both are available to download for a filing’’). 604 See, e.g., letters from Morrell and Troop. 605 See, e.g., letters from Better Markets; CalPERS 2015; and CalSTRS. PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 the disclosure, these accommodations should substantially limit the incremental burdens faced by SRCs in providing pay-versus-performance disclosure, while preserving some benefits to investors interested in executive compensation at such registrants. Another alternative with respect to the applicability of the final rules would be to expand the filings requiring payversus-performance disclosure, such as requiring that such disclosure accompany any Item 402 of Regulation S–K 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 final rules and broaden the disclosure requirement to include Section 15(d) registrants other than EGCs. However, the required disclosure may 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 adopted approach requires pay-versusperformance disclosure in proxy statements in each of these cases. As discussed above, one commenter agreed that this approach would provide ‘‘relevant information’’ when it is ‘‘most useful.’’ 606 Nonetheless, shareholders making voting decisions at a particular registrant may benefit from broader and more consistent availability of payversus-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 investors 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 TSR for such registrants may be less precise and less readily available, potentially making payversus-performance comparisons based on this measure less meaningful across such registrants. Also, as in the case of 606 See E:\FR\FM\08SER3.SGM letter from OPERS. 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 SRCs, Section 15(d) registrants are not subject to Item 201(e) of Regulation S– K requirements for stock price performance disclosure. Similarly, Section 12(g) registrants may not be required to disclose Item 201(e) of Regulation S–K 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 SRCs, the TSR of a peer group for this purpose. One commenter supported requiring the new pay-versusperformance disclosure in all filings that discuss compensation, but this commenter also acknowledged that shareholders would most likely only read those materials assembled for an annual meeting,607 which would include the new disclosure under the final rules. ii. General Disclosure Requirements We have considered several reasonable alternatives to the general disclosure requirements of the final rules. Many commenters recommended a more principles-based approach that would permit registrants to determine which measures of pay and performance to disclose or how to disclose the relationship between these measures based on what they deem to be appropriate for their individual situations.608 Such an approach could have the potential to allow investors 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 payversus-performance disclosure. On the other hand, a principles-based approach may reduce comparability of 607 See letter from Quirin. e.g., letters from AB; ASA; Aspen; BlackRock; BorgWarner; BRT 2015; CCMC 2015; CCMC 2022; CEC 2015; CEC 2022; Celanese; Coalition; Exxon; FSR; Hall; Honeywell; HysterYale; NACCO; Nareit; NAM 2022; NIRI 2015; NIRI 2022; PG 2015; Pearl; PNC; SCG; SCSGP; TCA 2015; TCA 2022; and WorldatWork. 608 See, VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 the disclosure and could increase shareholder confusion because the choice of pay and performance measures, and the disclosure time horizon, may vary significantly across registrants. Also, a principles-based approach may allow registrants to selectively choose the measures or time horizon that result in the most favorable disclosure. Several commenters indicated that scrutiny by sophisticated investors and proxy advisory firms, as well as the incentive effect of say-onpay votes, would motivate registrants to produce effective disclosures within the flexibility of a principles-based regime.609 However, we note that investors continue to express discontent with existing disclosures despite these factors.610 The adopted approach of specifying some uniform requirements for the disclosure, requiring certain elements that will vary across registrants (the Company-Selected Measure and Tabular List), allowing registrants to choose the format for describing the relationship between different measures, and permitting the inclusion of additional measures, additional years of data, or other supplemental disclosure should promote comparability while preserving flexibility to tailor the disclosure to a registrant’s individual situation. Registrants will also continue to have significant latitude in presenting additional compensation analyses, which provides further opportunity for registrants to clarify their unique circumstances and considerations in designing compensation. Conversely, we also considered prescribing a uniform format or some minimum requirements for the descriptions of the relationships between different measures. Under the final rules, registrants may apply a wide range of formats when presenting these relationships. For example, some registrants may discuss percentage changes in the measures in narrative form while others may present the levels of the measures in graphical form. Investors’ ability to easily interpret and compare the disclosure across registrants could be 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 609 See, e.g., letters from BorgWarner and Honeywell. 610 See Section IV.B.2 above. PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 55181 to tailor the format of the required disclosures to best reflect their individual circumstances, which may vary significantly. For example, with a prescribed format, registrants might not be able to scale a required description to reflect the relevance of a particular measure at that particular registrant, which could result in lengthy disclosure about relationships that are not meaningful. Under the final rules, the tabular disclosure of the annual values of the required compensation and performance measures should facilitate comparisons of the underlying content of the disclosures across registrants regardless of the format for the required descriptions. It is also possible that these descriptions could become more comparable as registrants gain experience with the requirements; as one commenter predicted, ‘‘[o]ver time best practices will emerge, and investors will encourage companies to follow those best practices.’’ 611 We also considered alternatives with respect to the extent of the required descriptions. As discussed above, the final rules require, for non-SRCs, the description of seven different relationships (and four in the case of SRCs) in graphical or narrative format. An alternative would be to not require the description of some of these relationships, such as that between net income and executive compensation actually paid of the PEO or the other NEOs. Such an approach could help to mitigate commenter concerns about the costs and length of the required disclosure,612 given that the description of a specific relationship might require the application of significant discretion and involve more space in the proxy statement than a particular column in the required table. Reducing the number of mandated descriptions may reduce the extent of disclosure in cases where the measures in question may not be relevant in the context of a particular registrant. A more focused set of required descriptions could reduce compliance costs and make it easier for investors to more quickly review the disclosures. The underlying measures would still be available in tabular form for investors to consider; for example, investors might refer to net income as a benchmark to gauge the adjustments in a non-GAAP profitability measure presented as a Company-Selected Measure. However, investors may benefit from understanding the registrant’s perspective on each performance measure, and, as discussed above, we expect that the descriptions 611 See 612 See E:\FR\FM\08SER3.SGM letter from CFA. Section IV.C.3 above. 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 55182 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations can be scaled depending on their relevance to a particular registrant. We also considered alternative approaches to presenting the pay and performance data. For example, several commenters suggested that, instead of requiring the presentation of year-byyear data, we could require registrants to aggregate pay over a three to five year horizon and compute the cumulative TSR over a similar horizon, and then either present a single pair of statistics or a set of rolling values of these multiyear statistics.613 As noted by these commenters, such an approach could help to smooth any lumpiness in pay (such as when certain awards or payments are not made every year) or short-term volatility in the performance measure. However, it would also make it harder to discern how pay has been associated with year-by-year changes in performance. Further, for investors preferring this approach, a form of aggregate analysis should be relatively straightforward to construct from the disclosure required under the final rules, by adding the values of executive compensation actually paid over multiple years and comparing this to the cumulative TSR over that horizon. In contrast, presenting aggregate statistics would not reduce compliance costs over time because new computations for the latest fiscal year would still be required each year that the disclosure is produced. Other commenters suggested that we require registrants to isolate pay granted in a particular year and provide an updated valuation of that pay, for each grant year in the time horizon of the disclosure, at the end of the latest fiscal year (or possibly at vesting), and relate those updated values to cumulative performance.614 Such a focus on the pay granted in a particular year, and how its value has changed, may provide insight specific to the compensation decisions by the board in each year. However, given that grants have overlapping performance periods, it may be difficult under this approach to judge the overall association of pay with performance, and the relationship between the performance in a particular period and all of the associated pay. We also considered alternatives with respect to the required structuring of the disclosures. Alternatives to the adopted approach include not requiring that the underlying data disclosed in tabular form be provided using a structured data language (i.e., tagged in Inline XBRL), requiring more or less of the information to be tagged, or requiring a 613 See, 614 See, e.g., letters from Farient; Pearl; and Ross. e.g., letters from CAP and PG 2015. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 different structured data language. Not requiring that the disclosure be provided in a structured data language would reduce the costs of compliance. Some commenters indicated that the tagging requirements would increase the costs and time to produce the disclosure or delay the filing process.615 The affected registrants are familiar with Inline XBRL because they are required to provide information in other filings in this data language, but the exact specifications differ and, with limited exception, they are not required to provide any structured data in proxy or information statements.616 The Inline XBRL requirements would impose additional burdens on registrants, beyond what they currently spend on producing structured 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. In addition, a few commenters anticipated some difficulties because staff preparing proxy statements would be unfamiliar with Inline XBRL.617 One commenter stated the cost of XBRL tagging can be up to tens of thousands of dollars.618 A few commenters remarked that the costs of XBRL tagging outweigh the benefit to investors,619 and questioned whether there was sufficient evidence that such structured data was being used by, or would benefit, investors.620 Since the time of the Proposing Release, the market has had significantly more experience with structured data languages, including XBRL. We expect that this experience, along with the adoption of Inline XBRL, will reduce the costs of implementing 615 See, e.g., letters from CCMC 2015; Celanese; FedEx 2015; Hay; IBC 2015; and NACCO. 616 BDCs were not previously required to provide their financial statements and financial statement footnotes in XBRL or Inline XBRL, and may thus be less familiar with data tagging than other registrants. However, all BDCs will be required to provide their financial statements and financial statement footnotes, as well as certain prospectus disclosures, in Inline XBRL from, at latest, February 1, 2023. Some BDCs may choose to incorporate prospectus disclosures by reference to their proxy or information statements, in which case those proxy or information statements would include Inline XBRL tagging. See Securities Offering Reform for Closed-End Investment Companies, Release No. IC–33836 (Apr. 8, 2020) [85 FR 28853 (May 5, 2020)]. We estimate that there are approximately seven BDCs that would be required to produce the pay-versus-performance disclosure. 617 See, e.g., letters from NACCO; Hyster-Yale; and XBRL US. 618 See letter from CCMC 2015. 619 See, e.g., letters from CCMC 2015; Celanese; and NIRI 2015. 620 See, e.g., letters from CCMC 2015 and NIRI 2015. PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 the requirements and enhance the quality of the data made available.621 While costs will remain, the Inline XBRL requirements should facilitate the extraction of the tagged data across large numbers of filings. These requirements may therefore benefit investors interested in analyzing and comparing the information in the disclosure across large numbers of registrants or, eventually, a large number of years.622 The tagging of compensation information under the final rules may be particularly beneficial to investors, in that several widely-used commercial databases collect compensation data only for large companies.623 Some commenters agreed that tagging the disclosures would enhance the benefits to investors, by increasing the efficiency with which large amounts of data could be filtered and analyzed,624 by enhancing the ability of investors to compare the data across companies or over time,625 and by allowing investors to obtain this data efficiently or at lower cost.626 There is also increased evidence that structured data is used by investors and generates benefits. For example, one study found that XBRL has helped to reduce the informational advantage of large institutions over small ones, in that small institutions’ trading 621 See, e.g., Michael Cohn, AICPA Sees 45% Drop in XBRL Costs for Small Companies, Accounting Today (Aug. 15, 2018), available at https://www.accountingtoday.com/news/aicpasees-45-drop-in-xbrl-costs-for-small-reportingcompanies (retrieved from Factiva database) (observing a 45% decline in average cost and a 69% decline in median cost of annual XBRL requirements for SRCs from 2014 to 2017); see also Ariel Markelevich, The Quality and Usability of XBRL Filings in the US, 5 Int’l. J. Acct. Tax 2 (2017) (with findings suggesting that, ‘‘starting in 2012, there has been a steady improvement in the quality and usability of the XBRL filings in most aspects . . . consistent with the notion of companies moving along a learning curve and improving the quality and usability of the XBRL data as they gain more experience tagging’’). 622 Some investors 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 a structured data language, such investors 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 structured data requirement is likely to be lower for such investors than for those primarily interested in the data to be tagged. 623 For example, the Standard & Poor’s Execucomp database covers the S&P 1500 and some additional registrants, and the ISS IncentiveLab database covers about 1,100 registrants, with coverage in both of these cases representing well under half of the affected registrants. 624 See, e.g., letters from CalPERS 2015 and XBRL US. 625 See, e.g., letters from AFL–CIO 2015; CII 2015; Public Citizen; SBA–FL; and XBRL US. 626 See, e.g., letters from CalPERS 2015 and XBRL US. E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 responsiveness to Form 10–K information and stock-picking skills improved relative to large institutions after the adoption of XBRL.627 Other studies provide evidence consistent with XBRL tagging of financial statement disclosures leading to an increase in stock price informativeness (i.e., the extent to which market prices reflect company-specific information).628 We considered not requiring some or all of the block tagging that the final rules will require, such as: the graphical or narrative disclosure that would follow the tabular disclosure; the disclosure of deductions and additions used to determine executive compensation actually paid; and the disclosure regarding vesting date valuation assumptions. While the nature and potential variation in format of these disclosures may make them less suitable for large-scale analysis than the numerical data in the main table, the incremental costs of tagging these disclosures as block-text should be low and such tagging could benefit investors interested in extracting these parts of the disclosure from a large number of filings We also considered, as proposed, not requiring 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 will require incremental compliance costs, it may benefit investors interested in using this data, such as for constructing alternate pay measures. We also considered requiring registrants to provide the data an XMLbased data language specific to the payversus-performance disclosures (‘‘custom XML’’) rather than Inline XBRL.629 As discussed in the Proposing Release, a custom XML requirement 627 See Nilabhra Bhattacharya, Young Jun Cho & Jae B. Kim, Leveling the Playing Field Between Large and Small Institutions: Evidence from the SEC’s XBRL Mandate, Acct. Rev., Sept. 2018, at 51. 628 See, e.g., Y. Huang, Y.G. Shan & J.W Yang, Information Processing Costs and Stock Price Informativeness: Evidence from the XBRL Mandate, 46 Aus. J. Mgmt. 1 (2021) (finding XBRL adoption ‘‘leads to more informative stock price through two channels, the firm-specific information incorporation, and increased disclosures’’); see also Y. Dong, O.Z. Li, Y. Lin & C. Ni, Does Information Processing Cost Affect Firm-Specific Information Acquisition? Evidence from XBRL Adoption, 51 J. Fin. Quant. Analys. 2 (2016) (finding ‘‘evidence consistent with the SEC’s statement that XBRL adoption helps market participants translate more firm-specific information into stock prices’’). 629 This would be consistent with the approach used for other XML-based structured data languages created by the Commission for certain forms, including the data languages used for reports on each of Form 13F, Form D and the Section 16 beneficial ownership reports (Forms 3, 4 and 5). VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 could increase the ease of implementation of the structured formatting requirement for the main table, and could thus reduce costs of structuring, particularly for smaller registrants. However, the Commission’s custom XML data languages are generally unsuitable for tagging large blocks of information or implementing detail tags within such blocks, and are therefore not as appropriate for implementing the requirements of the final rules. iii. Compensation Measures We have considered several alternative approaches to the compensation measures to be included in the disclosure, particularly with respect to the definition of executive compensation actually paid. The final rules define this compensation measure generally in line with the approach described as ‘‘incremental compensation earned’’ in the discussion of implementation alternatives in the Proposing Release. We also considered adopting definitions that would treat equity awards and pensions differently, such as in the proposed definition, or that would include different elements of compensation. With respect to equity awards, the proposed approach would have required registrants to include the fair value of stock and option awards in executive compensation actually paid at the time of vesting. As discussed in more detail above,630 some commenters agreed with arguments in the Proposing Release that certain features of this approach, such as the fact that it would reflect the change in value of equity awards based on performance outcomes after they are granted, would be beneficial for this purpose. However, many commenters raised concerns that the proposed definition would generate a mismatch between the period in which pay was reported and the period of the associated performance,631 and that this would significantly reduce the potential usefulness of the disclosure.632 Specifically, as discussed in the Proposing Release, under the proposed definition of executive compensation actually paid, the measure may be subject to volatility based not on performance but on the vesting pattern 630 See Section IV.C.2 above. e.g., letters from Allison; CAP; CCMC 2015; CEC 2015; Celanese; Coalition; Cook; Davis Polk 2022; Farient; Faulkner; FSR; Georgiev; Hodak; Huddart; Hyster–Yale; Infinite; NACCO; NACD 2015; NAM 2015; NAM 2022; PG 2015; PG 2022; Pearl; Ross; SBA–FL; SVA; TCA 2015; TCA 2022; Teamsters; TIAA; and WorldatWork. 632 See, e.g., letters from CEC 2015; Celanese; Cook; NACCO; NAM 2022; Pearl; PG 2015; Ross; TIAA; TCA 2022; and WorldatWork. 631 See, PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 55183 of equity awards, because it includes, in the year of vesting, the original grantdate value and all gains (or losses) related to returns in all years since the grant was made. A number of commenters highlighted concerns of this nature.633 Similar issues that commenters noted include an exacerbation of the misalignment when the size of an award is intended to recognize performance in the year of grant (or prior); 634 when awards formally vest in a different year than the end of the performance period,635 or when the vesting date of an award is distant from the end of the year.636 Commenters also noted that the timing mismatch would not apply equally to different types of compensation or across different vesting patterns, leading to difficulties in comparisons across registrants or executives.637 Consider, for example, a fiscal year in which one PEO receives a $1 million cash bonus and another instead receives a $1 million restricted stock award that vests after one year. Under the definition that was proposed, executive compensation actually paid would have been $1 million and zero, respectively, for the two PEOs in that fiscal year.638 As discussed above,639 the treatment of equity awards in the adopted measure of executive compensation actually paid is expected to preserve the benefits noted by commenters of the proposed approach while substantially reducing the risk of a timing mismatch.640 Under the adopted approach, the total value reflected in executive compensation actually paid for a given award, when summed across years, will be equivalent by the time of vesting to that which 633 See, e.g., letters from CEC 2015; Celanese; Cook; Faulkner; Hodak; Hyster–Yale; Infinite; NACCO; SVA; and TCA 2022. 634 See, e.g., CCMC 2015; McGuireWoods; and NAM 2022. 635 See, e.g., letters from Hall; PG 2015; PG 2022; and Towers. 636 See, e.g., letters from Celanese; Hyster–Yale; and NACCO. 637 See, e.g., letters from Hodak; Honeywell; Hyster–Yale; and NACCO. 638 The Proposing Release also provides an example of comparability issues in the case of executives with asynchronous vesting dates. 639 See Section IV.C.2 above. 640 Some timing mismatches may remain, even under the adopted approach. For example, in the case of compensation contingent on a performance condition (e.g., based on achieving a particular level of net income), that is later recovered (i.e., clawed back) because of a restatement, the market stock price correction associated with the restatement may happen in a more recent period, while the historical accounting performance and compensation measure would be corrected retroactively. In this case, even after recovery of the erroneously awarded compensation, the effect on executive compensation actually paid is not likely to appear in the same period as the associated market reaction in TSR. E:\FR\FM\08SER3.SGM 08SER3 55184 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 would have been included at vesting under the proposed approach. However, by attributing the change in an equity award’s fair value in a given year— which would reflect performance in that same year—to that individual year, rather than ascribing the full value to the vesting date, the revised measure should better align pay with the associated performance. This improved alignment will limit the volatility associated with vesting patterns, by distributing pay over the full vesting period, as it is earned. It will also reduce the sensitivity to small differences in formal vesting dates, by associating amounts of pay with particular years based on the changes in value attributable to those years rather than solely based on where the vesting date happens to fall. Attributing some of the value of equity awards to the grant year addresses the possibility that the size of awards may be designed to reward grant year performance.641 The revised approach also improves comparability; for example, the two PEOs discussed above, who receive a $1 million cash bonus and a $1 million restricted stock award, will both be considered to receive $1 million of compensation actually paid in that year, while any change in the value of the second executive’s stock until vesting would also be reflected in future years. Overall, the enhanced alignment resulting from the revised definition is expected to make it easier for investors to understand the relationship between pay and performance,642 though this comes at the cost of increased compliance costs for registrants. In valuing option awards in executive compensation actually paid, a number of commenters recommended that we use intrinsic values (i.e., the ‘‘in-themoneyness,’’ or the amount that would be gained upon immediate exercise) instead of fair values. Those 641 To the extent that registrants may use infrequent awards or so-called mega-grants in some years to award performance over multiple years (see, e.g., letters from Cook and PG 2015), the revised definition of executive compensation may increase sharply in grant years regardless of performance. The inclusion of Summary Compensation Table total compensation (which reports the aggregate grant date fair value of all equity awards granted to the NEO during the fiscal year, and would therefore also reflect any differences in annual grant sizes) alongside executive compensation actually paid in the tabular disclosure may assist investors in filtering these effects out from the patterns in pay that are more likely to be driven by performance after the grant date. 642 The revised definition 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. See, e.g., letter from Pearl. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 commenters indicated that intrinsic values would be easier and less burdensome to calculate 643 or would more appropriately reflect compensation rather than the effect of an executive’s investment decisions.644 We acknowledge that fair values are more burdensome to compute than intrinsic values. However, intrinsic values can severely understate the values of options.645 The fair value of an option provides a more accurate picture of the total value of the asset being transferred, which includes both the current intrinsic value and the ongoing time value of the option: the ability to potentially capture additional upside while not taking the commensurate downside risk. By granting an option with significant remaining time to maturity after vesting, boards are consciously awarding executives with value beyond the vesting-date intrinsic value. As such, this transfer of value may reasonably be considered to be compensation. While an executive might not wait until maturity to exercise an option, the fair value calculation should generally incorporate an assumption regarding typical exercise behavior. Whether the executive chooses to exercise earlier or later than is typical (and therefore expected by the board) can reasonably be considered an investment decision. Some commenters also suggested that we consider valuing equity awards as of alternate dates, such as the grant date 646 or, for options, the exercise date.647 Valuations as of these alternative dates may be less burdensome to calculate, as grant date fair values are already included in the Summary Compensation Table and the amount realized on exercise of options is already included in the Stock Vested and Options Exercised Table. However, grant date valuations would not reflect the performance sensitivity of unvested equity awards. As discussed above, because 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. Exercise date valuations, in turn, reflect the effect of 643 See, e.g., letters from CAP; Corning; Davis Polk 2015; Honeywell; Pearl; and WorldatWork. 644 See, e.g., letters from CEC 2015; CEC 2022; Honeywell; and Pearl. 645 See, e.g., Zvi Bodie, Robert S. Kaplan & Robert C. Merton, For the Last Time, Stock Options are an Expense, Harv. Bus. Rev. (Mar. 2003), available at https://hbr.org/2003/03/for-the-last-time-stockoptions-are-an-expense. 646 See, e.g., letters from CAP and NAM 2022. 647 See, e.g., letters from CEC 2015; Corning; Coalition; and FSR. PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 performance after the grant date, but also reflect the executive’s decision of when to exercise awards, which may reasonably be considered an investment decision rather than a compensation decision. For example, as one commenter noted, ‘‘executives who hold their options to the full term before exercise may be unjustifiably seen as being overpaid compared to executives who exercise their options quickly.’’ 648 With respect to pensions, the final rules require that executive compensation actually paid include the pension service cost for the year as well as the prior service cost (or credit) due to any plan amendments or initiations in the year, rather than just the pension service cost, as proposed. Some commenters alternatively suggested that we include the present value of pension benefits that were earned in the last fiscal year, or, similarly, the change in present value of accumulated pension benefits while holding the beginning and ending valuation assumptions constant.649 All of these approaches— including what is being adopted, what was proposed, and the commenters’ suggestions—should reduce the volatility in reported pay caused solely by changes in assumptions relative to the pension component of the Summary Compensation Table, because the latter includes the change in value of all previously accumulated benefits with changes in interest rates and other actuarial assumptions. Thus, any of these approaches should make it easier for investors to evaluate the relationship of pay with performance. We considered, as an alternative to the adopted approach, including only pension service cost (as proposed) or the present value of pension benefits that were earned in the last fiscal year (as suggested by, or similar to what was suggested by, various commenters). 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. They are also a function of the terms of the plan. Service costs are based on estimates of future benefits that assume plan terms remain fixed and that may already incorporate projections about future compensation levels. Service costs are also smoothed over time relative to how the future benefits are actually earned or change over time. As a result, the effect of plan amendments and actual changes in current compensation levels on the value included for pensions under the proposed approach may be dampened. 648 See letter from Honeywell. letters from AON; Barnard; Exxon; Mercer; Towers; and WorldatWork. 649 See E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations For example, if a plan were amended, current and future service costs would be adjusted upwards, but there would be no corresponding adjustment for service costs reported for previous years. The adopted approach would more fully reflect the effect of any plan amendments by including a catch-up adjustment for the impact on service costs reported in previous years. The adopted approach does not fully account for changes in actual compensation levels from the estimated compensation levels used to estimate service cost. 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 of including the present value of pension benefits earned in a given year may be more useful in evaluating the relationship between pay and performance. This alternative approach would fully reflect plan amendments as well as unexpected increases in pay,650 whose impact on pension benefits may reflect an important source of increased compensation.651 Under this alternative, registrants may be able to make the required computations based on the information already available to them, rather than through their actuarial services provider, which could marginally reduce compliance costs. Such an approach may also further increase the comparability between compensation provided through defined benefit and defined contribution plans, because 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, the amount included with respect to pensions under this alternative would not have as direct of a relationship with the values included in the audited GAAP financial statements as the service cost (and prior service cost or credit) included under the adopted approach. Some commenters suggested excluding components of pay that may be considered unrelated to performance—such as perquisites and values related to retirement benefits— from the definition of executive compensation actually paid.652 As discussed in the Proposing Release, 650 See, e.g., letter from Mercer. e.g., Irina Stefanescu, Yupeng Wang, Kangzhen Xie & Jun Yang, Pay Me Now (and Later): Pension Benefit Manipulation Before Plan Freezes and Executive Retirement, 127 J. Fin. Econ. 152 (2018). 652 See, e.g., letters from AON; CEC 2015; Coalition; Corning; Honeywell; and PG 2015. 651 See, VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 restricting the definition of executive compensation actually paid in such a way would not provide investors with a complete picture 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, the other components of compensation may still 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.653 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 would be excluded from the prescribed measure versus those that rely more heavily on compensation types that would be included. We also considered adjusting the definition of executive compensation actually paid to account for executives’ continued exposure to registrant performance after an equity award vests, due to restrictions on the transfer or monetization of such equity,654 by continuing to reflect such awards in executive compensation actually paid until these other restrictions lapse. In some cases, the relationship of executives’ wealth accumulation to registrant performance may be driven by their vested holdings of equity. When such holdings are mandated, the resulting exposure to registrant performance after vesting may reflect a compensation decision rather than an active investment decision by the executives, and could be helpful to consider in order to better understand the total required sensitivity of an executive’s income and financial assets to the registrant’s performance. However, different sets of restrictions on the transfer or monetization of equity can have different effects on the degree of continued required exposure. For example, some non-transferable holdings could be monetized by executives through contractual agreements with a broker-dealer, if the registrant’s hedging policies permit such 653 See, e.g., Lucian Bebchuk & Jesse Fried, Stealth Compensation via Retirement Benefits, 1 Berkeley Bus. L. J., 291 (2004). 654 Such restrictions include delayed option exercisability as well as equity anti-hedging, holding, and mandatory deferral requirements. See, e.g., letters from CEC 2015; CEC 2022; Davis Polk 2015; Hyster-Yale; and NACCO (describing awards to their executives consisting of ‘‘immediately vested and taxable restricted stock’’ that is ‘‘nontransferrable and generally may not be hedged, pledged or transferred for a period of 10 years’’). PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 55185 transactions. There is therefore uncertainty as to how best to reflect such restrictions for the purpose of the new disclosure. While the adopted definition of executive compensation actually paid does not include adjustments for restrictions on the transfer or monetization of equity awards, registrants can choose to provide supplemental measures of pay if they believe that those measures better demonstrate the effects of these features. The final rules 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. We considered excluding this measure. Some commenters indicated that it would be extraneous or confusing in the pay-versus-performance disclosure.655 However, as discussed above, some current pay-for-performance analyses used by investors use grant-date measures of pay, similar to total compensation from the Summary Compensation Table.656 To the extent that some investors 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 in the tabular disclosure. Further, as discussed above, this existing total compensation measure may be a useful benchmark for understanding executive compensation actually paid, such as in the case where infrequent grants designed to provide multi-year incentives may cause sharp increases in the latter measure in the years when such grants are made.657 We considered also requiring the disclosure of a measure of realizable pay, a type of measure that a number of commenters indicated may be useful in this context.658 The adopted measure of executive compensation actually paid is quite similar conceptually to realizable pay measures, with a few key differences. For example, realizable pay is typically computed based on equity awards granted over a fixed period. This approach may make it easier to evaluate the compensation decisions made by a board over such fixed period. However, equity awards can have long vesting periods and typically have overlapping performance periods, so considering all 655 See, e.g., letters from CEC 2015; Exxon; Hall; McGuireWoods; Meridian; PG 2015; TCA 2015; and TCA 2022. 656 See Section IV.B.2 above. 657 See supra note 641. 658 See supra note 520. E:\FR\FM\08SER3.SGM 08SER3 55186 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 unvested awards, regardless of when they were granted, may provide a more complete picture of pay for the purpose of evaluating its alignment with performance. Realizable pay is also typically computed over a multi-year period, with outstanding equity awards valued as of the end of the period (or sometimes at vesting or exercise, if earlier). As discussed above, such aggregated, multi-year pay measures can smooth certain outliers but can also obscure the year-to-year relationship of pay and performance. Registrants may voluntarily include measures of realized or realizable pay in the disclosure if they deem them to be helpful to explaining the relationship of their pay with performance. Lastly, we considered also requiring the disclosure of peer group compensation. While TSR for a peer group is required to be included under the final rules, also incorporating pay information for a peer group in order to produce relative pay-versusperformance disclosures may be useful to investors as it would provide further context in which to evaluate the payversus-performance alignment of a registrant.659 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 disclosures would most likely impose higher compliance costs. Under the final rules, investors can 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) of Regulation S–K or in the CD&A, if such peers have filed their disclosures as of the time of comparison. iv. Performance Measures We have considered several reasonable alternatives with respect to the performance measures to be included in the disclosures. For example, commenters raised, and we have considered, many different approaches to computing and 659 See, e.g., letter from Cook. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 presenting TSR. As discussed above, common suggestions included, among others, presenting a rolling average of TSR (i.e., for each year, registrants would report the cumulative TSR for the previous five years) or an annualized TSR (i.e., for each year, registrants would report TSR for that single year).660 While a rolling average could present a broader view of performance to those taking a longer-term perspective, it could also obscure the performance specific to a given year. A five-year rolling average TSR could change from year to year because of performance in the current year being newly included in the rolling average or because of the performance six years ago being newly excluded from the rolling average. An annualized TSR would provide greater clarity and align with the revised definition of executive compensation actually paid, which will reflect, in a given year, changes in the value of outstanding equity awards over that specific year. Also, according to one commenter, ‘‘most investors and proxy advisors generally look to an annualized approach when they assess a company’s TSR.’’ 661 However, the adopted approach of computing cumulative TSR, and presenting it as the changing value of an initial fixed dollar investment, will be familiar to both investors and registrants because it aligns with the Item 201(e) of Regulation S–K performance graph requirement. We also expect this approach will make the trend in performance easier to understand for less sophisticated investors, given concerns about financial literacy among investors 662 and, particularly, a common difficulty in appropriately combining percentage changes 663 (e.g., recognizing that a negative 50 percent return followed by a positive 50 percent return represents a negative 25 percent return on a cumulative basis). A cumulative return, scaled to a fixed investment, will still make the return attributable to a given year apparent, and sophisticated investors can easily 660 See supra notes 254 to 257 and accompanying text. 661 See letter from Towers. e.g., SEC Staff Study Regarding Financial Literacy Among Investors, as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (August 2012), available at https://www.sec.gov/files/917-financial-literacystudy-part1.pdf; and Annamaria Lusardi & Olivia Mitchell, The Economic Importance of Financial Literacy: Theory and Evidence, 52 J. Econ. Lit., No. 1, 5 (2014). 663 See, e.g., Haipeng Chen & Akshay Rao, When Two Plus Two is Not Equal to Four: Errors in Processing Multiple Percentage Changes, 34 J. Consumer Rsch. 327 (Oct. 2007). 662 See, PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 use this return to compute other variations of TSR that they may prefer. We also considered not requiring any registrants, including non-SRCs, to include peer group TSR in the disclosure. As discussed above, a number of commenters had concerns about the peer group TSR requirement,664 including that it would be costly and yet the benefits could be limited because variation in peer group selection, and in the degree of relevance of peer group performance, could reduce comparability and mislead investors. We acknowledge that peer group TSR will not provide an equally relevant benchmark across all registrants. However, it may nonetheless provide helpful context for assessing registrant TSR by providing some indication of broader market or industry conditions, and may help to address the concerns of commenters that registrant TSR could reflect a number of factors outside of the control of the executives of the registrant.665 We continue to expect the costs of including peer group TSR to be limited, even if a registrant does not use the same peer group as in the Item 201(e) of Regulation S–K peer group TSR disclosure, because the required data is readily available and the required computations are relatively straightforward. Another alternative to the final rules would be, as in the proposed rules, to not require any other prescriptive performance measures, beyond TSR and peer group TSR, to be included in the disclosure. As some commenters noted, it is not clear that any single measure other than TSR would be relevant across most registrants.666 Declining to prescribe additional measures would reduce costs and limit the risk that registrants would have to include and discuss a measure that could be misleading or which investors may not find to be useful. This approach could thereby increase the likelihood that investors could process the disclosures quickly, while not decreasing the total amount of underlying information available from public disclosures. At the same time, if the addition of another performance measure would better explain the pattern in executive compensation actually paid, registrants would be able to voluntarily provide such measures, and would likely be motivated to do so.667 664 See supra notes 261 to 269 and accompanying text. 665 See supra note 526. e.g., letters from AB; BlackRock; Davis Polk 2022; and TIAA. 667 See, e.g., letters from CFA; CII 2015; Davis Polk 2022; and SCG. 666 See, E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 However, as discussed in the Benefits section above, the inclusion of net income as an additional measure may provide investors with useful context for interpreting the disclosure. Even if required to include a Company-Selected Measure, registrants might not always provide a measure of profitability, in which case net income may help to provide a more complete picture of registrant performance. Further, as discussed above, measures of profitability are commonly used as performance metrics in executive compensation contracts.668 Yet, if registrants provide measures of profitability in the disclosure, they may be non-GAAP or adjusted measures, and investors may benefit from having net income beside these measures as a benchmark to better understand the effects of such adjustments. Finally, limiting the additional prescribed measures to a single, readily available measure should help to contain the costs and risks of expanding the required measures that are noted above. We also considered other financial measures as alternatives to net income. As discussed in the Baseline section above, the measures presented by third parties as part of pay-for-performance analyses in recent years—which may reflect investor interest in or demand for the measures—include operating cash flow growth, earnings per share growth, EBITDA growth, return on equity, return on invested capital, return on assets, and various ratios and growth rates using ‘‘economic value added.’’ 669 Measures that commenters suggested we consider include EBITDA,670 free cash flow,671 revenue or profit growth,672 return on investment,673 shareholder value added,674 or the ratio of enterprise value to either EBITDA or earnings before interest and taxes (‘‘EBIT’’).675 Overall, these suggestions and the measures presented in third party analyses differ from net income in that many involve some form of scaling— that is, some are ratios, which can help to account for the capital or assets used to generate profits, while others are growth rates—and many include adjustments to focus on operating items or cash flows. It is possible that investors may benefit more from a prescribed measure with these characteristics, rather than net income. 668 See Section IV.B.3 above. supra note 453. 670 See letter from Dimensional. 671 See letters from Dimensional and Quirin. 672 See letter from Grier. 673 See letter from Quirin. 674 See letter from Quirin. 675 See letter from PDI. 669 See VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 However, it is not obvious that there is a single preferred measure, and net income has the benefit of being a clearly-defined, widely-understood measure. Registrants may supplement the disclosure with other measures if they feel they would be useful or if their investors demand them. Another alternative to the final rules would be, as in the proposed rules, to give registrants the option to include additional performance measures but not to require a Company-Selected Measure of any registrant. As discussed above, if the addition of another performance measure would better explain the pattern in executive compensation actually paid, registrants would likely be motivated to include such a measure on a voluntary basis. Not requiring a Company-Selected Measure would also eliminate any costs or difficulties associated with isolating a single most important measure and give registrants more flexibility to include only the measures that they expect may be most useful to investors. For example, investors may benefit if registrants are able to present a different measure than the Company-Selected Measure in cases where the measure that drove compensation in the last fiscal year may not be the most important for explaining the pattern in executive compensation actually paid over the full five-year horizon of the disclosure. On the other hand, requiring a Company-Selected Measure may elicit additional helpful context in cases where registrants would not otherwise supplement the required performance measures. As an alternative to the Tabular List, we also considered other approaches to providing context about the measures that were critical in linking pay to performance at a given registrant. For example, we could have required registrants to disclose all of the measures actually used to link pay to performance, with or without quantitative disclosure of the outcomes of the quantifiable measures, any applicable thresholds and targets, and the associated payouts. Such disclosure may provide a more complete view of how pay is linked to performance at a given registrant, and the potential quantitative element may allow investors to more readily assess the sensitivity of pay to particular measures and the rigor of performance goals. Some investors commented that they would benefit from this information being more readily available.676 However, depending on the specific requirements, such disclosure could be more costly to produce than the Tabular List and may take more time for investors to review, rather than providing simple context and framing for an investor’s review of the main table and associated descriptions. There may also be implications of increased transparency of quantitative targets and thresholds, such as pressuring registrants to limit discretion in their pay programs, which may or may not be beneficial. Finally, we note that several commenters mentioned that some registrants are already providing such disclosures,677 with one indicating that the market does not seem to have coalesced around a consistent format for such disclosures.678 We expect that market practices in this area may continue to develop. VI. Paperwork Reduction Act A. Background Certain provisions of our regulations and schedules that would be affected by the final rules contain a ‘‘collection of information’’ within the meaning of the PRA. The Commission is submitting the final rules to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.679 The Commission published a notice requesting comment on changes to these collection of information requirements in the Proposing Release and submitted these requirements to the OMB for review in accordance with the PRA.680 The hours and costs associated with preparing, filing, and distributing the schedules 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 comply with, a collection of information unless it displays a currently valid OMB control number. Compliance with the final rules is mandatory. Responses to the information collections will not be kept confidential and there is no mandatory retention period for the information disclosed. The titles for the collections of information are: ‘‘Regulation 14A and Schedule 14A’’ (OMB Control No. 3235–0059); and ‘‘Regulation 14C and Schedule 14C’’ (OMB Control No. 3235–0065). We adopted the above-referenced regulations and schedules pursuant to the Securities Act or the Exchange Act. The regulations and schedules set forth 677 See, 676 See, e.g., letters from AFL–CIO 2015; AFL–CIO 2022; CalPERS 2022; CII 2015; CII 2022; and SBA– FL. PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 55187 e.g., letters from PG 2022 and SBA–FL. letter from PG 2022. 679 44 U.S.C. 3507(d) and 5 CFR 1320.11. 680 Id. 678 See E:\FR\FM\08SER3.SGM 08SER3 55188 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations the disclosure requirements for proxy and information statements filed by registrants to help investors make informed investment and voting decisions. The final rules are intended to satisfy the requirements of Section 14(i). A description of the final amendments, including the need for the information and its use, as well as a description of the likely respondents, can be found in Section II above, and a discussion of the expected economic effects of the final amendments can be found in Section V above. khammond on DSKJM1Z7X2PROD with RULES3 B. Summary of Comment Letters and Revisions to PRA Estimates In the Proposing Release, the Commission requested comment on the PRA burden hour and cost estimates and the analysis used to derive such estimates. While several commenters provided comments on the potential costs of the proposed rules and of the potential requirements discussed and analyzed in the Reopening Release, only one commenter specifically addressed our PRA estimates, stating that the Commission’s estimates of the man hour and cost burden of the rule on companies were ‘‘grossly underestimated.’’ 681 As discussed, above, we have made some changes to the proposed amendments as a result of comments received in response to the Proposing Release and the Reopening Release. We have revised our estimates from the Proposing Release accordingly, taking into account the changes and the comments received. C. Summary of Collection of Information Requirements We are adding new Item 402(v) to Regulation S–K. This item requires registrants to provide a table containing the Summary Compensation Table measure of total compensation and the values of the prescribed measure of executive compensation actually paid for the PEO and as an average for the other NEOs, TSR both for the registrant and its peer group, the registrant’s net income, and a Company-Selected Measure. Item 402(v) of Regulation S–K also requires a registrant to provide a clear description of (i) the relationships between executive compensation actually paid to its PEOs and, on average, to its other NEOs and the registrant’s TSR, (ii) the relationship between executive compensation actually paid to the registrant’s PEOs 681 See letter from NAM 2015. Another commenter contended that the Reopening Release should have included an updated PRA analysis. See letter from Toomey/Shelby. That letter is discussed in footnote 8, supra. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 and, on average, its other NEOs, and the net income of the registrant, (iii) the relationships between executive compensation actually paid to the registrant’s PEOs and, on average, its other NEOs and the registrant’s Company-Selected Measure, and (iv) the relationship between the registrant’s TSR and its peer group TSR, in each case over the registrant’s five most recently completed fiscal years. A registrant will also be required to disclose an unranked Tabular List of its most important financial performance measures used by it to link executive compensation actually paid to its PEOs and other NEOs during the fiscal year to registrant performance. The final rules require registrants to separately tag the values disclosed in the table in Inline XBRL, block-text tag the footnote and relationship disclosure and the Tabular List in Inline XBRL, and tag specific data points (such as quantitative amounts) within the footnote disclosures in Inline XBRL. The disclosure is 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. EGCs, registered investment companies, and foreign private issuers are not required to provide the disclosure. SRCs are subject to scaled disclosure requirements, under which they will not be required to provide a peer group TSR or a Company-Selected Measure (or any related relationship disclosures), nor will they be required to provide a Tabular List or disclose amounts related to pensions; and will only be required to provide three (two in the first applicable filing after the rules become effective) years of disclosure. SRCs must provide the Inline XBRL data beginning in the third filing in which they provide the required pay-versus-performance disclosure. Much of the information required to produce the pay-versus-performance disclosure is based on items that are already required elsewhere in the executive compensation disclosure and financial statements provided by registrants. In particular, 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 final rules are not expected to require registrants to collect significant new data, relative to current PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 disclosure requirements.682 All of the individual components needed to calculate executive compensation actually paid already must be reported under existing disclosure requirements, with the exception of the values to be included with respect to equity awards and the values to be included with respect to pension benefits for registrants other than SRCs, which are not required to include such pension amounts in their calculation of executive compensation actually paid. Information about net income for all registrants is already required to be disclosed in the registrant’s financial statements. Further, information about TSR and peer group TSR is already required to be disclosed in a registrant’s annual report to shareholders under Item 201(e) of Regulation S–K, and the measures that make up the Tabular List and the Company-Selected Measure are already considered by registrants when making executive compensation determinations, and may already be discussed, in a different form, in the CD&A. SRCs are not required to provide disclosure under Item 201(e) of Regulation S–K or a CD&A, but also are not required under the final rules to provide disclosure of peer group TSR, the Tabular List, or the CompanySelected Measure. However, SRCs, which currently are not required to disclose their TSR in annual reports, will need to calculate this measure under the final rules. We arrived at the estimates discussed below by reviewing our burden estimates for similar disclosure and considering our experience with other tagged data initiatives. In addition, the estimates discussed below reflect our belief that much of the information required to prepare the pay-versusperformance disclosure will be readily available to registrants because the information is required to be gathered, determined, or prepared in order to satisfy the other disclosure requirements of our rules, including Item 402 of Regulation S–K. We believe that the amendments regarding pay-versusperformance disclosure will enhance the already required compensation disclosure. The following PRA Table 1 summarizes the estimated effects of the final amendments on the paperwork burdens associated with the affected collections of information listed in Section VI.A. 682 See E:\FR\FM\08SER3.SGM supra Section V.C. 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations 55189 PRA TABLE 1—ESTIMATED PAPERWORK BURDEN EFFECTS OF THE FINAL AMENDMENTS Final amendments and effects Estimated burden effect * Pay-versus-Performance Table: • Registrants other than SRCs: Requiring a table containing the Summary Compensation Table measure of total compensation and the values of the prescribed measure of executive compensation actually paid for the PEO and as an average for the other NEOs, TSR for both the registrant and its peer group, the registrant’s net income, and a Company-Selected Measure. The calculation of executive compensation actually paid includes adjustments from the Summary Compensation Table amounts with respect to equity awards and pension benefits. Related footnote disclosure of the amounts that were deducted from, and added to, the Summary Compensation Table total and of valuation assumptions also required. Registrants required to separately tag the values disclosed in the table, block-text tag the footnote disclosure, and tag specific data points (such as quantitative amounts) within the footnote disclosures, all in Inline XBRL. Estimated burden increase: 20 hours per schedule. • SRCs: Requiring a table containing the Summary Compensation Table measure of total compensation and the values of the prescribed measures of executive compensation actually paid for the PEO and as an average for the other NEOs, TSR for the registrant, and the registrant’s net income. The calculation of executive compensation actually paid includes adjustments from the Summary Compensation Table amounts with respect to equity awards. Related footnote disclosure of the amounts that were deducted from, and added to, the Summary Compensation Table total and of valuation assumptions also required. Registrants required to separately tag the values disclosed in the table, block-text tag the footnote disclosure, and tag specific data points (such as quantitative amounts) within the footnote disclosures, all in Inline XBRL. Estimated burden increase: 15 hours per schedule. Relationship Disclosure: • Registrants other than SRCs: Requiring a clear description of (i) the relationships between executive compensation actually paid to its PEOs and, on average, its other NEOs and the registrant’s TSR, (ii) the relationships between executive compensation actually paid to the registrant’s PEOs and, on average, its other NEOs and the net income of the registrant, (iii) the relationships between executive compensation actually paid to the registrant’s PEOs and, on average, its other NEOs and the registrant’s Company-Selected Measure, and (iv) the relationships between the registrant’s TSR and its peer group TSR, in each case over the registrant’s five most recently completed fiscal years. Registrants required to block-text tag the relationship disclosure in Inline XBRL. Estimated burden increase: 4 hours per schedule. • SRCs: Requiring a clear description of (i) the relationships between executive compensation actually paid to its PEOs and, on average, its other NEOs and the registrant’s TSR and (ii) the relationships between executive compensation actually paid to the registrant’s PEOs and, on average, its other NEOs and the net income of the registrant, in each case over the registrant’s three most recently completed fiscal years. Registrants required to block-text tag the relationship disclosure in Inline XBRL. Estimated burden increase: 2 hours per schedule. Tabular List: • Requiring a registrant that is not an SRC to disclose an unranked Tabular List of the most important financial performance measures used by it to link executive compensation actually paid to its PEOs and NEOs during the fiscal year to company performance. Registrants required to block-text tag the Tabular List in Inline XBRL. Estimated burden increase: 4 hours per schedule. • 28 hour increase in compliance burden per schedule for registrants other than SRCs • 17 hour increase in compliance burden per schedule for SRCs. khammond on DSKJM1Z7X2PROD with RULES3 * Estimated effect expressed as an increase of burden hours on average and derived from Commission staff review of samples of relevant sections of the affected forms and schedules. The estimated burden increase associated with the final rules for both SRCs and non-SRCs reflects an increase from the estimated average burden increase of 15 hours for all registrants that was included in the Proposing Release.683 The increase reflects adjustments made due to comments received and accounts for several modifications relative to the proposed rules, including with respect to the calculation of executive compensation actually paid, the addition of net income and the Company-Selected Measure as performance measures to be included in the table, and related relationship disclosures with respect to those performance measures, and the requirement to provide the Tabular List. Because these estimates are averages of the burdens for all such companies in each respective category, the burden 683 See Section V.C of the Proposing Release. VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 could be more or less for any particular company, and may vary depending on a variety of factors, such as the complexity of companies’ compensation plans or the degree to which companies use the services of outside professionals, or internal staff and resources, to tag the data in Inline XBRL. This burden, as discussed in more detail below, will be added to the current burdens for Schedule 14A and Schedule 14C. D. Incremental and Aggregate Burden and Cost Estimates for the Final Amendments We anticipate that new disclosure requirements will increase the burdens and costs for the affected registrants. 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, as well as the average hourly rate PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 for outside professionals who assist with such preparation. The burden estimates were calculated by multiplying the estimated number of responses by the estimated average amount of time it would take a registrant to prepare and review disclosure required under the final amendments. For purposes of the PRA, the burden is to be allocated between internal burden hours and outside professional costs. 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.684 The portion of 684 We recognize that the costs of retaining outside professionals may vary depending on the nature of the professional services, but for purposes E:\FR\FM\08SER3.SGM Continued 08SER3 55190 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations 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. We estimate that about 1,275 EGCs are required to file proxy statements on Schedule 14A or information statements on Schedule 14C, in which executive compensation disclosure pursuant to Item 402 of Regulation S–K is required. We have adjusted the estimates to deduct the filings attributed to these companies from our estimate because EGCs are not subject to the final rules.685 The table below sets forth our estimates of the number of current filings on the schedules that will be affected by the final rules. We used this data to extrapolate the effect of these changes on the paperwork burden for the listed collections of information. PRA TABLE 2—ESTIMATED NUMBER OF AFFECTED FILINGS Current annual responses in PRA inventory * Form Schedule 14A .............................................................................................................................................. Schedule 14C .............................................................................................................................................. Estimated number of affected filings ** 6,369 569 4,968 444 * 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. ** Based on the approximately 1,275 EGCs that we estimate are required to file proxy statements on Schedule 14A or information statements on Schedule 14C relative to the estimated total number of approximately 4,530 registrants subject to the final rules, we estimate that approximately 22% of the registrants filing Schedules 14A or 14C are EGCs, which are not subject to the final rules. In estimating the hours and service costs, we have removed those filers from the Current Annual Responses totals for Schedule 14A and Schedule 14C. As a result, we expect the final rules to affect approximately 4,968 Schedule 14A filings [6,369 × 0.22 = 1,401; 6,369¥1,401 = 4,968] and approximately 444 Schedule 14C filings [569 × 0.22 = 125; 569¥125 = 444]. 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 (particularly in the first year of compliance with the final rules) and some registrants may experience less than the average costs. PRA Table 3 below illustrates the incremental change to the total annual compliance burden of affected collections of information, in hours and in costs, as a result of the final amendments. PRA TABLE 3—CALCULATION OF THE INCREMENTAL CHANGE IN BURDEN ESTIMATES OF CURRENT RESPONSES RESULTING FROM THE FINAL AMENDMENTS Collection of information Filed by * Estimated number of affected responses Burden hour increase per affected response Increase in burden hours for current affected responses Increase in company hours for current affected responses Increase in professional hours for current affected responses Increase in professional costs for current affected responses (A) (B) (C) = (A) × (B) (D) = (C) × 0.75 (E) = (C) × 0.25 (F) = (E) × $400 Schedule 14A .............. Schedule 14A .............. Non-SRC ....... SRC ............... 2,981 1,987 28 17 83,468 33,779 ........................ ........................ ........................ ........................ ........................ ........................ Schedule 14A (Total). Schedule 14C .............. Schedule 14C .............. ........................ 4,968 ........................ 117,247 87,935 29,312 $11,724,800 Non-SRC ....... SRC ............... 266 178 28 17 7,448 3,026 ........................ ........................ ........................ ........................ ........................ ........................ ........................ 444 ........................ 10,474 7,856 2,619 $1,047,600 Schedule 14C (Total). khammond on DSKJM1Z7X2PROD with RULES3 * Based on 2021 filings, SRCs represent about 41 percent (1,860 out of 4,530) of the affected registrants. We assume for purposes of our PRA estimates that 60 percent of each affected collection of information was filed by non-SRCs and 40 percent by SRCs. The following PRA Table 4 summarizes the requested paperwork burden, including the estimated total reporting burdens and costs, under the final amendments. of this PRA analysis, we estimate that such costs would be an average of $400 per hour. This estimate is based on consultations with several issuers, law firms, and other persons who regularly assist issuers in preparing and filing reports with the Commission. 685 See supra note 23. Although EGCs would not have been subject to the proposed amendments, the VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 estimates included in the Proposing Release were not adjusted to deduct the number of EGCs because at the time the precise number of these filers was difficult to determine. E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations 55191 PRA TABLE 4—REQUESTED PAPERWORK BURDEN UNDER THE FINAL AMENDMENTS Current burden Collection of information Schedule 14A .......... Schedule 14C .......... Current annual responses Current burden hours (A) (B) 6,369 569 778,802 56,356 Program change Revised burden Current cost burden Number of affected responses Increase in company hours Increase in professional costs Annual responses Burden hours Cost burden (C) (D) (E) † (F) ‡ (G) = (A) (H) = (B) + (E) (I) = (C) + (F) $103,805,312 7,514,944 4,968 444 87,935 7,856 $11,724,800 1,047,600 6,369 569 866,737 64,212 $115,530,112 8,562,544 † From Column (D) in PRA Table 3. ‡ From Column (F) in PRA Table 3. khammond on DSKJM1Z7X2PROD with RULES3 VII. Final Regulatory Flexibility Analysis The Regulatory Flexibility Act (‘‘RFA’’) 686 requires the Commission, in promulgating rules under Section 553 of the Administrative Procedure Act,687 to consider the impact of those rules on small entities. We have prepared this Final Regulatory Flexibility Analysis (‘‘FRFA’’) in accordance with Section 604 of the RFA.688 An Initial Regulatory Flexibility Analysis (‘‘IRFA’’) was prepared in accordance with the RFA and was included in the Proposing Release. This FRFA relates to the amendments to Item 402 of Regulation S–K, Item 405 of Regulation S–T, Schedule 14A, and Schedule 14C. A. Need For, and Objectives of, the Final Rules The final rules are designed to implement the requirements of Section 14(i), which was added by Section 953(a) of the Dodd-Frank Act. Section 14(i) mandates that the Commission adopt rules addressing specified disclosure requirements. Specifically, as described in detail in Section II above, the final rules will require registrants (other than EGCs, registered investment 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 registrant’s PEO and, on average, its other NEOs and the financial performance of the registrant for the three most recently completed fiscal years in the case of a registrant that qualifies as an SRC (or the five most recently completed fiscal years in the case of a non-SRC), taking into account any change in the value of the shares of stock and dividends of the registrant and any distributions. The final rules require registrants to present pay-versus-performance disclosure that can be readily compared 686 5 U.S.C. 601 et seq. U.S.C. 553. 688 5 U.S.C. 604. 687 5 VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 across registrants, while also providing investors with disclosure reflecting the specific situation of the registrant. We believe that the final rules will, among other things, allow investors to assess a registrant’s executive compensation actually paid relative to its financial performance more easily and at a lower cost to investors. The need for, and objectives of, the final rules are described in greater detail in Sections I and II. B. Significant Issues Raised by Public Comments In the Proposing Release, we requested comment on all aspects of the IRFA, including the nature of any impact on small entities and empirical data to support the extent of the impact. In addition, the Reopening Release included a discussion of the potential impact on SRCs of requiring disclosure of the additional performance measures discussed in that release and also requested comment on a number of matters with respect to SRCs in relation to the proposed rules and the additional requirements considered in that release. We did not receive any comments specifically addressing the IRFA.689 However, we received a number of comments on the proposed rules generally,690 and have considered these comments in developing the FRFA. In addition, as discussed in detail above in Section II.G.2, we received a variety of comments on whether SRCs should be subject to the proposed rules.691 Some commenters supported fully exempting SRCs from the pay-versus-performance disclosure requirements,692 while another suggested that the pay-versusperformance disclosure be voluntary for 689 As discussed in footnote 8, supra, one comment letter noted that the Commission did not update the RFA analysis in the Reopening Release, and ‘‘urge[d]’’ the Commission to ‘‘re-propose’’ with an updated RFA analysis. See letter from Toomey/ Shelby. 690 See supra Section II. 691 See supra notes 399–406 and accompanying text. 692 See letters from CCMC 2015; Mercer; Pearl; TCA 2015; and TCA 2022. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 SRCs.693 Other commenters stated that we should not exempt SRCs from the disclosure requirements,694 some noting that a lack of transparency could have negative market effects for SRCs.695 Commenters also made a variety of suggestions with respect to the timing of the disclosure for SRCs, including that SRCs be subject to the full pay-versusperformance disclosure requirement but with a one year ‘‘grace period,’’ 696 or that SRCs provide five years of data, but with a three year transition period.697 One commenter also suggested that the Commission exempt SRCs from the disclosure requirements for five years so that the Commission could first analyze the impact of the disclosure requirements on larger registrants.698 C. Small Entities Subject to the Final Amendments The final rules will affect some companies that are small entities. For purposes of the RFA, under our rules, an issuer, other than an investment company,699 is a ‘‘small business’’ or ‘‘small organization’’ if it had total assets of $5 million or less on the last day of its most recent fiscal year.700 The final rules will affect issuers that have a class of securities that are registered under Section 12 of the Exchange Act but are not foreign private issuers, registered investment companies, or EGCs. We estimate that there are approximately 450 issuers that may be considered small entities and are potentially subject to the final amendments. An investment company, 693 See letter from ICGN. letters from AB; Better Markets; CalPERS 2015; CalSTRS; CII 2015; Morrell; SBA–FL; and Troop. 695 See letter from CalPERS 2015. 696 See letter from AB. 697 See letter from Hermes. 698 See letters from NIRI 2015 and NIRI 2022. 699 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]. 700 See Exchange Act Rule 0–10(a) [17 CFR 240.0– 10(a)]. 694 See E:\FR\FM\08SER3.SGM 08SER3 55192 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 including a BDC, 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.701 We believe that the final rules will affect some small entities that are BDCs that have a class of securities registered under Section 12 of the Exchange Act. We estimate that one affected BDC may be considered a small entity.702 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements We expect the final rules to have an incremental effect on existing reporting, recordkeeping and other compliance burdens for all issuers, including small entities. Under the final rules, SRCs are permitted to provide disclosure in accordance with Item 402(v) of Regulation S–K that is scaled for small companies, consistent with SRCs’ existing scaled executive compensation disclosure requirements. Specifically, SRCs are not required to provide a peer group TSR, a Company-Selected Measure, a Tabular List, or to disclose amounts related to pensions. Because SRCs are not required to provide a peer group TSR or Company-Selected Measure, they are similarly not required to provide relationship disclosure with respect to those performance measures. In addition, because the existing scaled definition of NEO in Item 402 of Regulation S–K applicable to SRCs applies for purposes of the new Item 402(v) disclosure, SRCs are required to provide disclosure about fewer NEOs than non-SRC registrants. SRCs also will only be required to provide three years of disclosure (two in the first applicable filing after the rules become effective). Both SRCs and non-SRC registrants are required to separately tag the values disclosed in the table in Inline XBRL, block-text tag the footnote and relationship disclosure and the Tabular List in Inline XBRL, and tag specific data points (such as quantitative amounts) within the footnote disclosures in Inline XBRL, but SRCs are required to provide the required Inline XBRL data beginning in the third filing in which they provide pay-versusperformance disclosure. Much of the information required in the pay-versus-performance disclosure is based on items that are already required elsewhere in the executive compensation disclosure and financial 701 17 CFR 270.0–10(a). the seven BDCs that will be subject to the final amendments, one may be considered a small entity for purposes of the RFA. 702 Of VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 statements provided by registrants, and the final rules are not expected to require registrants to collect significant new data, relative to current disclosure requirements.703 Compliance with certain provisions affected by the amendments will require the use of professional skills, including accounting, legal, and technical skills. The final amendments are discussed in detail in Sections I and II above. We discuss the economic impact, including the estimated compliance costs and burdens of the final rules on all registrants, including small entities, in Sections V and VI above. the disclosure requirements for SRCs in an attempt to limit the compliance burden to which such companies will be subject. Accordingly, registrants that are SRCs will be subject to the final rules, but will be permitted to provide only three years of disclosure, instead of five years as required for all other registrants. Also, the final rules will require SRCs to disclose their company TSR and their net income, but they will not be required to disclose peer group TSR, a Company-Selected Measure, or a Tabular List. In addition, because the scaled compensation disclosure that applies to SRCs under existing Item 402 of Regulation S–K does not include E. Agency Action To Minimize Effect on pension plans, the pension plan Small Entities adjustment otherwise required under the final rules will not apply to SRCs. The RFA directs us to consider To the extent that a small entity is a alternatives that would accomplish our stated objectives, while minimizing any registrant, we believe that there are few, if any, small entities that do not qualify significant adverse impact on small as SRCs because it is unlikely that an entities. In connection with the final entity with total assets of $5 million or rules, we considered the following less would have a public float of $75 alternatives: • Establishing different compliance or million or more. Under the final rules, a small entity, therefore, will likely be reporting requirements or timetables subject to the scaled disclosure that take into account the resources requirements described above that will available to small entities; apply to SRCs.705 We believe this will • Clarifying, consolidating or minimize any adverse impact on small simplifying compliance and reporting entities of providing new disclosures requirements under the rules for small which they generally do not currently entities; provide. • Using performance rather than With respect to compliance design standards; and • Exempting small entities from all or timetables, the final rules also provide SRCs with transitional relief under part of the final rules. which they may provide two years of As noted above, the final rules will disclosure, instead of three, in the first require clear disclosure of prescribed applicable filing after the rules become measures of executive compensation effective, and three years of disclosure actually paid and the company’s in subsequent proxy and information financial performance and the statement filings. The final rules also relationship between these measures. provide SRCs with a phase-in of the All of the individual components requirement to provide the disclosure in needed for SRCs to calculate executive Inline XBRL, under which SRCs need compensation actually paid already must be reported by SRCs under current not comply with the Inline XBRL requirement until the third filing in disclosure rules, with the exception of which they provide pay-versusthe values to be included with respect performance disclosure. to equity awards. In addition, net Although the final rules will require income is required under existing disclosure of prescribed measures of financial disclosure. As discussed executive compensation actually paid above, we do not believe that it is and registrant financial performance, necessary to exempt small entities from the final rules entirely, as we believe the they will permit issuers significant flexibility in presenting the relationship benefit to investors of small entities between these measures. For example, providing pay-versus-performance issuers, including small entities, can disclosure outweighs the costs to them describe the relationships in narrative of preparing the scaled disclosure.704 form or by means of a graph or chart, or We have provided some different and a combination of both forms. In this simplified compliance requirements for respect, the final rules make use of both small entities, taking into account their design and performance standards as a resources. In particular, we have scaled means of balancing the investors’ need for uniform disclosure across registrants 703 See supra Section V.C. while also providing registrants, 704 The alternative of exempting SRCs in their entirety from the final rules is discussed above in Section V.C.4.i. PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 705 See E:\FR\FM\08SER3.SGM supra Section II.G.3. 08SER3 55193 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations including small entities, with flexibility to describe their pay-versusperformance relationship in a format that is best suited to their particular circumstances. Statutory Authority and Text of Amendments The final amendments contained in this release are being adopted 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, 232, and 240 Reporting and Recordkeeping requirements; Securities. For the reasons set out in the preamble, we are amending title 17, chapter II, of the Code of Federal Regulations as follows: 2. Amend § 229.402 by adding paragraph (v) to read 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 § 229.402 (Item 402) Executive compensation. * 1. The authority citation for part 229 continues to read as follows: ■ Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77n, 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, and 7201 et seq.; 18 U.S.C. 1350; sec. 953(a), Pub. L. 111–203, 124 Stat. 1904 (2010); sec. 953(b), Pub. L. 111–203, 124 Stat. 1904 (2010); and sec. 102(c), Pub. L. 112–106, 126 Stat. 310 (2012). * * * * (v) Pay versus performance. In connection with any proxy or information statement for which the rules of the Commission require executive compensation disclosure pursuant to this section (excluding any proxy or information statement of an ‘‘emerging growth company,’’ as defined in § 230.405 of this chapter or § 240.12b–2 of this chapter): (1) Provide the information specified in paragraph (v)(2) of this section for each of the registrant’s last five completed fiscal years in the following tabular format: khammond on DSKJM1Z7X2PROD with RULES3 PAY VERSUS PERFORMANCE Year Summary compensation table total for PEO Compensation actually paid to PEO Average summary compensation table total for non-PEO named executive officers (a) (b) (c) (d) (2) The table required by paragraph (v)(1) of this section must include: (i) The fiscal year covered (column (a)). (ii) The PEO’s (as defined in paragraph (a)(3) of this section) total compensation for the covered fiscal year as reported in the Summary Compensation Table pursuant to paragraph (c)(2)(x) of this section, or paragraph (n)(2)(x) of this section for smaller reporting companies (column (b)), and the average total compensation reported for the remaining named executive officers collectively reported pursuant to such applicable paragraph (column (d)). If more than one person served as the registrant’s PEO during the covered fiscal year, provide the total compensation, as reported in accordance with the immediately preceding sentence, for each person who served as the PEO during that period separately in an additional column (b) for each such person. (iii) The executive compensation actually paid to the PEO (column (c)) and the average executive compensation actually paid to the remaining named executive officers collectively (column (e)). If more than one person served as the registrant’s PEO during the covered VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 Average compensation actually paid to non-PEO named executive officers (e) Value of initial fixed $100 investment based on: Total shareholder return Peer group total shareholder return Net income [Companyselected measure] (f) (g) (h) (i) fiscal year, provide the compensation actually paid to each person who served as PEO during that period separately in an additional column (c) for each such person. For purposes of columns (c) and (e) of the table required by paragraph (v)(1) of this section, executive compensation actually paid must be the total compensation for the covered fiscal year for each named executive officer as provided in paragraph (c)(2)(x) of this section, or paragraph (n)(2)(x) of this section 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 accordance with paragraph (c)(2)(viii)(A) of this section; (B)(1) Add, for all defined benefit and actuarial pension plans reported in the Summary Compensation Table in accordance with paragraph (c)(2)(viii)(A) of this section, the aggregate of: (i) Service cost, 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; and PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 (ii) Prior service cost, calculated as the entire cost of benefits granted (or credit for benefits reduced) in a plan amendment (or initiation) during the covered fiscal year that are attributed by the benefit formula to services rendered in periods prior to the amendment. (2) ‘‘Service cost’’ and ‘‘prior service cost’’ must be calculated using the same methodology as used for the registrant’s financial statements under generally accepted accounting principles. (C)(1) Deduct the amounts reported in the Summary Compensation Table pursuant to paragraphs (c)(2)(v) and (vi) of this section and then include an amount calculated as follows for all stock awards, and all option awards, with or without tandem SARs (as defined in paragraph (a)(6)(i) of this section) (including awards that subsequently have been transferred): (i) Add the fair value as of the end of the covered fiscal year of all awards granted during the covered fiscal year that are outstanding and unvested as of the end of the covered fiscal year; (ii) Add the amount equal to the change as of the end of the covered fiscal year (from the end of the prior fiscal year) in fair value (whether positive or negative) of any awards E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 55194 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations granted in any prior fiscal year that are outstanding and unvested as of the end of the covered fiscal year; (iii) Add, for awards that are granted and vest in the same year, the fair value as of the vesting date; (iv) Add the amount equal to the change as of the vesting date (from the end of the prior fiscal year) in fair value (whether positive or negative) of any awards granted in any prior fiscal year for which all applicable vesting conditions were satisfied at the end of or during the covered fiscal year; (v) Subtract, for any awards granted in any prior fiscal year that fail to meet the applicable vesting conditions during the covered fiscal year, the amount equal to the fair value at the end of the prior fiscal year; and (vi) Add the dollar value of any dividends or other earnings paid on stock or option awards in the covered fiscal year prior to the vesting date that are not otherwise included in the total compensation for the covered fiscal year. (2) If at any time during the last completed fiscal year, the registrant has adjusted or amended the exercise price of 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 changes in fair value included pursuant to this paragraph (v)(2)(iii)(C) must take into account the excess fair value, if any, of any such modified award over the fair value of the original award as of the date of such modification. (3) Fair value amounts must be computed in a manner consistent with the fair value methodology used to account for share-based payments in the registrant’s financial statements under generally accepted accounting principles. For any awards that are subject to performance conditions, calculate the change in fair value as of the end of the covered fiscal year based upon the probable outcome of such conditions as of the last day of the fiscal year. (iv) For purposes of columns (f) and (g) of the table required by paragraph (v)(1) of this section, for each fiscal year disclose the cumulative total shareholder return of the registrant (column (f)) and peer group cumulative total shareholder return (column (g)) calculated, except as set forth below, in the same manner as under § 229.201(e) of this chapter (Item 201(e) of Regulation S–K). For purposes of calculating the cumulative total shareholder return of the registrant and peer group cumulative total shareholder VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 return, the term ‘‘measurement period’’ must 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 fiscal year for which cumulative total shareholder return of the registrant or peer group cumulative total shareholder return is being calculated. The closing price at the measurement point must be converted into a fixed investment of one hundred dollars, 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 must be the value of such fixed investment based on 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. For purposes of determining the total shareholder return of the registrant’s peer group, the registrant must use the same index or issuers used by it for purposes of § 229.201(e)(1)(ii) of this chapter or, if applicable, the companies it uses as a peer group for purposes of its disclosures under paragraph (b) of this section. If the peer group is not a published industry or line-of-business index, the identity of the issuers composing the group must be disclosed in a footnote. 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. If the registrant selects or otherwise uses a different peer group from the peer group used by it for the immediately preceding fiscal year, explain, in a footnote, the reason(s) for this change and compare the registrant’s cumulative total return with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year. (v) The registrant’s net income for each fiscal year (column (h)). (vi) An amount for each fiscal year attributable to an additional financial performance measure included in the Tabular List provided pursuant to paragraph (v)(6) of this section, designated as the Company-Selected Measure, which in the registrant’s assessment represents the most important financial performance measure (that is not otherwise required to be disclosed in the table) used by the registrant to link compensation actually paid to the registrant’s named executive officers, for the most recently completed fiscal year, to company performance (column (i)). For purposes of this PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 paragraph (v) of this section, ‘‘financial performance measures’’ means measures that are determined and presented in accordance with the accounting principles used in preparing the issuer’s financial statements, any measures that are derived wholly or in part from such measures, and stock price and total shareholder return. A financial performance measure need not be presented within the registrant’s financial statements or otherwise included in a filing with the Commission to be a Company-Selected Measure. Disclosure of any CompanySelected Measure, or any additional measure that the registrant elects to provide, that is not a financial measure under generally accepted accounting principles will not be subject to §§ 244.100 through 102 of this chapter (Regulation G) and § 229.10(e) of this chapter (Item 10(e)); however, disclosure must be provided as to how the number is calculated from the registrant’s audited financial statements. (3) For each amount disclosed in columns (c) and (e) of the table required by paragraph (v)(1) of this section, disclose in footnotes to the table each of the amounts deducted and added pursuant to paragraph (v)(2)(iii) of this section, the name of each named executive officer included as a PEO or in the calculation of the average remaining named executive officer compensation, and the fiscal years in which such persons are included. 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) of this section, disclose in a footnote to the table required by paragraph (v)(1) of this section any assumption made in the valuation that differs materially from those disclosed as of the grant date of such equity awards. (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) of this section to provide a clear description (graphically, narratively, or a combination of the two) of the relationships: (i) Between: (A) 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)) included in the Summary Compensation Table; and E:\FR\FM\08SER3.SGM 08SER3 khammond on DSKJM1Z7X2PROD with RULES3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations (B) The cumulative total shareholder return of the registrant (column (f)), across the registrant’s last five completed fiscal years; (ii) Between: (A) 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)) included in the Summary Compensation Table; and (B) Net income of the registrant (column (h)), across the registrant’s last five completed fiscal years; and (iii) Between: (A) 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)) included in the Summary Compensation Table; and (B) The Company-Selected Measure (column (i)), across the registrant’s last five completed fiscal years. (iv) The description provided in response to paragraph (v)(5)(i) of this section must 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. If a registrant elects to provide any additional measures in the table, each additional measure must be accompanied by a clear description of the relationship between: (A) 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)) included in the Summary Compensation Table; and (B) That additional measure, across the registrant’s last five completed fiscal years. (6) Subject to paragraph (v)(6)(iii) of this section, provide a tabular list of at least three, and up to seven, financial performance measures, which in the registrant’s assessment represent the most important financial performance measures used by the registrant to link compensation actually paid to the registrant’s named executive officers, for the most recently completed fiscal year, to company performance (‘‘Tabular List’’). (i) The registrant may provide the Tabular List disclosure either as one tabular list, as two separate tabular lists (one for the PEO, and one for all named executive officers other than the PEO), or as separate tabular lists for the PEO and each named executive officer other than the PEO. If the registrant elects to provide multiple tabular lists in VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 accordance with the immediately preceding sentence, each tabular list must include at least three, and up to seven, financial performance measures, which in the registrant’s assessment represent the most important financial performance measures used by the registrant to link compensation actually paid to that, or those, particular named executive officer, or officers, for the most recently completed fiscal year, to company performance. (ii) If fewer than three financial performance measures were used by the registrant to link compensation actually paid to the registrant’s named executive officers, for the most recently completed fiscal year, to company performance, the Tabular List must include all such measures that were used, if any. (iii) A registrant may include nonfinancial performance measures (i.e., performance measures other than those that fall within the definition of financial performance measures) used by the registrant to link compensation actually paid to the registrant’s named executive officers, for the most recently completed fiscal year, to company performance in the Tabular List, if it determines that such measures are among its three to seven most important performance measures, and it has disclosed its most important three (or fewer, if the registrant only uses fewer) financial performance measures, in accordance with this paragraph (v)(6). (iv) The Tabular List may include a maximum of seven performance measures, regardless of whether the registrant elects to include non-financial performance measures in the Tabular List. (7) The disclosure provided pursuant to this paragraph (v), including, but not limited to, any disclosure provided pursuant to paragraphs (v)(3) and (6) of this section, must appear with, and in the same format as, the rest of the disclosure required to be provided pursuant to this section and, in addition, must be provided in an Interactive Data File in accordance with § 232.405 of this chapter and the EDGAR Filer Manual (referenced in § 232.301 of this chapter). (8) A registrant that qualifies as a ‘‘smaller reporting company,’’ as defined by § 229.10(f)(1) of this chapter, may provide the information required by this paragraph (v) for three years, instead of five years. A smaller reporting company may provide the disclosure required by this 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)(2)(iv) or (v)(5) of this section with respect to the total PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 55195 shareholder return of any peer group, or the Company-Selected Measure disclosure required by paragraph (v)(2)(vi) of this section, or the Tabular List provided pursuant to paragraph (v)(6) of this section. For purposes of paragraph (v)(2)(iii) of this section with respect to smaller reporting companies, executive compensation actually paid must be the total compensation for the covered fiscal year for each named executive officer as provided in paragraph (n)(2)(x) of this section, adjusted to deduct the amounts reported in the Summary Compensation Table pursuant to paragraphs (n)(2)(v) and (vi) of this section, and to add in their place the fair value of the amounts added in paragraph (v)(2)(iii)(C) of this section. Disclose in a footnote to the table required pursuant to paragraph (v)(1) of this section 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, the name of each named executive officer included as a PEO or in the calculation of the average remaining named executive officer compensation, and the fiscal years in which they are included. A smaller reporting company is required to comply with paragraph (v)(7) of this section in the third filing in which it provides the disclosure required by this paragraph (v). Instructions to paragraph (v). 1. Transitional relief. A registrant may provide the disclosure required by this paragraph (v) for three years, instead of five years, in the first filing in which it provides this disclosure, and may provide disclosure for an additional year in each of the two subsequent annual filings in which this disclosure is required. 2. 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. 3. Incorporation by reference. The information required by paragraph (v) of this section 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 232—REGULATION S–T— GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS 3. The general authority citation for part 232 continues to read as follows: ■ E:\FR\FM\08SER3.SGM 08SER3 55196 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, 80a–30, 80a–37, 80b–4, 80b–10, 80b–11, 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted. * * * * * 4. Amend § 232.405 by: a. Revising the introductory text and paragraphs (a)(2) and (4). ■ b. In paragraph (b)(1)(i), removing the word ‘‘and’’ from the end of the sentence; ■ c. In paragraph (b)(1)(ii), removing the period from the end of the sentence, and adding ‘‘; and’’ in its place; ■ d. Adding paragraph (b)(1)(iii); ■ e. In paragraph (b)(3)(i)(A), removing the word ‘‘and’’ from the end of the sentence; ■ f. In paragraph (b)(3)(i)(B), adding ‘‘and’’ at the end; ■ g. Adding paragraphs (b)(3)(i)(C) and (b)(4); and ■ h. Revising Note 1 to § 232.405. The additions and revisions read as follows: ■ ■ khammond on DSKJM1Z7X2PROD with RULES3 § 232.405 Interactive Data File submissions. This section applies to electronic filers that submit Interactive Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S–K), General Instruction F of Form 11–K (§ 249.311), paragraph (101) of Part II— Information Not Required to be Delivered to Offerees or Purchasers of Form F–10 (§ 239.40 of this chapter), paragraph 101 of the Instructions as to Exhibits of Form 20–F (§ 249.220f of this chapter), paragraph B.(15) of the General Instructions to Form 40–F (§ 249.240f of this chapter), paragraph C.(6) of the General Instructions to Form 6–K (§ 249.306 of this chapter), Note D.5 of Rule 14a–101 under the Exchange Act (§ 240.14a–101 of this chapter), Item 1 of Rule 14c–101 under the Exchange Act (§ 240.14c–101 of this chapter), General Instruction C.3.(g) of Form N–1A (§§ 239.15A and 274.11A of this chapter), General Instruction I of Form N–2 (§§ 239.14 and 274.11a–1 of this chapter), General Instruction C.3.(h) of Form N–3 (§§ 239.17a and 274.11b of this chapter), General Instruction C.3.(h) of Form N–4 (§§ 239.17b and 274.11c of this chapter), General Instruction C.3.(h) of Form N–6 (§§ 239.17c and 274.11d of this chapter), and General Instruction C.4 of Form N–CSR (§§ 249.331 and 274.128 of this chapter) specify when electronic filers are required or permitted to submit an Interactive Data File (§ 232.11), as further described in note 1 to this section. This section imposes content, format and submission requirements for an Interactive Data VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 File, but does not change the substantive content requirements for the financial and other disclosures in the Related Official Filing (§ 232.11). (a) * * * (2) Be submitted only by an electronic filer either required or permitted to submit an Interactive Data File as specified by § 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S–K), General Instruction F of Form 11– K (§ 249.311), paragraph (101) of Part II—Information Not Required to be Delivered to Offerees or Purchasers of Form F–10 (§ 239.40 of this chapter), paragraph 101 of the Instructions as to Exhibits of Form 20–F (§ 249.220f of this chapter), paragraph B.(15) of the General Instructions to Form 40–F (§ 249.240f of this chapter), paragraph C.(6) of the General Instructions to Form 6–K (§ 249.306 of this chapter), Note D.5 of Rule 14a–101 under the Exchange Act (§ 240.14a–101 of this chapter), Item 1 of Rule 14c–101 under the Exchange Act (§ 240.14c–101 of this chapter), General Instruction C.3.(g) of Form N–1A (§§ 239.15A and 274.11A of this chapter), General Instruction I of Form N–2 (§§ 239.14 and 274.11a–1 of this chapter), General Instruction C.3.(h) of Form N–3 (§§ 239.17a and 274.11b of this chapter), General Instruction C.3.(h) of Form N–4 (§§ 239.17b and 274.11c of this chapter), General Instruction C.3.(h) of Form N–6 (§§ 239.17c and 274.11d of this chapter), or General Instruction C.4 of Form N–CSR (§§ 249.331 and 274.128 of this chapter), as applicable; * * * * * (4) Be submitted in accordance with the EDGAR Filer Manual and, as applicable, Item 601(b)(101) of Regulation S–K (§ 229.601(b)(101) of this chapter), General Instruction F of Form 11–K (§ 249.311 of this chapter), paragraph (101) of Part II—Information Not Required to be Delivered to Offerees or Purchasers of Form F–10 (§ 239.40 of this chapter), paragraph 101 of the Instructions as to Exhibits of Form 20– F (§ 249.220f of this chapter), paragraph B.(15) of the General Instructions to Form 40–F (§ 249.240f of this chapter), paragraph C.(6) of the General Instructions to Form 6–K (§ 249.306 of this chapter), Note D.5 of Rule 14a–101 under the Exchange Act (§ 240.14a–101 of this chapter), Item 1 of Rule 14c–101 under the Exchange Act (§ 240.14c–101 of this chapter), General Instruction C.3.(g) of Form N–1A (§§ 239.15A and 274.11A of this chapter), General Instruction I of Form N–2 (§§ 239.14 and 274.11a–1 of this chapter), General Instruction C.3.(h) of Form N–3 (§§ 239.17a and 274.11b of this chapter), General Instruction C.3.(h) of Form N– PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 4 (§§ 239.17b and 274.11c of this chapter), General Instruction C.3.(h) of Form N–6 (§§ 239.17c and 274.11d of this chapter); or General Instruction C.4 of Form N–CSR (§§ 249.331 and 274.128 of this chapter). (b) * * * (1) * * * (iii) The disclosure set forth in paragraph (b)(4) of this section. * * * * * (3) * * * (i) * * * (C) The disclosure set forth in paragraph (b)(4) of this section. * * * * * (4) The disclosure provided under 17 CFR part 229 (Regulation S–K) and related provisions that is required to be tagged, including, as applicable: (i) The information provided pursuant to § 229.402(v) of this chapter (Item 402(v) of Regulation S–K). (ii) [Reserved]. * * * * * Note 1 to § 232.405: Section 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S–K) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to § 239.11 of this chapter (Form S–1), § 239.13 of this chapter (Form S–3), § 239.25 of this chapter (Form S–4), § 239.18 of this chapter (Form S–11), § 239.31 of this chapter (Form F–1), § 239.33 of this chapter (Form F–3), § 239.34 of this chapter (Form F–4), § 249.310 of this chapter (Form 10–K), § 249.308a of this chapter (Form 10–Q), and § 249.308 of this chapter (Form 8– K). General Instruction F of § 249.311 of this chapter (Form 11–K) specifies the circumstances under which an Interactive Data File must be submitted, and the circumstances under which it is permitted to be submitted, with respect to Form 11–K. Paragraph (101) of Part II—Information not Required to be Delivered to Offerees or Purchasers of § 239.40 of this chapter (Form F–10) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to Form F–10. Paragraph 101 of the Instructions as to Exhibits of § 249.220f of this chapter (Form 20–F) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to Form 20–F. Paragraph B.(15) of the General Instructions to § 249.240f of this chapter (Form 40–F) and Paragraph C.(6) of the General Instructions to § 249.306 of this chapter E:\FR\FM\08SER3.SGM 08SER3 Federal Register / Vol. 87, No. 173 / Thursday, September 8, 2022 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES3 (Form 6–K) specify the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to § 249.240f of this chapter (Form 40– F) and § 249.306 of this chapter (Form 6–K). Note D.5 of § 240.14a–101 of this chapter (Schedule 14A) and Item 1 of § 240.14c–101 of this chapter (Schedule 14C) specify the circumstances under which an Interactive Data File must be submitted with respect to Schedules 14A and 14C. Section 229.601(b)(101) (Item 601(b)(101) of Regulation S–K), paragraph (101) of Part II—Information not Required to be Delivered to Offerees or Purchasers of Form F–10, paragraph 101 of the Instructions as to Exhibits of Form 20–F, paragraph B.(15) of the General Instructions to Form 40–F, and paragraph C.(6) of the General Instructions to Form 6–K all prohibit submission of an Interactive Data File by an issuer that prepares its financial statements in accordance with 17 CFR 210.6–01 through 210.6–10 (Article 6 of Regulation S–X). For an issuer that is a management investment company or separate account registered under the Investment Company Act of 1940 (15 U.S.C. 80a et seq.) or a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a– 2(a)(48)), General Instruction C.3.(g) of Form N–1A (§§ 239.15A and 274.11A of this chapter), General Instruction I of Form N–2 (§§ 239.14 and 274.11a–1 of this chapter), General Instruction C.3.(h) of Form N–3 (§§ 239.17a and 274.11b of VerDate Sep<11>2014 19:00 Sep 07, 2022 Jkt 256001 this chapter), General Instruction C.3.(h) of Form N–4 (§§ 239.17b and 274.11c of this chapter), General Instruction C.3.(h) of Form N–6 (§§ 239.17c and 274.11d of this chapter), and General Instruction C.4 of Form N–CSR (§§ 249.331 and 274.128 of this chapter), as applicable, specifies the circumstances under which an Interactive Data File must be submitted. PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 55197 D. * * * 5. Interactive Data File. An Interactive Data File must be included in accordance with § 232.405 of this chapter and the EDGAR Filer Manual where applicable pursuant to § 232.405(b) of this chapter. * * * * * 7. Amend § 240.14c–101 by revising Item 1 to read as follows: ■ § 240.14c–101 Schedule 14C. Information required in information statement. Schedule 14C Information * * * * Item 1. Information required by Items of Schedule 14A (17 CFR 240.14a–101). Authority: 15 U.S.C. 77c, 77d, 77g, 77j, Furnish the information called for by all 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, of the items of Schedule 14A of 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, Regulation 14A (17 CFR 240.14a–101) 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, (other than Items 1(c), 2, 4 and 5 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, thereof) which would be applicable to 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– any matter to be acted upon at the 3, 80b–4, 80b–11, and 7210 et seq., and 8302; meeting if proxies were to be solicited 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5521(e)(3); 18 in connection with the meeting. Notes U.S.C. 1350; and Pub. L. 111–203, 939A, 124 A, C, D, and E to Schedule 14A Stat. 1376, (2010); and Pub. L. 112–106, sec. (including the requirement in Note D.5 503 and 602, 126 Stat. 326 (2012), unless to provide an Interactive Data File in otherwise noted. accordance with § 232.405 of this * * * * * chapter and the EDGAR Filer Manual ■ 6. Amend § 240.14a–101 by adding where applicable pursuant to paragraph D.5 to the Notes to read as § 232.405(b) of this chapter) are also follows: applicable to Schedule 14C. * * * * * § 240.14a–101 Schedule 14A. Information 5. The general authority citation for part 240 continues to read as follows: ■ required in proxy statement. Schedule 14A Information * * * * * * * * Notes * PO 00000 * * By the Commission. Dated: August 25, 2022. Vanessa A. Countryman, Secretary. [FR Doc. 2022–18771 Filed 9–7–22; 8:45 am] Frm 00065 Fmt 4701 Sfmt 9990 BILLING CODE 8011–01–P E:\FR\FM\08SER3.SGM 08SER3

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 173 (Thursday, September 8, 2022)]
[Rules and Regulations]
[Pages 55134-55197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18771]



[[Page 55133]]

Vol. 87

Thursday,

No. 173

September 8, 2022

Part III





 Securities and Exchange Commission





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17 CFR Parts 229, 232, and 240





Pay Versus Performance; Final Rule

Federal Register / Vol. 87 , No. 173 / Thursday, September 8, 2022 / 
Rules and Regulations

[[Page 55134]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 232, and 240

[Release Nos. 34-95607; File No. S7-07-15]
RIN 3235-AL00


Pay Versus Performance

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to implement Section 14(i) (``Section 14(i)'') of 
the Securities Exchange Act of 1934 (``Exchange Act''), as added by 
Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''). Section 14(i) directs the 
Commission to adopt rules requiring registrants to provide disclosure 
of pay versus performance. The disclosure is required in proxy or 
information statements in which executive compensation disclosure is 
required. The disclosure requirements do not apply to emerging growth 
companies, registered investment companies, or foreign private issuers.

DATES: 
    Effective date: This final rule is effective on October 11, 2022.
    Compliance date: Companies (other than emerging growth companies, 
registered investment companies, or foreign private issuers) must begin 
to comply with these disclosure requirements in proxy and information 
statements that are required to include Item 402 of Regulation S-K (as 
defined below) disclosure for fiscal years ending on or after December 
16, 2022.

FOR FURTHER INFORMATION CONTACT: John Byrne, Special Counsel, Office of 
Small Business Policy, at (202) 551-3460, Division of Corporation 
Finance.

SUPPLEMENTARY INFORMATION: The Commission is adopting an amendment to 
add new paragraph (v) to 17 CFR 229.402 (``Item 402 of Regulation S-
K''); and amending 17 CFR 232.405 (``Item 405 of Regulation S-T''), 17 
CFR 240.14a-101 (``Schedule 14A''), and 17 CFR 240.14c-101 (``Schedule 
14C''), each under the Exchange Act.

Table of Contents

I. Introduction
    A. Background
    B. Overview of Final Amendments
II. Discussion of Final Amendments
    A. New Item 402(v) of Regulation S-K
    1. Application and Operation of Item 402(v) of Regulation S-K
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    2. Format and Location of Disclosure
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    B. Executives Covered
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    C. Determination of Executive Compensation Actually Paid
    1. Deduction of Change in Actuarial Present Value and Addition 
of Actuarially Determined Service Cost and Prior Service Cost
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    2. Inclusion of Above-Market or Preferential Earnings on 
Deferred Compensation That Is Not Tax Qualified
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    3. Equity Awards
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    D. Measures of Performance
    1. Requirement To Disclose TSR and Peer Group TSR
    i. Proposed Amendments
    ii. Comments
    iii. Final Amendments
    2. Requirement To Disclose Net Income
    i. Amendments Considered in the Reopening Release
    ii. Comments
    iii. Final Amendments
    3. Tabular List of the Registrant's ``Most Important'' 
Performance Measures
    i. Amendments Considered in the Reopening Release
    ii. Comments
    iii. Final Amendments
    4. Requirement To Disclose a Company-Selected Measure
    i. Amendments Considered in the Reopening Release
    ii. Comments
    iii. Final Amendments
    E. Time Period Covered
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    F. Permitted Additional Pay-Versus-Performance Disclosure
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    G. Required Disclosure for Smaller Reporting Companies
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
III. Other Matters
IV. Compliance Dates
V. Economic Analysis
    A. Background
    B. Baseline
    1. Affected Parties
    2. Existing Disclosures and Analyses
    3. Executive Compensation Practices
    C. Discussion of Economic Effects
    1. Introduction
    2. Benefits
    3. Costs
    4. Implementation Alternatives
    i. Registrants and Filings Subject to the Disclosure Requirement
    ii. General Disclosure Requirements
    iii. Compensation Measures
    iv. Performance Measures
VI. Paperwork Reduction Act
    A. Background
    B. Summary of Comment Letters and Revisions to PRA Estimates
    C. Summary of Collection of Information Requirements
    D. Incremental and Aggregate Burden and Cost Estimates for the 
Final Amendments
VII. Final Regulatory Flexibility Analysis
    A. Need For, and Objectives of, the Final Rules
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    E. Agency Action To Minimize Effect on Small Entities

    Statutory Authority and Text of Amendments

I. Introduction

A. Background

    Section 953(a) of the Dodd-Frank Act \1\ (``Section 953(a)'') added 
Section 14(i) \2\ to the Exchange Act.\3\ Section 14(i) mandates that 
the Commission shall, by rule, require each issuer to disclose in any 
proxy or consent solicitation material for an annual meeting of the 
shareholders of the issuer a clear description of any compensation 
required to be disclosed by the issuer under Item 402 of Regulation S-K 
(or any successor thereto), including, for any issuer other than an 
emerging growth company, information that shows the relationship 
between executive compensation actually paid and the financial 
performance of the issuer, taking into account any change in the value 
of the shares of stock and dividends of the issuer and any 
distributions. Section 14(i) also states that an issuer may include a 
graphic representation of the information required to be disclosed.
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 15 U.S.C. 78n(i).
    \3\ 15 U.S.C. 78a et seq. Subsequent to the addition of Section 
14(i) to the Exchange Act, Section 102(a)(2) of the Jumpstart Our 
Business Startups Act amended 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).
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    As a part of the Dodd-Frank Act legislative process, in a 2010 
report, the Senate Committee on Banking, Housing and Urban Affairs 
stated that the disclosure required under Section 14(i)

[[Page 55135]]

``may take many forms.'' \4\ In addition, the report indicated that the 
relationship between executive pay and performance has become a 
``significant concern of shareholders,'' and that the required 
disclosure should ``add to corporate responsibility,'' as registrants 
will be required to provide clearer executive pay disclosures.\5\
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    \4\ Report of the Senate Committee on Banking, Housing and Urban 
Affairs to accompany S. 3217, S. Rep. No. 111-176, at 135 (2010) 
(``Senate Report''). The report 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.''
    \5\ Id.
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    In 2015, the Commission proposed a new rule to implement Section 
953(a) by creating a new requirement in Item 402 of Regulation S-K. The 
proposed new item would require a registrant to provide a clear 
description of (1) the relationship between executive compensation 
actually paid to the registrant's named executive officers (``NEOs'') 
(including the registrant's principal executive officer (or persons 
acting in a similar capacity during the last completed fiscal year) 
(``PEO'')) 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 
registrant's five most recently completed fiscal years.\6\ The comment 
period for the Proposing Release was reopened in 2022 to permit 
commenters to further analyze and comment upon the proposed rules in 
light of developments since the publication of the Proposing Release 
and our further consideration of the Section 953(a) mandate.\7\ In the 
Reopening Release, we stated that we were considering, and requested 
public comment on, certain additional disclosure requirements that may 
better implement the Section 953(a) mandate by providing investors with 
additional decision-relevant data.\8\
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    \6\ See Pay Versus Performance, Release No. 34-74835 (Apr. 29, 
2015) [80 FR 26329 (May 7, 2015)] (``Proposing Release'').
    \7\ This reopening of the comment period was set out in 
Reopening of Comment Period for Pay Versus Performance Release No. 
34-94074 (Jan. 27, 2022) [87 FR 5939 (Feb. 2, 2022)] (``Reopening 
Release'').
    \8\ A comment letter from two members of Congress raised 
concerns about the Reopening Release. See letter from Sen. Pat 
Toomey and Sen. Richard Shelby, dated Feb. 1, 2022 (``Toomey/
Shelby''). Specifically, the letter criticized the Commission for 
reopening the comment period on the Proposing Release and seeking 
comment on a number of regulatory alternatives without updating the 
cost-benefit analysis and analysis required by the Paperwork 
Reduction Act and the Regulatory Flexibility Act. The letter 
asserted that the approach taken in the Reopening Release 
significantly impaired the public's ability to comment thoughtfully 
on the proposals and was inconsistent with the Administrative 
Procedure Act. In response to these concerns, we note that the 
Reopening Release included a robust discussion of the additional 
disclosures under consideration and solicited comment on specific 
aspects of those disclosures. The Reopening Release also discussed 
the potential benefits and costs of the additional disclosures, 
including their impact on efficiency, competition and capital 
formation. Finally, the Reopening Release discussed how the 
additional disclosures might affect smaller registrants and 
solicited comment on approaches that would minimize the impact on 
smaller registrants, such as exempting smaller reporting companies 
from certain aspects of the additional disclosures. Given the 
discussion included in the Proposing Release and subsequent 
Reopening Release, we believe the final rules satisfy the 
requirements of the Administrative Procedure Act and other 
applicable statutes. Moreover, we received numerous comments from 
members of the public on the additional disclosures described in the 
Reopening Release, including comments on the economic effects of the 
additional disclosure, and we have considered those comments in 
adopting the final rules and made certain changes in response.
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    We believe the disclosure mandated by Section 953(a) is intended to 
provide investors with more transparent, readily comparable, and 
understandable disclosure of a registrant's executive compensation, so 
that they may better assess a registrant's executive compensation 
program when making voting decisions, for example when exercising their 
rights to cast advisory votes on executive compensation under Exchange 
Act Section 14A or electing directors.\9\ This belief is supported by 
the fact that 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.'' \10\ These included Section 951 of the Dodd-Frank Act, 
which enacted new Exchange Act Section 14A,\11\ and Section 953(b) of 
the Dodd-Frank Act. These provisions required, respectively, that, not 
less than every three years, a separate resolution be put to a non-
binding shareholder vote to approve compensation of executives; \12\ 
and that registrants provide disclosure of the ratio of the median 
annual total compensation of employees to the annual total compensation 
of the chief executive officer.\13\
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    \9\ See generally Proposing Release at Section I.
    \10\ Dodd-Frank Act, H.R. Rep. 111-157, at 827 (2010).
    \11\ 15 U.S.C. 78n-1.
    \12\ Pursuant to the mandate in Section 14A of the Exchange Act, 
we adopted rules requiring a shareholder advisory vote to approve 
the compensation of a registrant's 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 under Commission 
rules. See Shareholder Approval of Executive Compensation and Golden 
Parachute Compensation, Release No. 33-9178 (Jan. 25, 2011) [76 FR 
6010] (Feb. 2, 2011).
    \13\ In 2015, we adopted rules to implement Section 953(b) of 
the Dodd-Frank Act. See Pay Ratio Disclosure, Release No. 33-9877 
(Aug. 5, 2015) [80 FR 50103] (Aug. 18, 2015).
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    We believe the disclosure mandated by Section 14(i) will allow 
investors to assess a registrant's executive compensation actually paid 
relative to its financial performance more readily and at a lower cost 
than under the existing executive compensation disclosure regime. Under 
Item 402 of Regulation S-K, which specifies the information that must 
be included when the applicable form or schedule requires executive 
compensation disclosure, specific information regarding financial 
performance is already required, including in the Performance Graph in 
17 CFR 229.201(e) (``Item 201(e) of Regulation S-K''), the 
Supplementary Financial Information in 17 CFR 229.302 (Item 302), and 
Management's Discussion and Analysis of Financial Condition and Results 
of Operations in 17 CFR 220.303 (Item 303). In addition, Item 402 of 
Regulation S-K also requires detailed disclosure of executive 
compensation and principles-based disclosure requirements regarding the 
relationship between pay and performance.\14\
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    \14\ The Compensation Discussion and Analysis (``CD&A'') 
required by 17 CFR 229.402(b) (``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 CFR 229.402(b)(1). With respect to performance, Item 
402(b)(2) of Regulation S-K 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. 17 CFR 229.402(b)(2)(v) through 
(vii).
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    There is no single place, however, where issuers must provide 
investors with direct comparisons of an executive's pay with their 
company's performance, and specifically financial performance, 
particularly if investors are interested in that comparison over a 
timespan longer than the most recent reporting period. Existing 
disclosures generally provide the necessary components to make these 
comparisons, including data required for calculations that aid in these 
comparisons, but doing so may be time-consuming and costly. We believe 
this information is important to investors in evaluating executive 
compensation, and that disclosures about executive compensation may be

[[Page 55136]]

most meaningful to investors when placed in the context of the 
company's financial performance.\15\ Indeed, we are aware that certain 
third parties (e.g., proxy advisors or compensation consultants) 
perform such analyses and charge clients for access to the resulting 
data.\16\ Requiring registrants to compute and report this information 
will make this information equally accessible to all investors in a 
consistent manner.
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    \15\ See infra Section V.C.2.
    \16\ See infra Section V.B.2.
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    By specifically referencing disclosure of ``information that shows 
the relationship between executive compensation actually paid and . . . 
financial performance of the issuer,'' Section 14(i) calls for 
information that will supplement management's discussion of material 
elements of executive compensation in the CD&A. In addition, we believe 
this disclosure will provide investors with important and decision-
useful information for comparison purposes in one place when they 
evaluate a registrant's executive compensation practices and policies, 
including for purposes of the shareholder advisory vote on executive 
compensation, votes on other compensation matters, director elections, 
or when making investment decisions.\17\
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    \17\ For example, academic researchers find that the salience 
and readability of disclosures about executive compensation affect 
say-on-pay votes. See, e.g., Danial Hemmings, Lynn Hodgkinson, & 
Gwion Williams, It's OK to Pay Well, if You Write Well: The Effects 
of Remuneration Disclosure Readability, 47 J. Bus. Fin. & Accounting 
547 (2020); and Reggy Hooghiemstra, Yu Flora Kuang, & Bo Qin, Does 
Obfuscating Excessive CEO Pay Work? The Influence of Remuneration 
Report Readability on Say-on-Pay Votes, 47 Accounting & Bus. Res. 
695 (2017).
---------------------------------------------------------------------------

    Section 14(i) did not expressly prescribe the manner in which 
issuers would disclose the required information and we have exercised 
our discretion to provide for a consistent format that we believe 
furthers the statutory objectives of making pay-versus-performance data 
clear and easy for investors to evaluate. Standardizing the format and 
presentation of data, in particular quantitative metrics, to promote 
such ease of use requires incremental costs for issuers. We have 
elected not to pursue a wholly principles-based approach because, among 
other reasons, such a route would limit comparability across issuers 
and within issuers' filings over time, as well as increasing the 
possibility that some issuers would choose to report only the most 
favorable information. In addition, as we describe more extensively 
below, the final rules require that issuers calculate the value of 
certain equity and pension awards in more detail than would have been 
required in the proposed rule. These changes, in our view, will result 
in disclosures that more accurately represent the time when the awards 
change in value, which is important for investors to be able to assess 
whether such changes correspond to company performance over the 
appropriate time period.
    We received many comment letters in response to the Proposing 
Release and the Reopening Release. After taking into consideration 
these public comments, we are adopting the proposed rules, together 
with certain of the supplemental disclosure requirements considered in 
the Reopening Release, with some modifications to reflect public 
comment. As discussed in more detail below, the final rules require 
registrants to present disclosure that reflects the specific situation 
of the registrant with respect to pay-versus-performance, and while 
also providing pay-versus-performance disclosure that can be readily 
compared across registrants.

B. Overview of Final Amendments

    The amendments add new 17 CFR 229.402(v) (``Item 402(v) of 
Regulation S-K''), which requires registrants to describe the 
relationship between the executive compensation actually paid by the 
registrant and the financial performance of the registrant over the 
time horizon of the disclosure. Item 402(v) of Regulation S-K requires 
disclosure of the cumulative TSR of the registrant (substantially as 
defined in Item 201(e) of Regulation S-K),\18\ the TSR of the 
registrant's peer group, the registrant's net income, and a measure 
chosen by the registrant and specific to the registrant (``Company-
Selected Measure'') as the measures of financial performance.
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    \18\ Item 201(e) of Regulation S-K sets forth the specific 
disclosure requirements for the issuer's stock performance graph, 
which is required to be included in the annual report to security 
holders provided for by 17 CFR 240.14a-3 and 240.14c-3. The Item 
provides that cumulative TSR is calculated by dividing the sum of 
the cumulative amount of dividends for the measurement period, 
assuming dividend reinvestment, and the difference between the 
registrant's share price at the end and the beginning of the 
measurement period; by the share price at the beginning of the 
measurement period.
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    The final rules require the following tabular disclosures, with the 
asterisked items indicating portions of the final rules from which 
smaller reporting companies (``SRCs'') \19\ are exempt: \20\
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    \19\ A ``smaller reporting company'' means, in the case of 
issuers required to file reports under Sections 13(a) or 15(d) of 
the Exchange Act, an issuer that is not an investment company, an 
asset-backed issuer, or a majority-owned subsidiary of a parent that 
is not a smaller reporting company and that: (1) had a public float 
of less than $250 million (as of the last business day of the 
issuer's most recently completed second fiscal quarter); or (2) had 
annual revenues of less than $100 million (as of the most recently 
completed fiscal year for which audited financial statements are 
available) and either: (i) no public float (as of the last business 
day of the issuer's most recently completed second fiscal quarter); 
or (ii) a public float of less than $700 million (as of the last 
business day of the issuer's most recently completed second fiscal 
quarter). 17 CFR 240.12b-2; and 17 CFR 229.10. Business development 
companies (``BDCs''), which are a type of closed-end investment 
company that is not registered under the Investment Company Act, do 
not fall within the SRC definition, and thus do not qualify for the 
scaled disclosures that we are adopting for SRCs. See infra Section 
II.G (discussing our considerations with respect to SRC disclosure 
requirements).
    \20\ The title of column (i) of the table, ``Company-Selected 
Measure,'' would be replaced with the name of the registrant's most 
important measure, and that column would include the numerically 
quantifiable performance of the issuer under such measure for each 
covered fiscal year. For example, if the Company-Selected Measure 
for the most recent fiscal year was total revenue, the company would 
title the column ``Total Revenue'' and disclose its quantified total 
revenue performance in each covered fiscal year.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                       Value of initial fixed
                                                                          Average                       $100 investment based
                                          Summary                         summary         Average                on:
                                       compensation    Compensation    compensation    compensation  --------------------------               [Company-
                Year                    table total    actually paid    table total    actually paid                Peer group   Net income    selected
                                          for PEO         to PEO        for non-PEO     to non-PEO       Total        total                   measure] *
                                                                           NEOs            NEOs       shareholder  shareholder
                                                                                                         return      return *
(a)                                              (b)             (c)             (d)             (e)          (f)          (g)          (h)          (i)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Y1..................................  ..............  ..............  ..............  ..............  ...........  ...........  ...........  ...........
Y2..................................  ..............  ..............  ..............  ..............  ...........  ...........  ...........  ...........
Y3..................................  ..............  ..............  ..............  ..............  ...........  ...........  ...........  ...........
Y4 *................................  ..............  ..............  ..............  ..............  ...........  ...........  ...........  ...........
Y5 *................................  ..............  ..............  ..............  ..............  ...........  ...........  ...........  ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 55137]]

    In addition, registrants are required to use the information in the 
above table to provide clear descriptions of the relationships between 
compensation actually paid and three measures of financial performance, 
as follows: describe the relationship between (a) the executive 
compensation actually paid to the registrant's PEO and (b) the average 
of the executive compensation actually paid to the registrant's 
remaining NEOs to (i) the cumulative TSR of the registrant, (ii) the 
net income of the registrant, and (iii) the registrant's Company-
Selected Measure, in each case over the registrant's five most recently 
completed fiscal years. Registrants are also required to provide a 
clear description of the relationship between the registrant's TSR and 
the TSR of a peer group chosen by the registrant, also over the 
registrant's five most recently completed fiscal years. Registrants 
have flexibility as to the format in which to present the descriptions 
of these relationships, whether graphical, narrative, or a combination 
of the two. Registrants will also have the flexibility to decide 
whether to group any of these relationship disclosures together when 
presenting their clear description disclosure, but any combined 
description of multiple relationships must be ``clear.'' SRCs will only 
be required to present such clear descriptions with respect to the 
measures they are required to include in the table and for their three, 
rather than five, most recently completed fiscal years.
    A registrant that is not an SRC also will be required to provide an 
unranked list of the most important financial performance measures used 
by the registrant to link executive compensation actually paid to the 
registrant's NEOs during the last fiscal year to company performance. 
Although, as discussed below, registrants may include non-financial 
performance measures in this list, they must select the Company-
Selected Measure from the financial performance measures included in 
this list, and it must be the financial performance measure that in the 
registrant's assessment represents the most important performance 
measure (that is not otherwise required to be disclosed in the table) 
used by the registrant to link compensation actually paid to the 
registrant's NEOs, for the most recently completed fiscal year, to 
company performance.\21\
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    \21\ Registrants that do not use any financial performance 
measures to link executive compensation actually paid to company 
performance, or that only use measures already required to be 
disclosed in the table, would not be required to disclose a Company-
Selected Measure or its relationship to executive compensation 
actually paid.
---------------------------------------------------------------------------

    As discussed below, the final rules permit registrants to 
voluntarily provide supplemental measures of compensation or financial 
performance (in the table or in other disclosure), and other 
supplemental disclosures, so long as any such measure or disclosure is 
clearly identified as supplemental, not misleading, and not presented 
with greater prominence than the required disclosure.\22\
---------------------------------------------------------------------------

    \22\ See infra Section II.F.3.
---------------------------------------------------------------------------

    The final rules apply to all reporting companies except foreign 
private issuers, registered investment companies, and emerging growth 
companies (``EGCs'').\23\ As proposed, BDCs will be treated in the same 
manner as issuers other than registered investment companies and, 
therefore, be subject to the disclosure requirement of new Item 402(v) 
of Regulation S-K.
---------------------------------------------------------------------------

    \23\ ``Emerging growth company'' means an issuer that had total 
annual gross revenues of less than $1.07 billion during its most 
recently completed fiscal year. An issuer that is an emerging growth 
company as of the first day of that fiscal year shall continue to be 
deemed an emerging growth company until the earliest of: (i) the 
last day of the fiscal year of the issuer during which it had total 
annual gross revenues of $1.07 billion or more; (ii) the last day of 
the fiscal year of the issuer following the fifth anniversary of the 
date of the first sale of common equity securities of the issuer 
pursuant to an effective registration statement under the Securities 
Act of 1933 [15 U.S.C. 77a et seq.]; (iii) the date on which such 
issuer has, during the previous three year period, issued more than 
$1 billion in non-convertible debt; or (iv) the date on which such 
issuer is deemed to be a large accelerated filer. 17 CFR 240.12b-2. 
Section 102(a)(2) of the Jumpstart Our Business Startups Act amended 
Section 14(i) to exclude registrants that are EGCs from the pay-
versus-performance disclosure requirements. Public Law 112-106, 126 
Stat. 306 (2012). In accordance with this provision, the Commission 
did not propose to require EGCs to provide pay-versus-performance 
disclosure.
---------------------------------------------------------------------------

II. Discussion of Final Amendments

A. New Item 402(v) of Regulation S-K

1. Application and Operation of Item 402(v) of Regulation S-K
i. Proposed Amendments
    We proposed including the pay-versus-performance disclosure in a 
new Item 402(v) of Regulation S-K, as 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. We proposed requiring registrants to 
include the Item 402(v) of Regulation S-K disclosure in any proxy or 
information statement for which disclosure under Item 402 of Regulation 
S-K is required.\24\ By including the requirement in Item 402 of 
Regulation S-K and requiring this disclosure in proxy statements on 
Schedule 14A and in information statements on Schedule 14C, 
shareholders would have available the pay-versus-performance 
disclosure, along with all other executive compensation disclosures 
called for by Item 402 of Regulation S-K, in circumstances in which 
shareholder action is to be taken with regard to executive compensation 
or an election of directors.
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    \24\ The disclosure called for under Item 402 of Regulation S-K 
is required under Item 8 of Schedule 14A, and Item 1 of Schedule 
14C. Schedule 14C correlates with the items of 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)] (``Section 14(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.
---------------------------------------------------------------------------

    Because 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, we proposed limiting the 
requirement to provide these disclosures to a registrant's proxy or 
information statement, instead of in all filings where disclosure under 
Item 402 of Regulation S-K is required (which would also include a 
registrant's Form 10-K \25\ and Securities Act \26\ registration 
statements). In addition, as proposed, the information would 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.
---------------------------------------------------------------------------

    \25\ 17 CFR 249.310.
    \26\ 15 U.S.C. 77a et seq.
---------------------------------------------------------------------------

ii. Comments
    Some commenters generally supported the proposed approach,\27\ with 
one noting that including the disclosure in proxy and information 
statements would provide ``relevant information at a time when (a) it 
is most useful to shareowners and (b) shareowners are equipped to act 
on the information if they are so inclined.'' \28\

[[Page 55138]]

One commenter suggested that the Commission limit the requirement to 
include the pay-versus-performance information to proxy statements 
only, noting that any other document could just make reference to the 
proxy statement; \29\ while another commenter suggested the pay-versus-
performance information ``should be included in all materials/filings 
that discuss compensation.'' \30\
---------------------------------------------------------------------------

    \27\ See letters from Federal Home Loan Banks, dated July 2, 
2015 (``FHL Banks''); Financial Services Roundtable, dated July 6, 
2015 (``FSR''); and Ohio Public Employees Retirement System, dated 
July 6, 2015 (``OPERS''). Comment letters received in response to 
the Proposing Release and Reopening Release are available at https://www.sec.gov/comments/s7-07-15/s70715.htm.
    \28\ Letter from OPERS.
    \29\ See letter from Hermes Investment Management, dated July 7, 
2015 (``Hermes'').
    \30\ Letter from Regis Quirin, dated June 24, 2015 (``Quirin'').
---------------------------------------------------------------------------

iii. Final Amendments
    As proposed, we are adopting the requirement to include the new 
Item 402(v) of Regulation S-K disclosure in any proxy or information 
statement for which disclosure under Item 402 of Regulation S-K is 
required. As noted by commenters \31\ and in the Proposing Release, 
placing the pay-versus-performance information in proxy statements and 
information statements will provide shareholders with the pay-versus-
performance disclosure (along with all other executive compensation 
disclosures called for by Item 402 of Regulation S-K) in circumstances 
in which shareholder action is to be taken with regard to an election 
of directors or executive compensation. We are not requiring the pay-
versus-performance disclosure in other filings where disclosure under 
Item 402 of Regulation S-K is required, as we believe that, taken in 
context, the language of Section 14(i) calling for registrants to 
provide the disclosure ``in any proxy or consent solicitation material 
for an annual meeting of the shareholders'' suggests that the 
information was intended to be presented in conjunction with a 
shareholder vote.
---------------------------------------------------------------------------

    \31\ See letters from FHL Banks and OPERS.
---------------------------------------------------------------------------

2. Format and Location of Disclosure
i. Proposed Amendments
    Section 14(i) 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 proposed 
allowing registrants to decide where in the proxy or information 
statement to provide the required disclosure. Although the new 
disclosure item 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, the 
Proposing Release indicated that it would be appropriate to provide 
flexibility for registrants in determining where in the proxy or 
information statement to provide the disclosure.
    We proposed requiring registrants to provide a standardized table 
containing the values of:
     The total PEO compensation reported in the Summary 
Compensation Table;
     The value of executive compensation actually paid to the 
PEO;
     For NEOs (other than the PEO), the average total 
compensation reported in the Summary Compensation Table;
     The value of the average executive compensation actually 
paid to the NEOs (other than the PEO);
     The value of a fixed investment scaled by cumulative TSR, 
for the registrant; and
     The value of a fixed investment scaled by cumulative TSR 
for the selected peer group.
    For the amounts disclosed as executive compensation actually paid, 
we proposed requiring footnote disclosure of the amounts that were 
deducted from, and added to, the Summary Compensation Table total 
compensation amounts to calculate the executive compensation actually 
paid,\32\ and footnote disclosure of vesting date valuation 
assumptions.
---------------------------------------------------------------------------

    \32\ See infra Section II.C (discussing the adjustments proposed 
to be made to the Summary Compensation Table total compensation to 
calculate executive compensation actually paid).
---------------------------------------------------------------------------

    Because the statute specifically references disclosure of the 
relationship between executive compensation actually paid and 
registrant's financial performance, we proposed requiring registrants, 
using the values presented in the table, 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. The disclosure about the relationship would follow the 
table and could be described as a narrative, graphically, or a 
combination of the two.
    In the Reopening Release, we requested comment on requiring the 
tabular disclosure to include disclosure of income or loss before 
income tax expense,\33\ net income, and a Company-Selected Measure. We 
also requested comment on requiring registrants to provide a clear 
description of the relationship of each of these additional measures to 
executive compensation actually paid, but, consistent with the 
relationship descriptions proposed with respect to TSR and peer group 
TSR, allowing the registrant to choose the format used to present the 
relationship, such as a graphical or narrative description (or a 
combination of the two).
---------------------------------------------------------------------------

    \33\ In the Reopening Release we used the term ``pre-tax net 
income,'' but are using the phrase ``income or loss before income 
tax expense'' in this release, to be consistent with the language in 
17 CFR part 210 (``Regulation S-X'').
---------------------------------------------------------------------------

    We also proposed that the disclosure be provided in interactive 
data format using machine-readable eXtensible Business Reporting 
Language (``XBRL''). Specifically, the proposal would require 
registrants to tag separately the values disclosed in the required 
table, and to separately block-text tag the required relationship 
disclosure and the footnote disclosures.\34\ In the Reopening Release, 
we requested comment on whether we should require registrants also to 
tag specific data points (such as quantitative amounts) within the 
footnote disclosures that would be block-text tagged, and to use Inline 
XBRL rather than XBRL to tag their pay-versus-performance 
disclosure.\35\
---------------------------------------------------------------------------

    \34\ Specifically, the proposed approach would require 
registrants to provide the interactive data 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; and 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.
    \35\ Subsequent to the proposal, the Commission adopted rules 
replacing XBRL tagging requirements for registrant financial 
statements with Inline XBRL tagging requirements. Inline XBRL embeds 
the machine-readable tags in the human-readable document itself, 
rather than in a separate exhibit. See Inline XBRL Filing of Tagged 
Data, Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 
2018)]. In 2020, the Commission adopted rules requiring BDCs to tag 
their financial statements and certain prospectus disclosures in 
Inline XBRL. See Securities Offering Reform for Closed-End 
Investment Companies, Release No. IC-33836 (Apr. 8, 2020) [85 FR 
33290 (June 1, 2020)]. The following year, the Commission required 
operating companies, BDCs, and non-interval registered closed-end 
funds to tag their filing fee exhibits on certain forms in Inline 
XBRL. See Filing Fee Disclosure and Payment Methods Modernization, 
Release No. 33-10997 (Oct. 13, 2021) [86 FR 70166 (Dec. 9, 2021)].
---------------------------------------------------------------------------

ii. Comments
    Commenters were divided over whether we should require registrants 
to include the pay-versus-performance disclosure in the CD&A,\36\ or 
allow registrants to decide where in the proxy or information statement 
to provide the required disclosure, as proposed.\37\

[[Page 55139]]

Commenters in favor of allowing registrants to decide where to provide 
the disclosure argued that including the disclosure in the CD&A could 
cause confusion, as registrants do not necessarily consider the 
information included in the pay-versus-performance disclosure when 
making decisions about executive compensation. Those in favor of 
locating the disclosure in the CD&A stated that locating the disclosure 
alongside other executive compensation disclosure would make the 
disclosure easier to locate for investors and provide investors the 
ability to more easily assess the pay-versus-performance disclosure.
---------------------------------------------------------------------------

    \36\ See letters from California Public Employees Retirement 
System Investment Office, dated July 6, 2015 (``CalPERS 2015''); CFA 
Institute, dated July 6, 2015 (``CFA''); Farient Advisors LLC, dated 
July 6, 2015 (``Farient''); and Teachers Insurance Annuity 
Association of America, dated July 6, 2015 (``TIAA'').
    \37\ See letters from Compensation Advisory Partners, dated July 
2, 2015 (``CAP''); Celanese Corp., dated June 12, 2015 
(``Celanese''); Frederic W. Cook & Co., dated June 24, 2015 
(``Cook''); Steven Hall ad Partners, dated July 6, 2015 (``Hall''); 
and Pearl, Myers and Partners, dated July 6, 2015 (``Pearl''). See 
also letter from Axcelis Technologies, Inc., dated Jan. 31, 2022 
(suggesting that pay and performance data for all companies should 
be made available on a new Commission website, rather than in 
individual registrant disclosures).
---------------------------------------------------------------------------

    Commenters were also divided on the proposal to require the 
disclosure in a tabular format. Some commenters generally supported the 
proposed tabular disclosure,\38\ while others opposed the tabular 
format, suggesting it was overly simplistic and would require 
significant supplemental disclosures.\39\
---------------------------------------------------------------------------

    \38\ See letters from AllianceBernstein L.P., dated Mar. 4, 2022 
(``AB''); As You Sow, dated July 2, 2015 (``As You Sow 2015''); CAP; 
Farient; Hermes; and OPERS.
    \39\ See letters from Aspen Institute's Business and Society 
Program, dated July 6, 2015 (``Aspen''); Celanese; Center on 
Executive Compensation, dated July 6, 2015 (``CEC 2015''); Corporate 
Governance Coalition for Investor Value, dated July 23, 2015 
(``Coalition''); Honeywell International Inc., dated July 2, 2015 
(``Honeywell''); International Bancshares Corp., dated June 29, 2015 
(``IBC 2015''); McGuireWoods LLP and Brownstein Hyatt Farber 
Schreck, LLP, dated Mar. 4, 2022 (``McGuireWoods''); and National 
Association of Manufacturers, dated July 6, 2015 (``NAM 2015'').
---------------------------------------------------------------------------

    We received significant comment on the specific performance 
measures to be included in the table, as discussed in Section II.E 
below. With respect to the other information proposed to be provided in 
the tabular format, one commenter suggested dividing the table to 
separate the TSR disclosure from the compensation actually paid 
disclosure.\40\ In addition, some commenters opposed requiring 
disclosure of the total compensation from the Summary Compensation 
Table,\41\ with one stating that ``including the SCT data would result 
in redundancy, would add a second figure which is not representative of 
compensation actually paid, and could result in possible confusion to 
shareholders.'' \42\ However, other commenters supported the inclusion 
of the Summary Compensation Table total compensation figures,\43\ with 
one suggesting that including the Summary Compensation Table figures 
would help investors understand the pay-versus-performance disclosure 
alongside the Summary Compensation Table disclosure when evaluating a 
registrant's annual compensation decisions,\44\ and another noting that 
the Summary Compensation Table figures ``will help to clarify potential 
differences between reported compensation and compensation actually 
paid.'' \45\
---------------------------------------------------------------------------

    \40\ See letter from AON Hewitt, dated July 6, 2015 (``AON'').
    \41\ See letters from CEC 2015; Exxon Mobil Corp., dated June 
23, 2015 (``Exxon''); Hall; McGuireWoods; Pay Governance LLC, dated 
June 30, 2015 (``PG 2015''); Pearl; Technical Compensation Advisors, 
dated July 6, 2015 (``TCA 2015''); and Technical Compensation 
Advisors, dated. Mar. 4, 2022 (``TCA 2022'').
    \42\ Letter from PG 2015.
    \43\ See letters from American Federation of Labor and Congress 
of Industrial Organizations, dated June 30, 2015 (``AFL-CIO 2015''); 
CalPERS 2015; and CAP.
    \44\ See letter from AFL-CIO 2015.
    \45\ Letter from CAP.
---------------------------------------------------------------------------

    A number of commenters suggested that we require or allow graphical 
disclosures. Some commenters suggested requiring graphical 
disclosure,\46\ while one specifically supported giving registrants the 
flexibility to choose whether to include graphical disclosure.\47\ A 
few of these commenters suggested requiring inclusion of the 
performance graph required in Item 201(e) of Regulation S-K, or a 
modified version of that graph.\48\ In addition, a few commenters 
suggested the Commission mandate formatting requirements for graphical 
disclosure, if graphical disclosure is permitted.\49\ One commenter 
suggested that we replace the tabular disclosure requirement with a 
graphical disclosure requirement depicting TSR and compensation 
actually paid,\50\ while another commenter stated that a prescribed 
graphical format would facilitate comparability.\51\
---------------------------------------------------------------------------

    \46\ See letters from AFL-CIO 2015 (stating that a graph would 
be especially useful if it disclosed (1) the change between 
executive compensation actually paid and the Summary Compensation 
Table figure and (2) the TSRs of both the registrant and a peer 
group over all five disclosure years); CalPERS 2015 (suggesting line 
graphs be required in addition to tabular and narrative 
disclosures); Council of Institutional Investors, dated June 25, 
2015 (``CII 2015'') (suggesting the Commission require registrants 
to disclose, at a minimum, ``a graph providing executive 
compensation actually paid and change in TSR on parallel axes and 
plotting compensation and TSR over the required time period''); 
Corning Inc., dated June 12, 2015 (``Corning'') (suggesting 
requiring the graph included in Item 201(e) of Regulation S-K); 
OPERS (suggesting requiring a line graph, showing TSR coupled with a 
corresponding line showing the executive compensation as a group); 
and Shareholder Value Advisors, dated July 6, 2015 (``SVA'') 
(suggesting requiring the inclusion of a scatterplot).
    \47\ See letter from Hall.
    \48\ See letters from Allison Transmission Holdings, Inc., dated 
July 6, 2015 (``Allison''); and Corning. But see letters from CAP; 
Center for Capital Markets Competitiveness, dated June 30, 2015 
(``CCMC 2015''); Davis Polk and Wardwell LLP, dated July 2, 2015 
(``Davis Polk 2015''); and McGuireWoods (each opposing the inclusion 
of the performance graph).
    \49\ See letters from Hermes and PG 2015. But see letter from 
Hall (recommending allowing registrants to choose their own 
graphical disclosure).
    \50\ See letter from Meridian Compensation Partners, dated July 
6, 2015 (``Meridian'').
    \51\ See letter from OPERS.
---------------------------------------------------------------------------

    One commenter generally supported the requirement to provide a 
clear description of the relationship between the measures disclosed in 
the table and executive compensation, stating that a ``simple-to-
understand approach would be particularly valuable to investors.'' \52\ 
Another commenter, who supported requiring disclosure only of one (or 
more) Company-Selected Measure(s), indicated that registrants should be 
required to provide a clear description of the relationship between the 
Company-Selected Measure(s) in the table and executive 
compensation.\53\
---------------------------------------------------------------------------

    \52\ See letter from Principles for Responsible Investment, 
dated Mar. 4, 2022 (``PRI'').
    \53\ See letter from National Association of Manufacturers, 
dated Mar. 4, 2022 (``NAM 2022'').
---------------------------------------------------------------------------

    Commenters were divided on the proposed XBRL tagging requirement. 
Of the commenters who opposed the requirement,\54\ some made 
alternative suggestions such as only requiring block-tagging,\55\ only 
requiring tagging of the information in the table,\56\ delaying the 
implementation of the tagging requirement,\57\ or permitting but not 
requiring tagging.\58\ One commenter stated the Commission should 
proceed ``cautiously'' to ensure that the cost of tagging does not 
outweigh the benefits,\59\ while another suggested the Commission 
should provide data on how many investors use XBRL disclosures before 
implementing the requirement.\60\ However, a number of commenters 
supported the XBRL

[[Page 55140]]

requirement,\61\ with one suggesting that tagging should be required 
for the actual metrics registrants use to determine executive 
compensation.\62\
---------------------------------------------------------------------------

    \54\ See letters from CCMC 2015; CEC 2015; Celanese; Davis Polk 
2015; Jon Faulkner, dated May 4, 2015 (``Faulkner''); FedEx Corp., 
dated July 6, 2015 (``FedEx 2015''); Hyster-Yale Materials Handling 
Inc., dated June 10, 2015 (``Hyster-Yale''); IBC 2015; McGuireWoods; 
NACCO Industries, Inc., dated June 9, 2015 (``NACCO''); Pearl; 
Society for Corporate Governance, dated Mar. 10, 2022 (``SCG''); and 
Society of Corporate Secretaries and Governance Professionals, dated 
July 7, 2015 (``SCSGP'').
    \55\ See letter from Pearl.
    \56\ See letters from Hyster-Yale and NACCO.
    \57\ See letters from Mercer, dated July 6, 2015 (``Mercer'') 
and NACCO.
    \58\ See letter from CII 2015.
    \59\ See letter from National Investor Relations Institute, 
dated July 10, 2015 (``NIRI 2015'').
    \60\ See letter from CCMC 2015.
    \61\ See letters from AFL-CIO 2015; CalPERS 2015; Public 
Citizen, dated July 6, 2015 (``Public Citizen 2015''); and State 
Board of Administration of Florida, dated July 6, 2015 (``SBA-FL''). 
See also CII 2015 (agreeing with the Commission's rationale for 
requiring tagging, and not opposing the Commission requiring XBRL 
tagging, but suggesting that ``permitting, rather than requiring, 
registrants to tag data when registrant-specific extensions are 
necessary may be more appropriate'').
    \62\ See letter from AFL-CIO 2015.
---------------------------------------------------------------------------

    In response to the Reopening Release request for comment regarding 
Inline XBRL, a number of commenters suggested requiring all registrants 
to use Inline XBRL to tag their pay-versus-performance disclosure, 
including the tagging of specific data points within the footnote 
disclosures that would be block-text tagged.\63\ One commenter directly 
opposed requiring the use of the Inline XBRL (as considered in the 
Reopening Release),\64\ while another commenter, who generally opposed 
an XBRL tagging requirement, stated that, if XBRL tagging is required, 
Inline XBRL tagging should be permitted.\65\ One commenter suggested 
the Commission give time for registrants to implement any XBRL 
requirements, due to the ``stylized'' nature of proxy statements, and 
that there may be a learning curve because registrant staff preparing 
the proxy statement may be different from the staff preparing documents 
that are subject to current tagging requirements.\66\
---------------------------------------------------------------------------

    \63\ See letters from Council of Institutional Investors, dated 
Feb. 24, 2022 (``CII 2022''); Steven Huddart, dated Mar. 4, 2022 
(``Huddart''); International Corporate Governance Network, dated 
Mar. 4, 2022 (``ICGN''); and XBRL US, dated Mar. 4, 2022 (``XBRL 
US'').
    \64\ See letter from Davis Polk and Wardwell LLP, dated Mar. 4, 
2022 (``Davis Polk 2022'') (noting that, while the use of Inline 
XBRL ``could increase the ability of investors to compare across 
filers, . . . the initial compliance costs, the quality and the 
extent of use of XBRL data by investors would not justify the cost 
of creating XBRL data in company filings,'' and therefore 
specifically recommending not requiring the use of Inline XBRL).
    \65\ See letter from McGuireWoods.
    \66\ See letter from XBRL US.
---------------------------------------------------------------------------

iii. Final Amendments
    The final rules provide registrants flexibility in determining 
where in the proxy or information statement to provide the disclosure 
required, as proposed. We believe, as noted in the Proposing Release 
and by some commenters, that mandating registrants to include the 
disclosure in the CD&A may cause confusion by suggesting that the 
registrant considered the pay-versus-performance relationship in its 
compensation decisions, which may or may not be the case.
    We are adopting the tabular disclosure format, as proposed, with 
the addition of two new financial performance measures--net income and 
the Company-Selected Measure--as considered in the Reopening Release. 
Each of these financial performance measures is discussed in more 
detail below.\67\ We are not persuaded by commenters who characterized 
the tabular disclosure requirement as overly simplistic. The simplicity 
of the tabular disclosure should allow investors to more easily 
understand and analyze the relationship between pay and performance. In 
addition, registrants can supplement the tabular disclosure, so long as 
any additional disclosure is clearly identified as supplemental, not 
misleading, and not presented with greater prominence than the required 
disclosure. We also believe the simplicity of the tabular disclosure 
matches the requirement in Section 14(i) that registrants provide a 
``clear description'' of their pay-versus-performance, and, consistent 
with Section 14(i), will better allow investors to compare disclosures 
within companies over time and across companies, making the disclosure 
more useful.
---------------------------------------------------------------------------

    \67\ See infra Sections II.D.1 (discussing TSR and peer group 
TSR); II.D.2 (discussing net income); and II.D.4 (discussing the 
Company-Selected Measure).
---------------------------------------------------------------------------

    We are adopting the requirement to include the Summary Compensation 
Table total compensation amounts for the PEO and the average (i.e., 
mean) of the remaining NEOs, as proposed. Those amounts will appear in 
columns (c) and (e) of the Pay Versus Performance table, respectively. 
We believe including these figures as proposed will provide useful 
information to investors, especially as the ``actually paid'' figures 
are directly related to those figures. Requiring disclosure of the 
Summary Compensation Table measure of total compensation together with 
executive compensation actually paid will provide shareholders with 
disclosure of two measures in one single table and, we believe, will 
facilitate comparisons of the two measures of a registrant's executive 
compensation to the registrant's performance.\68\ For example, 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 alongside 
executive compensation actually paid in the tabular disclosure. As 
proposed, the final rules will require registrants to provide footnote 
disclosure of the amounts that are deducted from, and added to, the 
Summary Compensation Table total compensation amounts reported in 
columns (c) and (e) to calculate the executive compensation actually 
paid amounts reported in columns (d) and (f), respectively. We believe 
any confusion created by the inclusion of the Summary Compensation 
Table totals in the table will be mitigated by this required footnote 
disclosure.
---------------------------------------------------------------------------

    \68\ For example, placing the Summary Compensation Table and 
actually paid figures side-by-side may make it easier for investors 
to follow the footnote disclosures in which the registrant explains 
how compensation actually paid differs from the Summary Compensation 
Table amounts.
---------------------------------------------------------------------------

    As proposed, registrants must also provide a narrative, graphical, 
or combined narrative and graphical description of the relationships 
between executive compensation actually paid and the registrant's TSR, 
and between the registrant's TSR and peer group TSR. We believe the 
disclosure of the relationship between executive compensation actually 
paid and TSR will satisfy the language of Section 14(i) that 
registrants disclose the ``relationship'' between executive 
compensation and registrant performance. Further, as noted in the 
Proposing Release, we believe disclosure about the relationship between 
registrant TSR and peer group TSR 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.\69\
---------------------------------------------------------------------------

    \69\ Peer comparisons are a component companies often use to 
assess the performance of their executives. See, e.g., John Bizjak, 
Swaminathan Kalpathy, Zhichuan Frank Li, & Brian Young, The Choice 
of Peers for Relative Performance Evaluation in Executive 
Compensation, 26 Rev. Fin. __(forthcoming 2022), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2833309 (finding 
that, in a sample of the largest 750 U.S. companies (by market 
capitalization), ``over 50%'' of companies in 2017 used performance 
awards based on performance relative to a peer group, ``comprising 
approximately one-third of the value of total compensation'').
---------------------------------------------------------------------------

    In light of the addition of two new performance measures to the 
table, we are also adopting a requirement that registrants provide a 
clear description of the relationships between executive compensation 
actually paid and net income, and between executive compensation 
actually paid and the Company-Selected Measure. These descriptions may 
also be provided in narrative, graphical, or combined narrative and 
graphical format. Since some of these measures and

[[Page 55141]]

relationships may be more important to some companies or investors than 
others, we believe including disclosure about each of these 
relationships will provide investors with a more complete picture of 
how pay relates to performance.
    We believe permitting, but not mandating, graphical disclosure is 
consistent with an acknowledgement in the Senate Report that there 
could be many ways to disclose the relationship between executive 
compensation and financial performance of the registrant,\70\ and the 
specific language of Section 14(i), which provides the pay-versus-
performance disclosures ``may'' include graphic representations. We 
encourage registrants to present this disclosure in the format that 
most clearly provides information to investors about the relationships, 
based on the nature of each measure and how it is associated with 
executive compensation actually paid. As discussed in the Proposing 
Release, the required relationship disclosure could include, for 
example, a graph providing executive compensation actually paid and 
change in the financial performance measure(s) (TSR, net income, or 
Company-Selected Measure) on parallel axes and plotting compensation 
and such measure(s) over the required time period. Alternatively, the 
required relationship disclosure could include narrative or tabular 
disclosure showing the percentage change over each year of the required 
time period in both executive compensation actually paid and the 
financial performance measure(s) together with a brief discussion of 
how those changes are related. The required table, along with the 
required relationship disclosures, should provide investors with clear 
information from which to determine the relationship between executive 
compensation actually paid and some basic facets of registrant 
financial performance. In addition, although the presentation format 
used by different registrants to demonstrate the relationship between 
executive compensation actually paid and the financial performance 
measures included in the table pursuant to Item 402(v) of Regulation S-
K may vary, these more variable descriptions may allow investors to 
understand more easily the registrant's perspective on these required 
relationship disclosures.
---------------------------------------------------------------------------

    \70\ See supra note 4 and accompanying text.
---------------------------------------------------------------------------

    The final rules require registrants to separately tag each value 
disclosed in the table, block-text tag the footnote and relationship 
disclosure, and tag specific data points (such as quantitative amounts) 
within the footnote disclosures, all in Inline XBRL. We recognize that, 
as noted by commenters,\71\ the requirement that registrants use Inline 
XBRL will increase costs for registrants. However, we believe these 
costs will be incremental, as registrants are subject to Inline XBRL 
tagging requirements for other Commission disclosures.\72\ In addition, 
we believe that requiring the data to be structured will lower the cost 
to investors of collecting this information, permit data to be analyzed 
more quickly, and facilitate comparisons among public companies, all of 
which justify the incremental cost to registrants. We also believe that 
the registrants who will be subject to the pay-versus-performance rule 
are familiar with Inline XBRL,\73\ and for that reason do not believe 
additional data about the complexity of Inline XBRL, or a phase-in 
period for the application of the requirement (other than as proposed 
for SRCs, as discussed below \74\), are necessary. With respect to 
comments questioning the utility of a structured data language, we note 
that investors and market participants have gained experience with XBRL 
and Inline XBRL filings since the time of the Proposing Release, and 
that there is increased evidence that data in these formats is useful 
to investors.\75\
---------------------------------------------------------------------------

    \71\ See, e.g., letter from Davis Polk 2022.
    \72\ See supra note 35 (noting that subsequent to issuing the 
Proposing Release, the Commission adopted rules replacing XBRL 
tagging requirements for registrant financial statements with Inline 
XBRL tagging requirements). See also Inline XBRL Filing of Tagged 
Data, Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 
2018)].
    \73\ See infra Section V.C.4.ii.
    \74\ See infra Section II.G.iii.
    \75\ See infra Section V.C.4.ii.
---------------------------------------------------------------------------

B. Executives Covered

1. Proposed Amendments
    Under the approach included in the Proposing Release, registrants 
other than SRCs would have been required to provide disclosure about 
``named executive officers,'' as defined in 17 CFR 229.402(a)(3); \76\ 
and SRCs would have been required to provide disclosure about ``named 
executive officers,'' as defined in 17 CFR 229.402(m).\77\ These are 
the executive officers for whom, under our current rules, compensation 
disclosure is required under Item 402 of Regulation S-K, including in 
the Summary Compensation Table and the other executive compensation 
disclosure requirements. Specifically, we proposed requiring 
registrants to separately disclose compensation information for the 
PEO, and as an average for the remaining NEOs. We also proposed that, 
if more than one person served as the PEO of the registrant in any 
year, the disclosure for those multiple PEOs would be aggregated for 
that year, because this reflects the total amount that was paid by the 
registrant for the services of a PEO.
---------------------------------------------------------------------------

    \76\ 17 CFR 229.402(a)(3) defines the NEOs for whom Item 402 of 
Regulation S-K executive compensation is required as (1) all 
individuals serving as the registrant's PEO during the last 
completed fiscal year, 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 of Regulation S-K 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 was proposed as new paragraph (v) to Item 402 of 
Regulation S-K, the disclosure also would be required for the NEOs.
    \77\ For SRCs, 17 CFR 229.402(m)(2) defines the NEOs for whom 
Item 402 of Regulation S-K executive compensation is required as (1) 
all individuals serving as the smaller reporting company's PEO 
during the last completed fiscal year, 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 Item 402 of 
Regulation S-K 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.
---------------------------------------------------------------------------

2. Comments
    A number of commenters supported requiring Item 402(v) of 
Regulation S-K to cover both PEOs and NEOs.\78\ These commenters noted 
that requiring Item 402(v) of Regulation S-K to cover PEOs and NEOs 
would be consistent with the disclosure in the Summary Compensation 
Table,\79\ and what Congress intended; \80\ and would provide investors 
with useful information about the registrant's compensation practices 
more broadly.\81\ However, a number of other commenters suggested we 
limit the disclosure to PEOs.\82\ Such commenters

[[Page 55142]]

raised concerns about the inclusion of non-PEO NEOs, including that: 
NEO groups may vary considerably from year to year; \83\ NEOs are more 
likely to have business-segment-based compensation, the performance of 
which might not be reflective of the registrant's overall performance; 
\84\ and not all NEOs are in positions to affect overall company 
performance.\85\ Commenters also stated that PEOs are under the most 
scrutiny from investors \86\ and are the only executives comparable 
across companies; \87\ and that requiring disclosure of non-PEO NEOs 
would create an increased reporting burden.\88\ In addition, one 
commenter expressed belief that Section 14(i) did not require the pay-
versus-performance disclosures to include non-PEO NEOs.\89\
---------------------------------------------------------------------------

    \78\ See letters from CalPERS 2015; CII 2015; CFA; Hay Group, 
Inc., dated July 6, 2015 (``Hay''); David Hook, dated May 3, 2015 
(``Hook''); OPERS; National Association of Corporate Directors, 
dated July 10, 2015 (``NACD 2015''); National Association of 
Corporate Directors, dated Mar. 10, 2022 (``NACD 2022''); and TIAA.
    \79\ See letters from CalPERS 2015; CFA; and Hay.
    \80\ See letter from CII 2015.
    \81\ See letter from CII 2015; CFA; OPERS; and TIAA.
    \82\ See letters from AON; BorgWarner Inc., dated Aug. 20, 2015 
(``BorgWarner''); CAP; CEC 2015; CCMC 2015; Celanese; Coalition; 
Corning; Davis Polk 2015; Exxon; FedEx 2015; FSR; Hall; Hodak Value 
Investors, dated July 2, 2015 (``Hodak''); Honeywell; Hyster-Yale; 
McGuireWoods; Mercer; NACCO; NIRI 2015; National Investor Relations 
Institute, dated Mar. 4, 2022 (``NIRI 2022''); Pearl; PNC Financial 
Services Group, dated July 6, 2015 (``PNC''); TCA 2015; TCA 2022; 
and WorldatWork, July 6, 2015 (``WorldatWork'').
    \83\ See letters from CCMC 2015; CEC 2015; Exxon; FSR; Meridian; 
Pearl; and PNC.
    \84\ See letters from Celanese; FSR; and PNC.
    \85\ See letters from CCMC 2015 and Coalition.
    \86\ See letters from CCMC 2015; CEC 2015; Corning; Davis Polk 
2015; FSR; NIRI 2015; NIRI 2022; Pearl; PNC; TCA 2015; and 
WorldatWork.
    \87\ See letter from TCA 2015.
    \88\ See letters from Davis Polk 2015 and WorldatWork.
    \89\ See letter from Coalition.
---------------------------------------------------------------------------

    Commenters were generally opposed to the proposal's approach of 
aggregating multiple PEOs for years when a registrant had more than one 
individual serve as PEO.\90\ These commenters proposed a number of 
alternatives to aggregation, including: allowing separate disclosure 
for each PEO; \91\ only requiring aggregation for external successors; 
\92\ only disclosing the compensation of the PEO serving at the end of 
the year (either annualized \93\ or not \94\); requiring disclosure of 
the outgoing PEO only; \95\ only aggregating payments for services 
rendered as PEO; \96\ requiring aggregated and disaggregated 
disclosures; \97\ or excluding any disclosures in years where the 
registrant has multiple PEOs.\98\ Additionally, a number of commenters 
opposed including signing and severance bonuses, either generally,\99\ 
or if the compensation of multiple PEOs were to be aggregated,\100\ 
while some other commenters more specifically stated that these bonuses 
were reasons not to aggregate PEO compensation.\101\
---------------------------------------------------------------------------

    \90\ See letters from AFL-CIO 2015; BorgWarner; Business 
Roundtable, dated July 6, 2015 (``BRT''); CCMC 2015; Coalition; 
Celanese; FedEx 2015; FSR; Hall; Honeywell; IBC 2015; McGuireWoods; 
Mercer; PG 2015; Pearl; TCA 2015; and TCA 2022.
    \91\ See letters from AFL-CIO 2015; BorgWarner; CCMC 2015; FedEx 
2015; Honeywell; SCSGP; TCA 2015; and TIAA.
    \92\ See letters from Cook and Pearl.
    \93\ See letters from FSR and Mercer.
    \94\ See letters from Mercer.
    \95\ See letters from Hodak and PG 2015.
    \96\ See letters from AON and SCSGP.
    \97\ See letters from As You Sow 2015 and Hermes.
    \98\ See letter from McGuireWoods.
    \99\ See letters from FedEx 2015 and SCSGP.
    \100\ See letters from CCMC 2015; Celanese; and Davis Polk 2015.
    \101\ See letters from FSR and Honeywell.
---------------------------------------------------------------------------

    A few commenters also opposed using the average NEO compensation in 
the table,\102\ while others supported average NEO compensation.\103\ A 
number of other commenters did not expressly oppose the use of average 
NEO compensation, but stated that this type of disclosure would provide 
little investor insight,\104\ could confuse investors,\105\ or would 
limit comparability.\106\ Two commenters suggested requiring separate 
disclosure for each NEO.\107\
---------------------------------------------------------------------------

    \102\ See letters from CEC 2015; Coalition; and Meridian.
    \103\ See letters from NACD 2015 and Pearl (generally opposing 
the disclosure of NEO compensation, but stating that it should be 
aggregated if required to be disclosed).
    \104\ See letter from Honeywell.
    \105\ See letter from IBC 2015.
    \106\ See letter from Meridian.
    \107\ See letters from Loring, Wolcott & Coolidge, dated Mar. 4, 
2022 (``LWC'') and OPERS.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting requirements for registrants to disclose 
information pertaining to both NEOs and PEOs in their Item 402(v) of 
Regulation S-K disclosure, as proposed. As noted in the Proposing 
Release, Section 14(i) does not specify which executives must be 
included in the pay-versus-performance disclosure. While we are mindful 
of concerns raised by commenters that individual NEOs may be in 
positions less likely to affect overall company performance than the 
PEO, may have more varied performance measures driving their 
compensation (including because NEOs within a company have different 
roles), can vary from year to year, and are less comparable across 
registrants (with respect to compensation), we believe that Congress 
intended for the rules to provide disclosure about both PEOs and the 
remaining NEOs because Section 14(i) specifically refers to 
``compensation required to be disclosed by the issuer under [Item 402 
of Regulation S-K],'' and Item 402 requires disclosure of NEO 
compensation. Further, while we agree that investors are typically most 
interested in the compensation of the PEO, as indicated by 
commenters,\108\ investors also are interested in how the incentives of 
NEOs relate to company performance, and our rationale of simplifying 
and reducing costs for investors who monitor executive performance 
therefore extends to NEOs.
---------------------------------------------------------------------------

    \108\ See supra note 86 and accompanying text.
---------------------------------------------------------------------------

    We are also adopting, as proposed, the requirement that registrants 
provide separate disclosure of the PEO's compensation. We believe this 
is appropriate because, as noted by commenters, investors frequently 
have more interest in PEO compensation, PEOs are generally more 
comparable across companies, and PEOs are frequently in a position to 
impact performance more than any other NEO.
    Similarly, we are adopting as proposed a requirement to include an 
average of compensation for the remaining NEOs. We disagree with 
commenters that suggested that average NEO compensation would provide 
little investor insight, could confuse investors, or would limit 
comparability. Rather, we believe disclosure of the relationship of 
performance to average NEO compensation will be more meaningful to 
shareholders than individual or aggregate NEO compensation. Because a 
registrant's individual NEOs may change from year to year, we believe 
that the disclosure of the average NEO compensation will make it easier 
for investors to compare the registrant's pay-versus-performance 
disclosure over time. Further, we believe disclosure of compensation 
for all NEOs (consisting of the PEO, and the remaining NEOs in the 
aggregate) aligns with our understanding of the intent of Congress that 
all NEOs be included in the pay-versus-performance disclosure. In 
addition, we are adopting a requirement that registrants identify in 
footnote disclosure the individual NEOs whose compensation amounts are 
included in the average for each year, so that investors can consider 
whether changes in the average compensation reported from year to year 
were due to compositional changes in the included NEOs. We believe this 
will alleviate concerns raised by commenters that the aggregation of 
NEOs could confuse investors.
    Although some commenters opposed our proposal to require an average 
of NEO compensation and suggested that we instead require the 
disclosure of compensation for each of the NEOs as separate columns in 
the table, we believe that approach could result in a lengthy and 
potentially confusing table, due to the fact that in any year there are 
multiple NEOs and, as noted by several

[[Page 55143]]

commenters,\109\ there can be frequent turnover in a registrant's NEOs 
from year to year. In addition, we are not permitting registrants to 
remove signing bonuses, severance bonuses, and other one-time payments 
from the amount of executive compensation actually paid, because, 
although those figures may not represent the executive's compensation 
in a `typical' year where no such payment is made, they do reflect 
amounts that are ``actually paid'' to the executives. Even if such 
payments are not ordinarily recurring with respect to a particular 
executive, shareholders voting on executive compensation or directors 
may wish to take into account the company resources devoted to such 
payments in light of the company's performance.
---------------------------------------------------------------------------

    \109\ See supra note 83.
---------------------------------------------------------------------------

    In a change from the proposal, in response to comments, the final 
rules do not require aggregating the compensation of PEOs in years when 
a registrant had multiple PEOs. Instead, the final rules require that, 
in those years, registrants include separate Summary Compensation Table 
total compensation and executive compensation actually paid columns for 
each PEO. For example, the below table shows the disclosure that would 
be required when there were two PEOs in ``Year 2'':

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Value of initial fixed
                                                                                                                     Average                    $100 investment based
                                                             Summary       Summary    Compensation  Compensation     summary       Average               on:
                                                          compensation  compensation    actually      actually    compensation  compensation --------------------------               [Company-
                          Year                             table total   table total     paid to       paid to     table total    actually                  Peer group   Net income    selected
                                                            for first    for second     first PEO    second PEO    for non-PEO  paid to non-     Total        total                    measure]
                                                               PEO           PEO                                      NEOs        PEO NEOs    shareholder  shareholder
                                                                                                                                                 return       return
                                                                   (a)           (b)           (b)           (c)           (d)           (e)          (f)          (g)          (h)          (i)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Y1......................................................           N/A             $           N/A             $             $             $            $            $            $            $
Y2......................................................             $             $             $             $             $             $            $            $            $            $
Y3......................................................             $           N/A             $           N/A             $             $            $            $            $            $
Y4......................................................             $           N/A             $           N/A             $             $            $            $            $            $
Y5......................................................             $           N/A             $           N/A             $             $            $            $            $            $
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    We believe including separate disclosure for each PEO, as 
recommended by some commenters,\110\ would address commenters' concerns 
that aggregating PEO disclosure could lead to confusing or misleading 
disclosure.\111\ In the case of multiple PEOs in a single year, this 
approach would make the table itself slightly longer, but it would have 
the added benefit of distinguishing the compensation paid to separate 
PEOs both visually and in the structured data, instead of presenting a 
potentially confusing aggregated figure in the table and only having 
discussion of the separate PEOs in footnote and narrative disclosure.
---------------------------------------------------------------------------

    \110\ See supra note 91.
    \111\ We note that a registrant may elect to provide additional 
information about its PEO or PEOs, such as the amount of time during 
the year each individual served as PEO, if the registrant believes 
that information would provide relevant context to investors.
---------------------------------------------------------------------------

C. Determination of Executive Compensation Actually Paid

    We proposed that ``executive compensation actually paid'' under 
Item 402(v) of Regulation S-K would be total compensation as reported 
in the Summary Compensation Table, modified to adjust the amounts 
included for pension benefits and equity awards. In both the Proposing 
and Reopening Releases, we requested comment on the proposed approaches 
to calculating these amounts, and whether the proposed definition 
appropriately captures the concept of ``executive compensation actually 
paid,'' and in the Proposing Release we offered an economic analysis of 
an alternative approach to calculating equity awards. We received 
significant comment, as discussed below, on the proposed approaches to 
calculating the amounts of pension benefits and equity awards to be 
included as ``actually paid.'' In addition, several commenters to the 
Proposing Release noted that the definition of compensation actually 
paid as proposed may result in some misalignment between the time 
period to which pay is attributed and the time period in which the 
associated performance is reported.\112\ After considering the 
statutory language and the comments received, we are adopting final 
rules for calculating the amounts reported for pension benefits and 
equity awards that are modifications of our proposed approach, 
including, as discussed further below, requiring equity awards to be 
revalued more frequently than as proposed. We believe that these 
approaches will more accurately reflect executive compensation actually 
paid, as required by Section 14(i), and mitigate commenter concerns 
about timing mismatches by more closely associating compensation with 
the period of the corresponding performance.
---------------------------------------------------------------------------

    \112\ See, e.g., letters from Allison; Celanese; CEC 2015; Cook; 
Coalition; Farient; Faulkner; FSR; Honeywell; NACCO; NACD 2015; NAM 
2015; Pearl; Ross Stores, Inc. dated June 26, 2015 (``Ross''); SVA; 
SBA-FL; TIAA; TCA 2015; and WorldatWork.
---------------------------------------------------------------------------

    Although 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. 
Because Congress was aware of the language of Item 402 at the time of 
the Dodd-Frank Act, and adopted text that did not mirror the language 
of that provision, 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 using as a 
starting point the total compensation that registrants already are 
required to report in the Summary Compensation Table and making 
adjustments to some of those figures is appropriate to give effect to 
the statutory language and reflect executive compensation that is 
``actually paid.'' \113\ Commenters generally agreed that adjustments 
to the Summary Compensation Table total

[[Page 55144]]

were appropriate to determine ``executive compensation actually paid,'' 
\114\ noting that there are some items reportable in the Summary 
Compensation Table total that are not reflective of compensation 
``actually paid''; \115\ or more generally suggesting that the Summary 
Compensation Table total is not reflective of ``executive compensation 
actually paid.'' \116\
---------------------------------------------------------------------------

    \113\ A few commenters on the proposed rules sought clarity on 
the disclosure required in circumstances where a registrant recovers 
(or ``claws back'') any portion of an executive officer's 
compensation. See letters from Hyster-Yale; IBC 2015; and NACCO. See 
also letters from BRT and NACD 2015 (noting that the proposed rules 
did not account for claw-backs). Consistent with the approach 
currently taken by registrants when reporting claw-backs in the 
Summary Compensation Table, when any portion of an executive 
officer's compensation for a fiscal year that is included in the 
table is clawed back, the amounts of executive compensation 
disclosed in response to Item 402(v) as the Summary Compensation 
Table Total and as the Compensation Actually Paid initially reported 
for such year should be adjusted to reflect the effects of the claw-
back, with footnote disclosure of the amount(s) recovered, when 
applicable.
    \114\ See, e.g., letters from AON; CAP; CEC 2015; Exxon; FedEx 
2015; FSR; Hall; Honeywell; Hyster-Yale; KPMG LLP, dated July 1, 
2015 (``KPMG''); Meridian; NACCO; NACD 2015; PG 2015; Public Citizen 
2015; SCSGP; SVA; TCA 2015; TCA 2022; TIAA; Towers Watson, dated 
July 6, 2015 (``Towers''); and WorldatWork. But see letter from IBC 
2015 (stating that ``the Summary Compensation Table already required 
by Regulation S-K is sufficient'').
    \115\ See letters from AON; CAP; CEC 2015; FedEx 2015; Hall; 
Honeywell; KPMG; Meridian; NACD 2015; Public Citizen 2015; SCSGP; 
SVA; TIAA; Towers; and WorldatWork.
    \116\ See letters from CEC 2015; Exxon; FSR (stating that 
``Congress did not intend that compensation [actually paid] would be 
determined by reference to the Summary Compensation Table''); Hall; 
Hyster-Yale (suggesting an approach where companies are permitted to 
define ``actually paid'' independently, and then reconcile those 
amounts with the Summary Compensation Table totals); NACCO (same); 
PG 2015; SVA; TCA 2015; and TCA 2022.
---------------------------------------------------------------------------

1. Deduction of Change in Actuarial Present Value and Addition of 
Actuarially Determined Service Cost and Prior Service Cost
i. Proposed Amendments
    We proposed requiring registrants to deduct the change in actuarial 
present value of all defined benefit and actuarial pension plans \117\ 
from the Summary Compensation Table total compensation figure, and to 
add back the actuarially determined service cost for services rendered 
by the executive during the applicable year,\118\ when calculating 
executive compensation actually paid. We proposed removing the change 
in actuarial present value of these plans in order to avoid potential 
volatility associated with revaluing previously accumulated benefits 
with changes in actuarial inputs and assumptions. However, as discussed 
in the Proposing Release, we believed that including the service cost 
from the applicable year was appropriate because it more closely 
reflected compensation ``actually paid'' during that year, in that it 
could be seen as an estimate of the value that would be set aside by 
the registrant to fund the benefits payable in retirement for the 
service provided during the applicable year. We also stated that we 
believed that using the actuarially determined service cost, instead of 
the Summary Compensation Table pension measure, may increase 
comparability across registrants of the amounts ``actually paid'' under 
both defined benefit and defined contribution plans. 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,\119\ which 
will also be included in computing compensation actually paid for 
purposes of the new disclosure.
---------------------------------------------------------------------------

    \117\ 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.
    \118\ 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.
    \119\ 17 CFR 229.402(c)(2)(ix)(E).
---------------------------------------------------------------------------

    In the Reopening Release, we stated that some commenters had 
noticed challenges with using the pension service cost approach to 
determining the value of pension benefits ``actually paid,'' and 
requested comment on whether there is an alternative measure of the 
change in pension value attributable to the applicable fiscal year that 
is better representative of the amount of pension benefits ``actually 
paid.''
ii. Comments
    Some commenters generally supported limiting the pension benefits 
included in executive compensation actually paid to service cost.\120\ 
In addition, some commenters supported the proposed deduction of the 
change in actuarial present value of defined benefit and pension plans 
not attributable to the applicable year of service,\121\ or generally 
supported the Commission's choice to exclude the value associated with 
actuarial assumptions.\122\
---------------------------------------------------------------------------

    \120\ See letters from Chris Barnard, dated June 24, 2015 
(``Barnard 2015''); Chris Barnard, dated Mar. 2, 2022 (``Barnard 
2022''); CAP; Hall; Exxon; and WorldatWork.
    \121\ See letters from CAP; CEC 2015; Exxon; TIAA; and Towers.
    \122\ See letter from NACD 2015.
---------------------------------------------------------------------------

    There were also a number of commenters who opposed the inclusion of 
pension service cost in executive compensation actually paid,\123\ 
noting it may remain subject to vesting conditions and may not ever 
actually be paid; \124\ has assumptions built in that would prevent 
comparability across registrants or distort the figure; \125\ is not 
presently calculated on a per participant basis, so would add cost; 
\126\ or generally that it does not equal compensation ``actually 
paid.'' \127\ However, a number of commenters who opposed the inclusion 
of service cost noted their view that it would be a better 
representation of compensation ``actually paid'' than the current 
Summary Compensation Table figure.\128\ A few commenters suggested 
excluding changes in pension values entirely,\129\ while some others 
suggested that the registrant should have the option to exclude service 
cost, if the executive is not vested in the pension benefits.\130\
---------------------------------------------------------------------------

    \123\ See letters from AON; CCMC 2015; CEC 2015; Honeywell; IBC 
2015; and NACCO.
    \124\ See letters from Honeywell and Towers.
    \125\ See letters CCMC 2015; IBC 2015; and Towers.
    \126\ See letters NACCO.
    \127\ See letters CEC 2015.
    \128\ See letters from AON; Honeywell; Pearl; and Towers.
    \129\ See letters from Coalition; Honeywell; and Pearl 
(advocating a realized pay approach that would exclude all pension 
associated values).
    \130\ See letters from AON (generally supporting the exclusion 
of all non-vested pension benefits); Hyster-Yale; and NACCO.
---------------------------------------------------------------------------

    A number of commenters suggested other ways to include pension 
amounts in executive compensation actually paid. Some commenters 
recommended an approach requiring registrants to calculate the change 
in pension value to equal the actuarial present value of the benefit 
earned during the year,\131\ noting that it tracks the actual pattern 
of benefit increases resulting from pay increases and plan 
amendments,\132\ and links directly to the existing approach and 
assumptions used for the Summary Compensation Table.\133\ Another 
suggested multiplying the value of the pension increase during the 
year, net of any inflationary increase and contribution by the 
employee, by twenty.\134\
---------------------------------------------------------------------------

    \131\ See letters from Mercer and Towers; see also letter from 
AON (suggesting the same, if pensions must be included in 
compensation actually paid). Other commenters recommended approaches 
similar to this approach. See letters from Barnard 2022 
(recommending that we include the change in the actuarial present 
value of pension benefits over the applicable fiscal year using the 
same economic assumptions as used in the calculation at the start of 
the applicable fiscal year); Exxon (recommending that we include the 
portion of the currently-reported change in pension values that is 
attributable to an additional year of service); and WorldatWork 
(same).
    \132\ See letter from Mercer.
    \133\ See letters from Mercer and Towers; see also letter from 
AON (suggesting the same, if pensions must be included in 
compensation actually paid).
    \134\ See letter from Hermes (specifically suggesting the 
Commission follow the United Kingdom's method of multiplying the 
value of the increase in annual pension benefit, net of any 
inflationary increase and contribution by the employee, by twenty).
---------------------------------------------------------------------------

    Some commenters requested clarification regarding the calculation 
of the service cost amount. Two commenters suggested alternatives to 
the application of FASB ASC Topic

[[Page 55145]]

715,\135\ with one suggesting that the Commission instead clarify that 
the intended measurement is the change in pension values attributable 
to an additional year of service,\136\ and the other suggesting the 
Commission use the accumulated benefit obligation service cost or the 
change in present value of accrued benefits, using the same assumptions 
at the beginning and end of each year.\137\ Two commenters suggested 
the Commission eliminate the reference to the required use of future 
salary increases to estimate service cost, because it would require 
significant new data and reveal new information to investors,\138\ with 
one also suggesting the Commission clarify that the intended 
measurement is the change in pension values attributable to an 
additional year of service.\139\
---------------------------------------------------------------------------

    \135\ See letters from AON and Exxon.
    \136\ See letter from Exxon.
    \137\ See letter from AON (alternatively suggesting a third 
alternative of disclosing the present value, using year end 
assumptions, of the increase in accrued benefit during the year).
    \138\ See letters from Towers and WorldatWork.
    \139\ See letter from WorldatWork.
---------------------------------------------------------------------------

    Three commenters responded to our request for comment in the 
Reopening Release asking if there is an alternative measure of the 
change in pension value attributable to the applicable fiscal year that 
is better representative of the amount of pension benefits ``actually 
paid.'' One suggested that the ``value of dollars set aside to provide 
a pension benefit to an executive'' be disclosed.\140\ Another 
suggested that registrants should be required to disclose the ``change 
in (increase) the actuarial present value of pension benefits over the 
applicable fiscal year using the same economic assumptions as used in 
the calculation at the start of the applicable fiscal year.'' \141\ The 
third stated that pension benefits should be fully excluded from the 
``actually paid'' amount, but also stated that service cost was ``far 
more representative of the compensation received'' than the change in 
actual present value amount included in the Summary Compensation Table 
total.\142\
---------------------------------------------------------------------------

    \140\ Letter from ICGN.
    \141\ Letter from Barnard 2022.
    \142\ Letter from Aon Human Capital Solutions, dated Mar. 4, 
2022 (``Aon HCS'').
---------------------------------------------------------------------------

iii. Final Amendments
    With respect to pension compensation, we are adopting final rules 
largely as proposed with a modification in response to commenters' 
suggestion to also include the value of plan amendments in the 
calculation of compensation actually paid. The final rules will require 
registrants to deduct from the Summary Compensation Table total the 
aggregate change in the actuarial present value of all defined benefit 
and actuarial pension plans,\143\ and add back the aggregate of two 
components: (1) actuarially determined service cost for services 
rendered by the executive during the applicable year, as proposed (the 
``service cost''); and (2) the entire cost of benefits granted in a 
plan amendment (or initiation) during the covered fiscal year that are 
attributed by the benefit formula to services rendered in periods prior 
to the plan amendment or initiation (the ``prior service cost''), in 
each case, calculated in accordance with U.S. Generally Accepted 
Accounting Principles (``U.S. GAAP'').\144\
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    \143\ As discussed below, smaller reporting companies would not 
need to deduct this amount or add the service cost because the 
Summary Compensation Table requirements for smaller reporting 
companies do not require disclosure of the change in actuarial 
present value. See infra Section II.G.3.
    \144\ See FASB ASC Topic 715.
---------------------------------------------------------------------------

    As noted above, 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. The change in actuarial present value 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 not reflected in the Summary 
Compensation Table and reported only in a footnote to column (h)), no 
amounts should be deducted for purposes of Item 402(v) of Regulation S-
K.
    The below table shows the changes from the proposed rules to the 
final rules with respect to pension compensation (specific changes are 
bolded and italicized):

------------------------------------------------------------------------
                                 Proposed Rules          Final Rules
------------------------------------------------------------------------
Deduct (from Summary          The aggregate change  The aggregate change
 Compensation Table total):.   in the actuarial      in the actuarial
                               present value of      present value of
                               all defined benefit   all defined benefit
                               and actuarial         and actuarial
                               pension plans.        pension plans.
Add back:...................  Service cost........  The aggregate of:
                                                    (1) Service cost;
                                                     and
                                                    (2) Prior service
                                                     cost.
------------------------------------------------------------------------

    We believe that it is appropriate to include pension compensation 
in the calculation of compensation ``actually paid.'' The adopted 
approach in particular provides an appropriate measure for purposes of 
determining compensation ``actually paid'' during the applicable year 
because it reflects the benefits an executive may expect to receive 
based on additional service the executive provided during the year (or 
service cost), and it incorporates additional benefits attributable to 
changes in the pension contract between the executive and the company 
(or prior service cost). In many cases, this measure will approximate 
the value that would be set aside currently by the registrant to fund 
the pension benefits payable upon retirement for the service provided, 
and any plan amendments made, during the applicable year. In addition, 
the inclusion of pension compensation is consistent with other 
compensation disclosure requirements, such as Item 402(c) of Regulation 
S-K. These same rationales apply whether or not the pension amounts are 
vested. Consistent with the equity compensation adjustment, the pension 
adjustment will be included even when unvested until an officer leaves 
the company.
    Another advantage to the approach we are adopting is that it is 
more closely associated with underlying information from the GAAP 
financial statements. In particular, the pension's service cost and 
prior service cost, while not required to be reported separately and 
for a subset of employees, is computed in the process of calculating 
the aggregate service cost and prior service cost at the plan level. As 
a result, a registrant would not be required to collect significant new 
data or prepare a new calculation of the actuarial present value of the 
benefit earned during the year, but would rather calculate service cost 
and prior service cost for a subset of employees for which the 
underlying information is already available and subject to internal 
control over financial reporting. The direct

[[Page 55146]]

relationship of this information to the amounts recognized in the 
audited financial statements may also provide an additional level of 
comfort to investors as to its accuracy and reliability. In addition, 
because this approach excludes changes that derive only from 
differences in the actuarial assumptions used to estimate the value of 
benefits already earned in prior periods, it will provide for a more 
meaningful comparison across registrants of the amounts ``actually 
paid'' under both defined benefit and defined contribution plans. 
Further, as noted above, commenters were generally more supportive of a 
service cost approach rather than an approach that would include the 
amount required to be disclosed in the Summary Compensation Table.\145\
---------------------------------------------------------------------------

    \145\ See supra notes 120 and 128.
---------------------------------------------------------------------------

    One weakness in the proposed approach, identified by 
commenters,\146\ was that the service cost approach would not fully 
account for changes in the value of an executive's expected benefit 
arising from plan amendments or initiations. Our modified approach as 
adopted addresses this concern by requiring that the registrant 
include, as a component of this item of compensation actually paid, the 
entire cost of benefits granted in a plan amendment (or initiation) 
that are attributed by the benefit formula to services rendered in 
periods prior to the plan amendment or initiation. Such prior service 
cost information is part of the underlying information required to 
account for a defined-benefit plan under U.S. GAAP.\147\
---------------------------------------------------------------------------

    \146\ See letters from AON and Mercer; see also letters from 
AON; Towers; and WorldatWork.
    \147\ See FASB ASC Topic 715.
---------------------------------------------------------------------------

    For purposes of the final rules, ``prior service cost'' also refers 
to any credit arising from a reduction in benefits related to services 
rendered in prior periods as a result of a negative plan amendment. We 
acknowledge that including the prior service credit associated with 
such a negative plan amendment would result in a reduction of 
compensation actually paid. We believe that such an outcome would be 
consistent with the statutory objective of capturing compensation 
actually paid, because the reduction in the accrued benefit reflects a 
reduction in compensation in the same manner that an increase in the 
accrued benefit reflects an increase in compensation.
    Although one commenter also noted that service cost would exclude 
the costs related to unexpected compensation changes,\148\ we are not 
adopting a modification in this regard. Under U.S. GAAP,\149\ the 
effects on the projected benefit obligation of unexpected compensation 
changes (i.e., changes from the estimated future compensation levels 
used in measuring service cost) are recorded in actuarial gain or loss. 
In considering whether to add another component to the tabular pension 
measure related to actuarial gain or loss due to unexpected 
compensation changes, we determined that the benefits of isolating 
these items from other actuarial gains and losses did not merit the 
costs and complexities associated with calculating the additional 
adjustment. However, we note that information about compensation 
changes should still generally be discernible by investors, as such 
compensation amounts would be included as other components of the 
compensation disclosed in the Item 402(v) of Regulation S-K table.
---------------------------------------------------------------------------

    \148\ See letter from Mercer.
    \149\ See FASB ASC Topic 715.
---------------------------------------------------------------------------

    We are not persuaded that the other alternative approaches 
recommended by commenters \150\ would more accurately reflect 
compensation ``actually paid.'' Although some of the suggested 
alternatives could more fully account for changes in compensation 
levels by reflecting unexpected increases in pay as well as plan 
amendments,\151\ we believe that the benefits discussed above with 
respect to the adopted approach, including its direct relationship to 
the values already calculated for the purpose of financial statement 
reporting, outweigh the potential benefits of the alternatives. 
Further, while we acknowledge there may be an additional cost to obtain 
the service cost and prior service cost information on a per 
participant basis, the other calculations suggested by commenters also 
would include additional costs since registrants are not currently 
performing those calculations in the manner suggested.\152\ In the case 
of commenters who suggested that we omit all pension cost amounts, we 
disagree that their suggested approach would be a reasonable 
interpretation of compensation ``actually paid.'' Although the approach 
we are adopting may not always perfectly reflect all potential changes 
in pension value, the resulting measure is considerably more accurate 
than a measure that treats the value of promised pension awards as zero 
when they may ultimately cost the registrant millions of dollars.
---------------------------------------------------------------------------

    \150\ See supra notes 131-134 and accompanying text.
    \151\ See infra Section V.C.4.iii.
    \152\ See letters from AON; Barnard; Exxon; Hermes (suggesting 
multiplying the value of the pension increase during the year, net 
of any inflationary increase and contribution by the employee, by 
twenty); Mercer; Towers; and WorldatWork.
---------------------------------------------------------------------------

    We are also requiring that the calculation of ``service cost'' and 
``prior service cost'' be consistent with the definitions provided 
under U.S. GAAP.\153\ As discussed above,\154\ we acknowledge that some 
commenters suggested alternatives to the U.S. GAAP definition; however, 
we believe that this definition is appropriate because it reflects the 
service cost amount included in the financial statements, and therefore 
is familiar to registrants. The final rules require the entire amount 
of prior service cost related to a plan amendment to be included in the 
pension measure rather than the amortized portion of prior service cost 
recognized as part of periodic pension cost under U.S. GAAP for the 
year.
---------------------------------------------------------------------------

    \153\ See FASB ASC Topic 715.
    \154\ See supra notes 131-134 and accompanying text.
---------------------------------------------------------------------------

2. Inclusion of Above-Market or Preferential Earnings on Deferred 
Compensation That Is Not Tax Qualified
i. Proposed Amendments
    Consistent with Summary Compensation Table disclosure requirements, 
we proposed that the executive compensation actually paid would include 
above-market or preferential earnings on deferred compensation that is 
not tax qualified.\155\
---------------------------------------------------------------------------

    \155\ These earnings are reported pursuant to 17 CFR 
229.402(c)(2)(vii), or, for smaller reporting companies, 17 CFR 
229.402(n)(2)(viii).
---------------------------------------------------------------------------

ii. Comments
    Two commenters generally agreed with the proposed rules on 
disclosure of deferred compensation that is not tax qualified.\156\ Two 
other commenters recommended permitting registrants to exclude unvested 
amounts of deferred compensation that is not tax qualified.\157\
---------------------------------------------------------------------------

    \156\ See letters from NACCO and TIAA.
    \157\ See letters from Hyster-Yale and NACCO.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting, as proposed, the requirement that executive 
compensation actually paid include above-market or preferential 
earnings on deferred compensation that is not tax qualified. We 
believe, as discussed in the Proposing Release, that excluding those 
amounts until their eventual payout would make the amount ``actually 
paid'' contingent on an NEO's choice to withdraw or take a distribution 
from their account, rather than the registrant's compensatory decision 
to pay the above-market return, which we do not believe would be an

[[Page 55147]]

accurate representation of compensation ``actually paid.'' As with 
pension awards, these amounts may be viewed to approximate the value 
that would be set aside currently by the registrant to satisfy its 
obligations in the future. In addition, excluding those amounts would 
be inconsistent with the approach in the Summary Compensation Table, 
which requires disclosure of the underlying deferred amounts when 
earned.\158\ We believe that, to the extent the Summary Compensation 
Table approach aligns with the statutory ``actually paid'' language and 
purpose of the disclosure, we should minimize adjustments to the 
Summary Compensation Table figures, in order to make disclosures easier 
to understand for investors and easier to produce for registrants.\159\ 
To that end, we are also not permitting registrants to voluntarily 
exclude unvested amounts of deferred compensation that is not tax 
qualified, as we believe that could complicate investors' understanding 
of the disclosure, and would limit the comparability of the ``actually 
paid'' amounts across different registrants.\160\
---------------------------------------------------------------------------

    \158\ See Instruction 1 to 17 CFR 229.402(c) and Instruction 1 
to 17 CFR 229.402(n) (each providing that ``[a]ny amounts deferred, 
whether pursuant to a plan established under section 401(k) of the 
Internal Revenue Code (26 U.S.C. 401(k)), or otherwise, shall be 
included in the appropriate column for the fiscal year in which 
earned'').
    \159\ See letters from Hyster-Yale and NACCO (both stating that 
``[t]he fewer adjustments that are made to the SCT earnings, the 
easier the new proxy table will be for investors to understand and 
for companies to produce.'').
    \160\ See infra Section II.C.3.iii (discussing the general 
approach taken in the final rules with respect to unvested amounts 
of compensation).
---------------------------------------------------------------------------

3. Equity Awards
i. Proposed Amendments
    We proposed 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. In proposing this approach, we noted that an executive does not 
have an unconditional right to an equity award before vesting, and 
therefore unvested options or other equity awards may not be ``actually 
paid'' prior to the vesting conditions being satisfied, which can be 
viewed as representing payment by the registrant. In addition, we noted 
that using the vesting date fair value would incorporate changes in the 
value of the equity awards from the grant date to the vesting date, 
with that change being one of the key ways that pay is linked to 
registrant performance.
    With respect to the calculation of the vesting date fair value, we 
noted that the vesting date fair value of stock awards is already 
disclosed (by registrants other than SRCs) in the Option Exercises and 
Stock Vested Table,\161\ and that the vesting date fair value of option 
awards can be calculated using existing models and methodologies. 
Specifically, the proposed approach would require (i) the amounts 
reported pursuant to 17 CFR 229.402(c)(2)(v) and (vi) to be deducted 
from Summary Compensation Table total, and (ii) the vesting date fair 
value of stock awards and options (with or without stock appreciation 
rights), each computed in accordance with the fair value guidance under 
U.S. GAAP,\162\ to be added. 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.
---------------------------------------------------------------------------

    \161\ See 17 CFR 229.402(g)(2)(v).
    \162\ See FASB ASC Topic 718.
---------------------------------------------------------------------------

    In response to comments received on the Proposing Release 
(discussed below), we included a request for comment in the Reopening 
Release, noting commenters' concerns that there was a potential 
misalignment between the time period to which pay is attributed and the 
time period in which the associated performance is reported, and asking 
if there were other approaches that would alleviate this misalignment, 
or if the inclusion of the additional measures considered in the 
Reopening Release would affect this misalignment.
ii. Comments
    We received a number of comments on both the proposal to use fair 
value methodology to value equity awards in the calculation of 
executive compensation actually paid, and on the proposal to value such 
awards as of the vesting date.
    Some commenters supported the proposed fair value methodology.\163\ 
However, a number of commenters opposed the approach,\164\ noting that 
the calculation of fair value is time consuming and expensive, 
particularly when many separate fair value calculations would be 
required, as in the case of awards that are on a pro-rata vesting 
schedule or with multiple tranches in a given year; \165\ few companies 
have familiarity with valuing options that have been outstanding for 
several years; \166\ the assumptions that are included in fair value 
calculations are company-specific and therefore would reduce 
comparability; \167\ and that the fact that assumptions and projections 
are included in fair value calculations is inconsistent with the 
concept of ``actually paid.'' \168\ As an alternative to fair value, a 
number of commenters suggested the Commission require options to be 
valued at their intrinsic value,\169\ or permit registrants to choose 
between disclosure of fair value and intrinsic value (with the non-
chosen value being provided in footnote disclosure).\170\ These 
commenters argued that intrinsic value is easier and cheaper to 
calculate; \171\ aligns with the value that the executives would 
receive upon immediate exercise; \172\ and does not include the 
valuation assumptions that accompany the fair value methodology.\173\ 
Some commenters suggested that if the final rules did not use intrinsic 
value, they should instead use fair value with certain safe harbors or 
simplified assumptions that would reduce the effort required to compute 
the valuation.\174\
---------------------------------------------------------------------------

    \163\ See letters from AFL-CIO 2015; CII 2015; The 
Predistribution Initiative and Responsible Asset Allocator 
Initiative, dated Mar. 4, 2022 (``PDI''); and TIAA.
    \164\ See letters from BRT; CEC 2015; Celanese; Cook; FSR; 
Honeywell; Meridian; and PG 2015.
    \165\ See letters from CAP; Cook; KPMG; and WorldatWork.
    \166\ See letter from CAP.
    \167\ See letter from IBC 2015.
    \168\ See letters from CEC 2015; Meridian; and SCSGP.
    \169\ See letters from CEC 2015 (supporting the use of intrinsic 
value if the Commission requires vesting date reporting); Celanese 
(supporting the use of intrinsic value if the Commission requires 
vesting date valuation); Coalition (supporting the use of intrinsic 
value if the commenter's preferred principles-based approach to the 
pay-versus-performance disclosure was not adopted); Corning; Hall; 
Honeywell (supporting the use of intrinsic value if the commenter's 
preferred principles-based approach to the pay-versus-performance 
disclosure was not adopted); Mercer; Meridian; Pearl (supporting the 
use of intrinsic value if the Commission does not adopt a realizable 
pay methodology) PG 2015; SCG; SCSGP; TCA 2015 (supporting the use 
of intrinsic value if the commenter's preferred principles-based 
approach to the pay-versus-performance disclosure was not adopted); 
and WorldatWork. Many of these commenters had slightly different 
concepts of how options should be valued, but they all generally 
supported using intrinsic value, or the difference between the 
exercise price and the market price.
    \170\ See letter from Hall.
    \171\ See letters from Corning and Davis Polk 2015.
    \172\ See letter from Corning.
    \173\ See letter from Davis Polk 2015.
    \174\ See letters from Mercer; TCA 2015 and TCA 2022. See also 
letter from Infinite Equity, dated Mar. 3, 2022 (``Infinite'') 
(suggesting that certain existing safe harbors should be acceptable 
for the new disclosures).
---------------------------------------------------------------------------

    Some commenters supported valuing equity at the vesting date,\175\ 
stating that valuing equity at the vesting date will incorporate the 
grant date fair value and changes until vesting (which ``represent a 
direct channel, and one of the primary means, through which pay is 
linked to

[[Page 55148]]

registrant performance''), but will not include post-vesting changes 
(which ``generally reflect investment decisions made by the executive 
rather than compensation decisions made by the registrant''); \176\ 
will avoid ``underestimating the actual compensation received by 
executives,'' which could occur if grant date reporting was required; 
\177\ and ``better reflect[s] the value ultimately delivered to 
executives.'' \178\ Some commenters specifically opposed exercise date 
valuation,\179\ while others supported requiring the vesting date 
valuation of stock awards, but the exercise date valuation of options 
\180\ or requiring the vesting date valuation of performance-based 
awards, but the grant date valuation of time-based awards.\181\ Some 
commenters opposed vesting date valuation,\182\ with one arguing that 
valuing options at vesting date would be misleading because executives 
do not generally include the option value in their income at the time 
of vesting.\183\ As alternatives, commenters suggested: valuing awards 
at the end of a multi-year period, such as a three-year period; \184\ 
valuing equity at grant date but reversing the value at the vesting 
date for awards that fail to vest; \185\ revaluing outstanding equity 
awards annually; \186\ or revaluing all equity granted during a period 
at the end of the most recent completed fiscal year.\187\
---------------------------------------------------------------------------

    \175\ See letters from AFL-CIO 2015; CII 2015; Honeywell; PDI; 
and TIAA.
    \176\ See letter from CII 2015.
    \177\ See letter from PDI.
    \178\ See letter from TIAA.
    \179\ See letters from AFL-CIO 2015; CII 2015; and Honeywell.
    \180\ See letters from Coalition (specifically recommending that 
compensation be deemed ``actually paid'' when reported on Form W-2 
for income tax purposes, which they state would include vested stock 
awards and amounts received in connection with exercised options); 
Hall; and Mercer.
    \181\ See letter from McGuireWoods.
    \182\ See letters from Celanese; CCMC 2015; Cook; and NACD 2015.
    \183\ See letter from Cook.
    \184\ See letter from Farient.
    \185\ See letter from SVA.
    \186\ See letters from Hodak; Farient; Infinite; TCA 2015; and 
TCA 2022.
    \187\ See letter from CAP; PG 2015; and PG 2022.
---------------------------------------------------------------------------

    A number of commenters opposed the reporting of equity as of the 
vesting date.\188\ Some of these commenters noted that vesting date 
reporting of equity would lead to a timing misalignment between actual 
performance and executive compensation actually paid, as the 
performance that ``earned'' the equity would have occurred between the 
grant date and the vesting date, but only the total amounts of equity 
would be reported on the vesting date.\189\ However, two commenters, 
who acknowledged the misalignment, indicated that there was no other 
approach that would eliminate all misalignment.\190\
---------------------------------------------------------------------------

    \188\ See letters from CAP; Celanese; CCMC 2015; Cook; FSR; 
McGuireWoods; NACCO; NACD 2015; NAM 2022; Ross; SVA; and TIAA. But 
see Hermes (expressly supporting vesting date reporting of equity).
    \189\ See letters from CEC 2015; Celanese; CCMC 2015; Cook; 
Faulkner; FSR; Hyster-Yale; NACCO; PG 2015; Pearl; Ross; SBA-FL; 
SVA; TIAA; TCA 2015; and WorldatWork.
    \190\ See letters from Aon HCS and Teamsters.
---------------------------------------------------------------------------

    Several commenters requested clarifications about the proposed 
approach. A few commenters expressed that reporting equity on the 
vesting date creates uncertainty in application, and either sought 
clarification regarding the vesting date or the meaning of when ``all 
applicable vesting conditions were satisfied.'' \191\ One commenter 
suggested that an award should be considered vested on the date the 
executive is able to monetize the award,\192\ while another suggested 
that awards should only be considered ``actually paid'' when 
restrictions on equity lapse, even if already vested.\193\ Two 
commenters also made suggestions that awards should be considered 
vested when the associated performance period is completed, even if the 
vesting of the award is still subject to board certification.\194\
---------------------------------------------------------------------------

    \191\ See letters from Cook; IBC 2015; Mercer; Pearl; and 
Towers.
    \192\ See letters from Davis Polk 2015 and Davis Polk 2022.
    \193\ See letter from CEC 2015.
    \194\ See letters from Mercer and Towers.
---------------------------------------------------------------------------

    Commenters suggested a number of alternatives to vesting date 
reporting of equity, including: grant date reporting; \195\ exercise 
date reporting; \196\ exercise date reporting of the equity's intrinsic 
value; \197\ principles-based reporting (i.e., allowing companies to 
make their own modifications to the reporting date); \198\ reporting 
``in the fiscal year for which the compensation was considered as 
paid''; \199\ and annual reporting, starting in the grant year, of the 
year-end fair value of the award, with annual reporting of any change 
in the fair value until, and including, the year of vesting.\200\ Two 
commenters also suggested the Commission adopt the ``2 \1/2\ month 
rule,'' under which equity vesting in the first two and one half months 
of the calendar year would be attributed to the prior year.\201\ One 
commenter stated that, because the proposed rules would move away from 
grant date fair value calculations for equity awards, it would be 
important that the disclosure include dividends paid on unvested equity 
or equivalents for a given year.\202\
---------------------------------------------------------------------------

    \195\ See letters from CAP and NAM 2022.
    \196\ See letters from CEC 2015; Coalition; and FSR.
    \197\ Letter from Corning.
    \198\ See letter from Hall.
    \199\ See letter from TIAA.
    \200\ See letters from Infinite; TCA 2015; and TCA 2022. Other 
commenters made similar suggestions that vary slightly from this 
suggestion, including by using intrinsic rather than fair value for 
options, measuring pay over an aggregate time horizon rather than 
presenting data broken out by year, and revaluing vested as well as 
unvested equity holdings. See letters from CAP; Farient; Hodak; PG 
2015; and Pay Governance, dated Mar. 3, 2022 (``PG 2022'').
    \201\ See letters from Hyster-Yale and NACCO.
    \202\ See letter from TIAA.
---------------------------------------------------------------------------

    A few commenters supported the proposed requirement that changes in 
the underlying assumptions for valuation that are materially different 
from those made in the financial statements as of the grant date must 
be disclosed, with one specifically supporting the proposed 
requirement,\203\ one supporting requiring any changes from the 
assumptions in the current financial statements to be disclosed,\204\ 
and two opposing the disclosure of changes in valuation 
assumptions.\205\
---------------------------------------------------------------------------

    \203\ See letter from CII 2015.
    \204\ See letter from Towers.
    \205\ See letters from Davis Polk 2015 and McGuireWoods.
---------------------------------------------------------------------------

    In response to a request for comment in the Reopening Release, one 
commenter indicated that the additional performance measures considered 
in the Reopening Release would not exacerbate the timing 
misalignment,\206\ while another stated the additional measures would 
not improve the misalignment.\207\
---------------------------------------------------------------------------

    \206\ See letter from Aon HCS.
    \207\ See letter from McGuireWoods.
---------------------------------------------------------------------------

iii. Final Amendments
    After consideration of the comments received, we are modifying our 
approach to the treatment of equity awards in relation to the total 
compensation reported in the Summary Compensation Table. While the 
final amendments continue to use ``fair value'' as the measure of the 
amount of an equity award, which is consistent with accounting in the 
financial statements, we are adjusting the date on which the award is 
valued in response to comments, so that the first fair value disclosure 
is made in the year of grant, and changes in value of the award are 
reported from year to year until the award is vested.\208\ We believe 
this approach will better align the timing of the disclosure and 
valuation with when

[[Page 55149]]

the award is actually ``earned'' by the executive, resulting in 
disclosure that more clearly shows the relationship between executive 
compensation and the registrant's performance.
---------------------------------------------------------------------------

    \208\ This approach was discussed as an implementation 
alternative in the Proposing Release. See Proposing Release at 
Section IV.C.3.c. Two commenters specifically noted this 
implementation alternative and were supportive of its adoption. See 
letters from Infinite; TCA 2015; and TCA 2022.
---------------------------------------------------------------------------

    In particular, the proposed rules would have required the deduction 
of the equity award amounts reported in the Summary Compensation Table 
total and the addition of:
     The vesting date fair value of stock awards and options 
(with or without stock appreciation rights), each computed in 
accordance with the fair value guidance under U.S. GAAP.
    The final rules also require the deduction of the equity award 
amounts reported in the Summary Compensation Table total; however, 
instead of the addition of the vesting date fair value of stock awards 
and options, the final rules require the addition (or subtraction, as 
applicable) of the following:
     The year-end fair value of any equity awards granted in 
the covered fiscal year that are outstanding and unvested as of the end 
of the covered fiscal year;
     The amount of change as of the end of the covered fiscal 
year (from the end of the prior fiscal year) in fair value of any 
awards granted in prior years that are outstanding and unvested as of 
the end of the covered fiscal year;
     For awards that are granted and vest in the same covered 
fiscal year, the fair value as of the vesting date; \209\
---------------------------------------------------------------------------

    \209\ There is no adjustment for awards that are granted and 
determined not to vest in the same covered fiscal year because those 
awards result in no compensation actually paid.
---------------------------------------------------------------------------

     For awards granted in prior years that vest in the covered 
fiscal year, the amount equal to the change as of the vesting date 
(from the end of the prior fiscal year) in fair value;
     For awards granted in prior years that are determined to 
fail to meet the applicable vesting conditions during the covered 
fiscal year, a deduction for the amount equal to the fair value at the 
end of the prior fiscal year; \210\ and
---------------------------------------------------------------------------

    \210\ For any of an executive's equity awards that are 
determined to fail to vest, a negative amount equal to the fair 
value at the end of the prior fiscal year would be included as part 
of the executive's compensation actually paid as of the date the 
registrant determines the award will not vest. This negative amount 
takes the cumulative reported value of that award to $0 since it did 
not vest.
---------------------------------------------------------------------------

     The dollar value of any dividends or other earnings paid 
on stock or option awards in the covered fiscal year prior to the 
vesting date that are not otherwise reflected in the fair value of such 
award or included in any other component of total compensation for the 
covered fiscal year.
    We believe fair value is an appropriate measure for compensation 
``actually paid.'' Although fair value calculations, like all 
accounting estimates, do involve some subjective assumptions, we do not 
agree with commenters that stated that the assumptions and projections 
included in fair value calculations render such amounts inconsistent 
with the concept of ``actually paid.'' \211\ Fair value is an estimate 
of the amount by which an executive is compensated as a result of an 
award, and therefore represents a reasonable measure of that 
executive's ``actual pa[y].'' Specifically, the fair value of an option 
is a widely-used measure to estimate the total value of the asset, 
including both its value if exercised immediately (``intrinsic value'') 
and the additional value created by the holder's contractual right to 
exercise at some time in the future (``time value'' of the option). In 
our view it also represents a more accurate measure of actual pay than 
alternatives recommended by some commenters.
---------------------------------------------------------------------------

    \211\ See supra note 168 and accompanying text.
---------------------------------------------------------------------------

    We are not adopting the approach suggested by some commenters that 
we use other measures such as intrinsic value. Intrinsic value would 
ignore the option value inherent in exercisable awards prior to 
exercise, including the option value inherent in an option award that 
is at-the-money or out-of-the-money (i.e., the stock price is equal to 
or less than the strike price of the options), and therefore has zero 
intrinsic value. Intrinsic value (or any similar measure used to 
calculate compensation ``actually paid'') would also be a departure 
from the primary disclosures related to equity compensation, and the 
recognition and measurement of such compensation in the financial 
statements under U.S. GAAP, and we believe would not allow investors to 
as easily link and analyze ``compensation actually paid'' with the 
other information they are receiving about executive compensation. 
Further, in 2004, the accounting for stock-based compensation in U.S. 
GAAP was revised to require fair value accounting.\212\ In the revised 
accounting standard, it was noted that other equity instruments and the 
consideration the issuing entity receives in exchange for them are 
recognized in the financial statements based on the fair value of the 
instrument at the date issued. The fact that the equity instruments 
would be issued for goods or services rendered or to be performed did 
not seem to be a reason to measure the cost of the goods or services 
performed on a different basis. The standard further noted that most 
advocates of intrinsic value favored its use only at a grant date 
measurement, and noted that there are weaknesses in its use even in 
that case, such as treating most fixed share options as though they 
were a ``free good.'' \213\ However, even at the grant date, employee 
services received in exchange for share options are not free and there 
is value in the employee services performed and the related stock and 
stock options received.
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    \212\ See FASB SFAS No. 123 (Revised 2004), Accounting for 
Stock-Based Compensation (``FAS 123R''), which was issued in 
December 2004 and superseded Accounting Bulletin Opinion No. 25, 
Accounting for Stock Issued to Employees, which was an intrinsic 
value approach to stock-based compensation. FAS 123R was codified in 
FASB ASC Topic 718.
    \213\ Id.
---------------------------------------------------------------------------

    Registrants and investors are already familiar with fair value 
calculations and the determination of the assumptions for such 
calculations through their use in existing Commission disclosure 
requirements as well as U.S. GAAP. For example, the Grants of Plan-
Based Awards Table requires grant date fair value disclosure of each 
individual equity award granted during the last completed fiscal 
year.\214\ U.S. GAAP requires information about grant date fair value 
for equity awards, including the weighted-average grant-date fair value 
of awards that were granted, vested and forfeited during the year and a 
description of the significant assumptions used during the year to 
determine the fair value of share-based compensation awards.\215\
---------------------------------------------------------------------------

    \214\ See 17 CFR 229.402(d)(2)(vii) and Instruction 8 to 17 CFR 
229.402(d).
    \215\ See FASB ASC Topic 718-10-50-2.
---------------------------------------------------------------------------

    We do not agree with the suggestion from commenters that we 
consider an option or other award requiring exercise to be ``actually 
paid'' only upon its exercise, as we believe doing so would commingle 
the registrant's compensatory decision with the executive's investment 
decision about when to exercise and would allow executives to influence 
pay-versus-performance disclosure by controlling the fiscal year in 
which they receive the compensation. We additionally determined that 
year-over-year change in fair value better meets the statutory purposes 
than grant-date fair value, because valuing awards only at grant date 
fails to reflect increases in value to the executive after the grant 
date, during the period over which the compensation actually paid is 
earned. Even if year-over-year change in fair value is only a 
reasonable estimate, we believe it is far more accurate to include this 
estimate than to omit such increases in value entirely.

[[Page 55150]]

    We have changed the reporting and valuation date requirements from 
the Proposing Release to first require the year-end reporting and 
valuation of awards granted during the fiscal year and then the year-
over-year change in fair value of such awards until the vesting date 
(or the date the registrant determines the award will not vest).
    We have made these changes to the reporting and valuation 
requirements to address commenters' concerns about potential 
misalignment between the time period to which pay is attributed and the 
time period in which the associated performance is reported, and the 
degree to which this would affect the usefulness of the disclosure. We 
believe that, compared to the vesting date valuation approach included 
in the Proposing Release, the adopted approach will more effectively 
allow registrants to describe the relationship between compensation and 
registrant performance, as the reported amounts of compensation will 
annually adjust based on the registrant's performance, among other 
things, in that year. In addition, we acknowledge commenters' 
observation that comparability may be somewhat reduced by the 
assumptions that are included in fair value calculations, which, as 
noted by a commenter, may differ from issuer to issuer. Because 
investors are already familiar with fair value as the measurement 
approach for equity awards under U.S. GAAP, they are aware of the 
reduced comparability that may occur due to the use of different 
assumptions from issuer to issuer. However, we believe that the use of 
a consistent measurement approach to equity compensation in the Summary 
Compensation Table, the financial statements, and the calculation of 
compensation ``actually paid,'' along with the required disclosures 
about significant assumptions under U.S. GAAP in the final rules, 
allows for comparability with respect to an individual issuer's 
disclosures from year to year. Further, as discussed in the Proposing 
Release,\216\ we believe that, overall, comparability regarding the 
awards included by registrants in the disclosure will be greater under 
the adopted approach than it would have been under the proposed 
approach, as volatility in executive compensation actually paid across 
the disclosure periods that is due simply to vesting patterns should 
decrease (as the amount of executive compensation actually paid will be 
adjusted each year as it is ``earned'' over the course of the vesting 
period).\217\
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    \216\ See Proposing Release, Section IV.C.3.c (considering the 
adopted approach as an implementation alternative).
    \217\ See supra note 210.
---------------------------------------------------------------------------

    Investors will also be able to more easily understand the impact of 
performance on awards-based compensation over time, because under the 
final rules as adopted investors will be able to observe the amount by 
which the value of an executive's compensation changes each year, 
rather than only observing the value of that compensation in the year 
an award vests. Furthermore, we believe that the adopted approach in 
the final rules is similar to the concept of realizable pay, 
recommended by some commenters, as it reflects an attempt to measure 
the change in value of an executive's pay package after the grant date, 
as performance outcomes are experienced.
    This approach to unvested equity compensation is consistent with 
the treatment of other unvested elements of compensation under the 
final rules, such as unvested pension benefits and contributions to 
unvested defined contribution plans. In each case, the adopted approach 
reflects this compensation as it is earned rather than at vesting. We 
believe the consistent use of this approach should reduce misalignment 
between the timing of when compensation is earned and when it is 
reported, and allow the disclosure to more clearly represent the 
relationship of pay with performance over time.
    We also believe this revised approach for equity awards comports 
with the statutory term ``executive compensation actually paid.'' While 
non-vested amounts of compensation could be considered unpaid due to 
their contingent nature, over time the values reported in connection 
with a particular award will aggregate to its ultimate value upon 
vesting. Aligning the compensation reporting more closely with when the 
compensation changes in value also provides investors with a clearer 
picture of ``the relationship between executive compensation actually 
paid and the financial performance of the issuer.'' For example, where 
an award vests over a three-year period and the registrant's financial 
performance is positive in the first of those two years and negative in 
the third, reporting the full value of the award only in the vesting 
year may give investors the misleading impression that the executive 
was not rewarded for positive performance in years one and two and was 
rewarded despite negative performance in year three. In addition, the 
required reporting of the year-over-year change in fair value of such 
awards until the vesting date (or a deduction for prior reported 
amounts as of the date the registrant determines the award will not 
vest) will account for any amounts that fail to vest; will address 
concerns, noted by commenters, that grant date reporting undervalues 
compensation ``actually paid''; and will not include those post-vesting 
changes that generally reflect the executives' investment decisions, 
not compensation.\218\
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    \218\ Not all post-vesting date changes reflect the executives' 
investment decisions, as vested awards could remain subject to other 
restrictions (e.g., anti-hedging restrictions or holding 
requirements) that would limit the investment decisions available to 
an executive.
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    We recognize that requiring fair value calculations for each equity 
award at a date other than the grant date may be burdensome for some 
issuers, as noted by some commenters,\219\ particularly those that have 
compensation programs with numerous and complex equity grants. However, 
in the final rules we are not adopting a safe harbor or simplified 
assumptions other than those generally accepted under U.S. GAAP, as 
suggested by some commenters.\220\ Since accounting for share-based 
compensation in U.S. GAAP was revised in 2004 to require fair value 
accounting,\221\ registrants have been accounting for equity 
compensation based on a fair value approach and must determine 
valuation assumptions every time a new award is granted. While 
commenters correctly noted that companies are not as familiar with the 
fair valuation of options after the grant date, U.S. GAAP requires the 
re-valuation of an award when modified,\222\ so the concept of valuing 
a stock award before vesting is also not novel to registrants. As such, 
registrants are required to have internal controls and processes over 
the valuation of stock awards, including the assumptions used in 
determining fair value.\223\ We believe that registrants will likely 
rely upon the existing fair value

[[Page 55151]]

processes and internal controls for stock-based compensation, which 
should mitigate the concerns raised by commenters about assumptions. In 
addition, the option and contingent-equity valuation models are well-
developed and related software solutions are widely available, which 
will further mitigate those additional burdens and concerns related to 
valuation approach and related inputs.
---------------------------------------------------------------------------

    \219\ See, e.g., letters from CAP (stating that ``a fair value 
calculation for previously granted stock options at the time of 
vesting, registrants will undoubtedly encounter many 
complications,'' and noting that few companies have familiarity with 
valuing options that have been outstanding for several years); Cook 
(stating that ``[c]alculating the fair value of stock options as of 
each vesting date will be a time-consuming and tedious process''); 
KPMG (stating that ``the vesting date fair value of share options 
will be more difficult for companies than determining the grant date 
fair value of those awards''); and WorldatWork (describing the 
proposed vesting date fair value approach as ``burdensome'').
    \220\ See supra note 174 and accompanying text.
    \221\ See supra note 212 and accompanying text.
    \222\ See FASB ASC Topic 718-20-35.
    \223\ See also 17 CFR 240.13a-14, 13a-15, 15d-14 & 240.15d-15.
---------------------------------------------------------------------------

    The final rules also require footnote disclosure of any valuation 
assumptions that materially differ from those disclosed at the time of 
grant, as in the proposal.\224\ The proposal did not specify how to 
disclose the valuation assumptions. Similar to U.S. GAAP, when multiple 
awards are being valued in a given year, a registrant may disclose a 
range of the assumptions used or a weighted-average amount for each 
assumption. In addition, the fact that certain institutional investors 
and third parties (often proxy advisors or compensation consultants) 
are already incorporating similar computations in their own pay for 
performance analyses,\225\ suggests that the adopted approach is 
already considered useful and operational by some investors.
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    \224\ For example, there may be a material difference in 
assumptions if the registrant has made changes to key assumptions 
that would have materially changed the grant date fair value if the 
assumption(s) applied as of grant date.
    \225\ See infra Section V.B.2.
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    Further, we are also requiring the dollar value of any dividends or 
other earnings paid on stock or option awards in the covered fiscal 
year prior to the vesting date to be included in the amount of 
executive compensation actually paid, if such amounts are not reflected 
in the fair value of such award or included in any other component of 
total compensation for the covered fiscal year. As noted by a 
commenter, the pay-for-performance disclosure should include dividends 
paid on unvested equity or equivalents ``as a result of the move away 
from grant date fair value calculations for equity awards.'' \226\ 
Under the Summary Compensation Table total, any such amounts would be 
typically included in the grant date fair value, as no such dividends 
or earnings would have been paid on that date. However, if any 
dividends or other earnings are paid on stock or option awards over 
time, these amounts would decrease future fair value amounts. This 
decrease would not be reflective of a decrease in the amount ``actually 
paid'' to the executive, to the contrary, the amount of the decrease 
would reflect actual dividends or earnings paid to the executive prior 
to the valuation. We believe these amounts are compensation ``actually 
paid'' and should be reflected in the disclosure.
---------------------------------------------------------------------------

    \226\ See letter from TIAA.
---------------------------------------------------------------------------

D. Measures of Performance

1. Requirement To Disclose TSR and Peer Group TSR
i. Proposed Amendments
    We proposed requiring all registrants subject to the proposed rule 
to use TSR as the measure of financial performance of the registrant 
for purposes of the required disclosure. In addition, we proposed 
requiring registrants that are not SRCs to disclose peer group TSR, 
using either the same peer group used for purposes of Item 201(e) of 
Regulation S-K or a peer group used in the CD&A for purposes of 
disclosing registrants' compensation benchmarking practices.\227\
---------------------------------------------------------------------------

    \227\ See 17 CFR 229.402(b)(xiv).
---------------------------------------------------------------------------

ii. Comments
    Commenters were divided on the use of TSR as a required financial 
performance measure, with some commenters generally supportive,\228\ 
and some generally opposed.\229\ Additionally, some commenters opposed 
TSR being used as the sole measure of financial performance.\230\
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    \228\ See letters from Americans for Financial Reform 
Educational Fund, dated Mar. 18, 2022 (``AFREF''); Barnard 2015; 
Barnard 2022; BlackRock, dated July 2, 2015 (``BlackRock''); CalPERS 
2015; CAP; CFA; CII 2015; Farient; Hook; Infinite; OPERS; Public 
Citizen 2015; and TIAA.
    \229\ See letters from American Securities Association, dated 
Mar. 14, 2022 (``ASA''); Aspen; Better Markets, dated Mar. 4, 2022 
(``Better Markets''); CCMC 2015; CEC 2015; Coalition; Cook; 
Dimensional Fund Advisors LP, dated Mar. 3, 2022 (``Dimensional''); 
FedEx 2015; FSR; Hay; Honeywell; International Bancshares Corp., 
dated Mar. 3, 2022 (``IBC 2022''); McGuireWoods; NAM 2015; NAM 2022; 
NIRI 2015; NIRI 2022; and SBA-FL.
    \230\ See letters from BorgWarner; BRT; Celanese; Hall; 
Honeywell; Hyster-Yale; IBC 2015; ICGN; Mercer; NACCO; NACD 2015; 
NACD 2022; PG 2015; Pearl; PNC; PDI; Judy Samuelson, dated Mar. 4, 
2022 (``Samuelson''); SCG; SCSGP; Simpson Thacher & Bartlett, dated 
July 6, 2015 (``Simpson Thacher''); and WorldatWork.
---------------------------------------------------------------------------

    Commenters in favor of including TSR as a required financial 
performance measure noted that TSR is well-understood by investors; 
\231\ is widely used by companies in setting compensation; \232\ is 
generally a fair representation of company performance; \233\ will 
assist companies ``in articulating and providing justification for 
their compensation practices''; \234\ will increase comparability; 
\235\ and reflects stock price fluctuations that regularly occur in 
response to publicly known information and company leadership.\236\ 
Commenters in favor of TSR also observed that requiring its disclosure 
is consistent with the language in Section 953(a) that the pay-versus-
performance disclosure should ``tak[e] into account any change in the 
value of the shares of stock and dividends of the issuer and any 
distributions.'' \237\
---------------------------------------------------------------------------

    \231\ See letters from Barnard 2015; Barnard 2022; CFA; and 
Farient.
    \232\ See letters from Barnard 2015; Barnard 2022; BlackRock; 
CalPERS 2015; CFA; CII 2015; and Public Citizen 2015.
    \233\ See letters from Barnard 2015; Barnard 2022; CII 2015; 
Farient; and OPERS.
    \234\ See letter from CalPERS 2015.
    \235\ See letters from Barnard 2015; Barnard 2022; CAP; CII 
2015; Hodak; and TIAA.
    \236\ See letter from Infinite.
    \237\ See letters from AFREF; CAP; CII 2015; and Public Citizen 
2015.
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    Commenters opposed to the use of TSR, generally or as the sole 
measure of performance, as well as a few commenters in favor of the use 
of TSR,\238\ noted that TSR has specific limitations, including: not 
necessarily being used by the subject company to determine 
compensation; \239\ being an unreliable performance measure for thinly-
traded stocks; \240\ incentivizing short-term performance at the 
expense of investors' long-term best interests \241\ (which some 
commenters indicated could incentivize companies to incorporate 
strategies to inflate stock prices over the short term,\242\ or to 
engage in buybacks \243\); requiring lengthy explanatory disclosures to 
explain any misalignments between compensation and TSR; \244\ causing 
companies to adjust their compensation programs to more heavily rely on 
TSR; \245\ being subject to fluctuations based on circumstances outside 
of the control of companies, industries, and executives; \246\ and 
being affected by the

[[Page 55152]]

granting and vesting of stock options.\247\ In response to these 
concerns, some commenters (including commenters in favor of using TSR 
\248\), suggested permitting disclosure of other metrics alongside 
TSR.\249\ Other commenters generally stated that there was no single 
performance measure that would align with the compensation plan of 
every registrant, and therefore suggested adopting a principles-based 
approach, allowing companies to choose their own performance 
measures.\250\ Alternatively, a number of commenters suggested 
requiring registrants to disclose the actual metrics used in 
determining their executive compensation,\251\ or revising Item 402 of 
Regulation S-K to require disclosure of ``all'' metrics actually used 
to determine NEO incentive compensation.\252\
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    \238\ See letters from AFREF; CalPERS 2015; CFA; and CII 2015.
    \239\ See letters from CCMC 2015 and Coalition.
    \240\ See letters from Hyster-Yale and NACCO.
    \241\ See letters from AFREF; ASA; BlackRock; BRT; CCMC 2015; 
CEC 2015; Coalition; FedEx 2015; FSR; Hall; IBC 2015; IBC 2022; 
Mercer; NACCO; NACD 2015; NAM 2015; NIRI 2015; Samuelson; SCG; 
Simpson Thacher; and WorldatWork. But see letter from OPERS (stating 
that the use of TSR alone is not likely to drive short-term 
decision-making).
    \242\ See letters from Better Markets; IBC 2022; McGuireWoods; 
NACCO; Pearl; and PDI.
    \243\ See letters from AFREF; Better Markets; PDI; and 
Samuelson.
    \244\ See letters from Aspen; Celanese; Coalition; Exxon; 
Hyster-Yale; NACCO; NAM 2015; NIRI 2015; NIRI 2022; and PNC.
    \245\ See letters from CEC 2015; CCMC 2015; Hall; Hay; Hermes; 
FSR; George S. Georgiev, dated Mar. 4, 2022 (``Georgiev''); 
McGuireWoods; Mercer; Pearl; PNC; SCSGP; Simpson Thacher; and 
WorldatWork.
    \246\ See letters from AFL-CIO 2015; Aspen; CEC 2015; 
Dimensional; FSR; Hay; IBC 2015; IBC 2022; McGuireWoods; Mercer; 
NACCO; NIRI 2015; NIRI 2022; PDI; Pearl; Samuelson; and SBA-FL.
    \247\ See letter from IBC 2022.
    \248\ See letters from CalPERS 2015; CAP; CFA; CII 2015; 
Farient; OPERS; and TIAA.
    \249\ See letters from CalPERS 2015; CAP; CFA; CII 2015; Davis 
Polk 2015; Davis Polk 2022 (stating that TSR should be the only 
required measure, but that we should permit registrants to 
voluntarily disclose other measures, particularly ``[g]iven the 
complexity and importance of long-term incentive compensation''); 
Farient; Hall; Mercer; NIRI 2015; OPERS; Pearl; Sacred Heart 
University, dated July 7, 2015; Simpson Thacher; and TIAA. But see 
letter from IBC 2022 (stating, in response to the Reopening 
Release's considered additional net income, income or loss before 
income tax expense, and Company-Selected Measure measures, that the 
inclusion of additional metrics does not fix the fact that the 
inclusion of TSR ``overstates'' the importance of TSR).
    \250\ See letters from BRT; Celanese; Exxon; Hall; Hay; Hyster-
Yale; McGuireWoods; NACCO; PNC; SCG; SCSGP; and Simpson Thacher.
    \251\ See letters from AFL-CIO 2015; CCMC 2015; FedEx 2015; Hook 
(supporting the proposal, but stating ``I would like to see the 
metrics for comparison include focus on longer-term performance''); 
Public Citizen 2015 (specifically suggesting that the Commission 
``mandate a metric supplemental to the TSR of a company's own 
choosing that it contends would capture long-term performance''); 
and SBA-FL.
    \252\ See letters from American Federation of Labor and Congress 
of Industrial Organizations, dated Mar. 2, 2022 (``AFL-CIO 2022''); 
AFREF; California Public Employees Retirement System Investment 
Office, dated Mar. 4, 2022 (``CalPERS 2022''); California State 
Teachers' Retirement System, dated Mar. 2, 2022 (``CalSTRS''); CII 
2022; Georgiev; ICGN; and International Brotherhood of Teamsters, 
dated Mar. 3, 2022 (``Teamsters'').
---------------------------------------------------------------------------

    A number of commenters raised questions or made comments regarding 
the calculation of TSR. A few commenters suggested that TSR should be 
presented as a percentage change instead of an indexed dollar 
value.\253\ Others generally raised questions about the method used for 
calculating TSR,\254\ with some suggesting TSR should be calculated and 
disclosed as a one-year measure,\255\ others suggesting that TSR should 
be calculated as a rolling average,\256\ and a third group suggesting 
TSR be calculated as a cumulative average over the time period of the 
disclosure.\257\ Other commenters suggested that we permit registrants 
to decide the time period used to calculate their TSR.\258\
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    \253\ See letters from AON and Towers.
    \254\ See letters from Anonymous, dated May 27, 2015; 
BorgWarner; CEC 2015; Cook; Hall; Honeywell; Mercer; PG 2015; Pearl; 
TCA 2015; and Towers.
    \255\ See letters from Cook; Infinite (suggesting that a one-
year TSR would be consistent with Item 201(e) of Regulation S-K, but 
that also including three-year and five-year TSRs may provide 
helpful context); TCA 2015; TCA 2022; and Towers. But see letter 
from Farient (opposing the calculation of TSR as a year-over-year 
measurement). See also Davis Polk 2015 (stating that, if the 
Commission requires an annual TSR, we should permit registrants to 
also disclose a multi-year TSR, because compensation may be based on 
multi-year performance).
    \256\ See letters from AFREF (supporting a ``five year 
cumulative and rolling average''); CEC 2015 (supporting the use of a 
three-year or five-year rolling average TSR); Honeywell (stating 
that a multi-year rolling TSR would be more meaningful); ICGN; NACD 
2015 (recommending the Commission require a three-year or five-year 
TSR in addition to an annual TSR); and NACD 2022 (also recommending 
the Commission require a three-year or five-year TSR in addition to 
an annual TSR). But see letter from PG 2015 (noting that a five-year 
rolling TSR calculation would not be consistent with the Commissions 
intent).
    \257\ See letters from Pearl (supporting a cumulative 5-year TSR 
measurement); PG 2015 (noting that a cumulative TSR would be 
consistent with the Commission's intent, but could ``complicate[ ] 
comparisons by causing the starting point for TSR measurement to 
change each year''); and Teamsters.
    \258\ See letters from BorgWarner; Davis Polk 2015; Davis Polk 
2022 (suggesting that TSR should be calculated ``in a manner that is 
consistent with the ways in which the compensation committee 
considers TSR in the pay setting process''); Exxon (generally 
opposing the use of TSR, but stating that, if we require its use, we 
should allow registrants to choose the time period for measuring 
cumulative TSR that best suits them); and NIRI 2015; see also letter 
from Huddart (suggesting each component of the PEO's compensation 
actually paid be associated with a requisite service period, and 
then requiring the calculation of TSR and peer group TSR over the 
requisite service period of the component of the PEO's compensation 
having the largest dollar value in a given year).
---------------------------------------------------------------------------

    Commenters were also divided on our proposal to require 
registrants, other than SRCs, to disclose peer group TSR. Some 
commenters supported requiring the inclusion of peer group TSR,\259\ 
while others suggested peer group disclosure should be optional.\260\ A 
number of other commenters opposed the requirement to disclose peer 
group TSR,\261\ arguing peer group disclosure: is already disclosed in 
the performance graph required by Item 201(e) of Regulation S-K; \262\ 
is beyond the mandate of the Dodd-Frank Act; \263\ will confuse or 
mislead investors; \264\ will be expensive and/or time-consuming for 
registrants to calculate; \265\ is difficult for registrants to explain 
and would require lengthy disclosures; \266\ is difficult to understand 
given that frequent changes in peer groups \267\ and different market 
conditions or performance cycles affect different ``peer'' companies 
differently; \268\ and creates issues relating to the difficulty for 
companies to find adequate peers, limiting the ability to make direct 
comparisons between registrants.\269\ A number of commenters also 
opposed requiring weighted peer group TSR (weighted by market 
capitalization), as used in Item 201(e) of Regulation S-K.\270\ In 
addition, one commenter suggested we permit multiple peer groups to be 
disclosed, if peer group TSR disclosure is required.\271\
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    \259\ See letters from As You Sow 2015; CalPERS 2015; OPERS; and 
TIAA.
    \260\ See letters from AON and Hay.
    \261\ See letters from ActiveAllocator Activist Capital Advisors 
L.P., dated Feb. 3, 2022; CCMC 2015; CEC 2015; Celanese; Cook; Davis 
Polk 2015; FSR; Georgiev; Hyster-Yale; IBC 2015; IBC 2022; LWC; 
McGuireWoods; Meridian; NACCO; NAM 2015; NIRI 2015; NIRI 2022; 
Pearl; PNC; SCG; SCSGP; TCA 2015; TCA 2022; and WorldatWork.
    \262\ See letters from Exxon; Georgiev; Pearl; PNC; SBA-FL; and 
TCA 2015.
    \263\ See letters from BRT; CEC 2015; Celanese; Davis Polk 2015; 
Exxon; FSR; Hay; Meridian; Pearl; PNC; and WorldatWork.
    \264\ See letters from CEC 2015; Celanese; Davis Polk 2015; 
Georgiev; Hay; Hyster-Yale; LWC; NACCO; and PNC.
    \265\ See letters from Celanese; Hyster-Yale; and NACCO.
    \266\ See letters from BRT; CCMC 2015 (also noting that 
registrants may face public liability for assumptions made regarding 
a peer's performance); Davis Polk 2015 (similar); and SCSGP.
    \267\ See letters from Hay; Hyster-Yale; and NACCO.
    \268\ See letters CCMC 2015; Exxon; and Pearl.
    \269\ See letters from Hay; Hyster-Yale; IBC 2015; FSR; NACCO; 
NAM 2015; and Pearl.
    \270\ See letters from Allison; AON; Cook; Meridian; and Ross.
    \271\ See letter from Pearl.
---------------------------------------------------------------------------

    Commenters generally supported allowing registrants to have 
flexibility in setting their peer groups for the pay-versus-performance 
disclosure. Commenters had various suggestions as to how to achieve 
this flexibility, including allowing registrants to choose any peer 
group referenced in the CD&A; \272\ allowing the use of the peer group 
from either Item 201(e) of Regulation S-K or the CD&A; \273\ or 
allowing registrants to choose a peer group other than the Item 201(e) 
of Regulation S-K or CD&A peer groups.\274\ These commenters generally 
supported requiring registrants to provide disclosure explaining the 
make-up of their peer group.\275\ One commenter,

[[Page 55153]]

however, opposed giving flexibility to registrants in setting their 
peer groups, and instead suggested requiring that the peer group should 
be the same as the peer group used in benchmarking executive 
compensation.\276\
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    \272\ See letter from SCSGP.
    \273\ See letter from Quirin.
    \274\ See letters from Barnard 2015; Corning; and Towers 
(specifically supporting allowing registrants to use the peer group, 
if any, that is used in setting compensation).
    \275\ See letters from Barnard 2015; Quirin; and SCSGP.
    \276\ See letter from AFL-CIO 2015; see also letter from As You 
Sow 2015 (stating that ``ideally'' all registrants would use the 
benchmarking peer group in their pay-versus-performance disclosure).
---------------------------------------------------------------------------

    Commenters raised questions about the impact of a registrant 
changing its peer group. Some commenters advocated for requiring 
additional disclosure in the event that a registrant changes its peer 
group,\277\ including requiring the disclosure of comparative results 
of TSR for all peer groups used in the disclosed time period.\278\ 
Others questioned what impact the change of a peer group would have on 
cumulative TSR,\279\ with some commenters suggesting we only require 
disclosure of the current peer group.\280\ One commenter suggested 
that, if annual TSR is used, the peer group in place in the respective 
year of disclosure should be the peer group used to calculate the peer 
group TSR for that year of disclosure.\281\
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    \277\ See letters from AFL-CIO 2015; Hermes; and SBA-FL.
    \278\ See letter from Hermes.
    \279\ See letters from Cook and Pearl.
    \280\ See letters from Cook and Quirin.
    \281\ See letter from Cook.
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iii. Final Amendments
    We are adopting the requirement, as proposed, that all registrants 
subject to the final rules use TSR, and that registrants (other than 
SRCs) use peer group TSR, as measures of performance. As noted in the 
Proposing Release, Section 14(i) does not mandate we require specific 
measures in the pay-versus-performance disclosure. However, the statute 
does provide that the disclosures should ``tak[e] into account any 
change in the value of the shares of stock and dividends of the issuer 
and any distributions.'' \282\ While we recognize commenters' concerns 
that TSR is not an equally useful measure for all registrants (as it is 
not necessarily used by all registrants to set compensation and is seen 
by some commenters to be an unreliable performance measure for thinly-
traded stocks), is subject to fluctuations based on circumstances 
outside of the control of the registrant, and may be affected by the 
granting and vesting of stock options, we believe that TSR is 
consistent with that statutory language. In addition, we believe 
mandating a consistently calculated measure for all registrants will 
further the comparability of the pay-versus-performance disclosures 
across registrants, as noted by some commenters.\283\ We acknowledge, 
as noted by some commenters, that some registrants may need to provide 
somewhat lengthy explanatory disclosures to explain any misalignments 
between compensation and TSR; however, we believe those disclosures are 
the types of disclosures intended by the language of Section 14(i), and 
will help investors understand the relationship between executive 
compensation actually paid and the registrant's performance.
---------------------------------------------------------------------------

    \282\ 15 U.S.C. 78n(i).
    \283\ See supra note 235.
---------------------------------------------------------------------------

    We are not requiring registrants to disclose all measures they use 
to set executive compensation, as recommended by some commenters,\284\ 
because we believe such a requirement would be a significant change 
from the current executive compensation disclosure requirements, and 
would be more appropriately considered by the Commission in a broader 
context not related to the Section 953(a) mandate. In addition, as 
noted below,\285\ as with other mandated disclosures, registrants would 
be permitted to disclose additional measures of performance, so long as 
any additional disclosure is clearly identified as supplemental, not 
misleading and not presented with greater prominence than the required 
disclosure. While this does not provide registrants with the full 
flexibility of a principles based approach suggested by some 
commenters, we believe this ability to supplement the required 
disclosures will provide registrants with adequate discretion to 
provide sufficiently fulsome disclosure of the relationship between 
their performance and the compensation actually paid to their 
executives.
---------------------------------------------------------------------------

    \284\ See supra notes 251-252.
    \285\ See infra Section II.F.3.
---------------------------------------------------------------------------

    We also believe that absolute company performance alone, as 
reflected in TSR, may not be a sufficient basis for comparison between 
companies, and that peer group TSR will provide investors with more 
comprehensive information for assessing whether the registrant's 
performance was driven by factors common to its peers or instead by the 
registrant's own strategy and other choices. The final rules require a 
registrant to disclose weighted peer group TSR (weighted according to 
the respective issuers' stock market capitalization at the beginning of 
each period for which a return is indicated), using either the same 
peer group used for purposes of Item 201(e) of Regulation S-K or a peer 
group used in the CD&A for purposes of disclosing registrants' 
compensation benchmarking practices. If the peer group is not a 
published industry or line-of-business index, the identity of the 
issuers composing the group must be disclosed in a footnote. 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 this requirement by incorporation by reference to those 
filings. We believe this would avoid the potential for duplicative 
disclosure. Consistent with the approach taken in Item 201(e) of 
Regulation S-K, as proposed, if a registrant changes the peer group 
used in its pay-versus-performance disclosure from the one used in the 
previous fiscal year, it will only be required to include tabular 
disclosure of peer group TSR for that new peer group (for all years in 
the table), but must explain, in a footnote, the reason for the change, 
and compare the registrant's TSR to that of both the old and the new 
group.\286\ Some commenters advocated for more disclosure when a peer 
group changes (including requiring the disclosure of comparative 
results of TSR for all peer groups used in the disclosed time period), 
while other commenters suggested we only require disclosure of the 
current peer group. We believe the adopted approach strikes the 
appropriate balance of providing investors information when a peer 
group changes, while also not requiring overcomplicated disclosure. In 
addition, as proposed, we are requiring weighted peer group TSR, as 
calculated under Item 201(e) of Regulation S-K, as registrants are 
already familiar with this calculation.\287\
---------------------------------------------------------------------------

    \286\ See 17 CFR 229.402(v)(2)(iv).
    \287\ To calculated weighted peer group TSR, the returns of each 
component issuer of the group must be weighted according to stock 
market capitalization at the beginning of each period for which a 
return is indicated. See Instruction 5 to Item 201(e) of Regulation 
S-K.
---------------------------------------------------------------------------

    In response to commenters' questions about the calculation of TSR, 
we are clarifying the definition of ``measurement period'' in the final 
text of the rule. TSR will continue to be calculated on the same 
cumulative basis as is used in Item 201(e) of Regulation S-K, measured 
from 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 
fiscal year for which TSR is being calculated (i.e., the TSR for the 
first year in the table will represent the TSR over that first year, 
the TSR for the second year will represent the cumulative TSR

[[Page 55154]]

over the first and the second years, etc.). We are also clarifying that 
both TSR and peer group TSR should be calculated based on a fixed 
investment of one hundred dollars at the measurement point. As noted by 
a commenter,\288\ the TSR presented in the stock performance graph 
includes a starting investment amount on the y-axis, from which the 
subsequent TSR amounts are calculated. As the final rules mandate a 
tabular not graphical disclosure of TSR, we are clarifying that the TSR 
amounts should be calculated based on an initial fixed investment of 
one hundred dollars, to clarify for investors what amount is used to 
calculate the TSR figures, and to standardize the disclosure across 
registrants. We are not requiring, as suggested by some commenters, 
that TSR be calculated as a percentage change instead of a dollar 
value; be disclosed as a one-year measure; be calculated as a rolling 
average; or be calculated based on a time period chosen by the 
registrant as we believe all of those approaches would depart from the 
existing approach used in Item 201(e) of Regulation S-K, and therefore 
could be burdensome to registrants and confusing to investors. 
Similarly, we believe that permitting registrants to choose their own 
criteria for calculating their TSR and peer group TSR for the pay-
versus-performance disclosure could also lead to investor confusion.
---------------------------------------------------------------------------

    \288\ See letter from CAP (noting that ``TSR is indexed based on 
a $100 investment while compensation is reported in dollars so the 
scales are fundamentally different'' and suggesting that ``[t]he 
easiest solution would be to require companies to calculate 
compensation actually paid for 6 years, with the sixth year indexed 
to 100, similar to TSR in the stock performance graph'').
---------------------------------------------------------------------------

    We disagree with commenters who raised concerns that peer group TSR 
would be confusing to investors, expensive to calculate, and hard to 
understand. Peer group TSR is already included in other disclosures, 
meaning both investors and registrants are generally familiar with it. 
While peer group TSR is not specifically included in Section 14(i), we 
believe it is a useful measure for evaluating a registrant's 
performance, as noted by other commenters, and we are therefore using 
our discretionary authority to require this additional information to 
enhance the Dodd-Frank Act mandated disclosures. As we described above, 
peer group comparisons are often used by registrants' compensation 
committees,\289\ and may help in determining whether a registrant's 
performance was driven by factors common to its peers, which may have 
been outside of the control of its executives.
---------------------------------------------------------------------------

    \289\ See supra note 69 and accompanying text.
---------------------------------------------------------------------------

    As discussed below,\290\ to address commenters' concerns with 
respect to the proposal to use TSR and peer group TSR as the sole 
measures of performance (such as causing companies to adjust their 
compensation programs to more heavily rely on TSR), we are also 
requiring registrants to include net income and a Company-Selected 
Measure as performance measures in the tabular disclosure, and also 
permitting companies to voluntarily include additional measures of 
their choosing in the table, as suggested by some commenters.\291\ The 
inclusion of the Company-Selected Measure and the ability of 
registrants to voluntarily include additional measures may also address 
commenters' concerns with respect to incentivizing short-term 
performance at the expense of shareholders' long-term best interests. 
We believe these additional measures should help alleviate concerns 
expressed by some commenters that disclosing only TSR (for a registrant 
and its peer group) would put too much emphasis on that one measure.
---------------------------------------------------------------------------

    \290\ See infra Sections II.D.2; II.D.4; and II.F.3.
    \291\ See supra note 249.
---------------------------------------------------------------------------

2. Requirement To Disclose Net Income
i. Amendments Considered in the Reopening Release
    In the Reopening Release, we requested comment on requiring 
registrants to disclose both income or loss before income tax expense 
and net income in their pay-versus-performance disclosure.\292\ We 
stated we were considering these two measures because in reflecting a 
registrant's overall profits (net of costs and expenses), they could be 
additional important measures of company financial performance that may 
be relevant to investors in evaluating executive compensation, and 
could complement the market-based performance measures required in the 
Proposing Release (TSR and peer group TSR) by also providing 
accounting-based measures of financial performance. In addition, both 
net income and income or loss before income tax expense are measures 
that are familiar to registrants and investors, as both are generally 
required to be presented on the face of the Statement of Comprehensive 
Income by Regulation S-X. Net income is also a line item required by 
U.S. GAAP and International Financial Reporting Standards (``IFRS'') as 
issued by the International Accounting Standards Board.
---------------------------------------------------------------------------

    \292\ As discussed above, in this release, to be consistent with 
the language in Regulation S-X, we are using the phrase ``income or 
loss before income tax expense'' in lieu of the phrase ``pre-tax net 
income,'' which was used in the Reopening Release. See supra note 
33.
---------------------------------------------------------------------------

ii. Comments
    Commenters were divided over the potential inclusion of income or 
loss before income tax expense and net income. A number of commenters 
generally supported the inclusion of the measures as additional 
measures in the table; \293\ noting that they will be useful to 
investors in assessing executive compensation; \294\ will cause minimal 
compliance challenges, as they are already calculated by registrants; 
\295\ and will increase comparability.\296\ However, other commenters 
opposed requiring registrants to disclose the measures,\297\ noting 
they are not relevant for or comparable across all companies \298\ 
(particularly early stage companies and real estate investment trusts 
(``REITs'') \299\); are not used by

[[Page 55155]]

many companies in setting executive compensation; \300\ would be 
incomplete or misleading without appropriate context; \301\ and can 
vary period over period due to one-time adjustments and events such 
that the relationship with pay would be distorted.\302\ Other 
commenters opposed the measures more generally, as non-company-specific 
measures, indicating their inclusion would ``substantially lengthen'' 
the pay-versus-performance disclosure, without providing specific 
insight into the registrant,\303\ would not address the shortcomings of 
TSR because they have similar weaknesses (such as encouraging short-
termism or ``overemphasiz[ing] financial performance''),\304\ or would 
stifle innovation by encouraging more uniform compensation structures 
given the standardized disclosure across registrants.\305\
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    \293\ See letters from As You Sow, dated Mar. 4, 2022 (``As You 
Sow 2022''); Better Markets; Better Markets, Institute for Policy 
Studies, Global Economy Project, and Public Citizen, dated Mar. 4, 
2022 (``Better Markets et al.''); CalPERS 2022; CalSTRS; CII 2022; 
ICGN; Mark C, dated Feb. 21, 2022 (``Mark C''); PRI; Public Citizen, 
dated Mar. 4, 2022 (``Public Citizen 2022''); Teamsters; and Troop 
Inc., dated Feb. 17, 2022 (``Troop'').
    \294\ See letters from As You Sow 2022; Better Markets; Better 
Markets et al.; CalPERS 2022; CalSTRS; CII 2022; ICGN (noting that 
net income ``could be useful for companies that have a highly 
complex tax structure''); PRI; Public Citizen 2022; Teamsters; and 
Troop.
    \295\ See letter from Better Markets; Better Markets et al.; 
PRI; and Public Citizen 2022.
    \296\ See letter from PRI.
    \297\ See letters from AB; Aon HCS; ASA; Center on Executive 
Compensation, dated Mar. 4, 2022 (``CEC 2022''); Davis Polk 2022; 
Dimensional; FedEx Corp., dated Mar. 4, 2022; Georgiev; Infinite; 
Legal & General Investment, dated Mar. 3, 2022 (``LGIM''); 
McGuireWoods; Nareit, dated Mar. 4, 2022 (``Nareit''); NAM 2022; 
NIRI 2022; PG 2022; SCG; and TCA 2022.
    \298\ See letters from AB; CEC 2022; Dimensional; Infinite; 
LGIM; Nareit; NIRI 2022; PG 2022; and SCG.
    \299\ See letters from Dimensional (noting that changes to a 
company's business plan (such as closing business lines, selling 
certain assets, or investing in research and development) could 
result in low or negative net income, ``even though the strategies 
may ultimately pay off for shareholders over the long term''); 
Infinite (noting that income or loss before income tax expense and 
net income ``may not provide reliable insight into the results of 
management's efforts at developmental or transitional stage 
companies''); LGIM (noting that ``different growth stages'' of a 
company might necessitate it focusing on metrics other than income 
metrics); Nareit (stating that ``[d]ue to certain features of the 
way REITs are organized and operated under [F]ederal tax law as well 
as certain features of U.S. GAAP,'' income or loss before income tax 
expense and net income are not typically used by investors or 
management when evaluating the alignment of pay with performance for 
REITs); and NIRI 2022 (stating that income measures are ``completely 
impractical as measures of financial performance for smaller 
companies that are at a startup or early phase and not generating 
any net income under GAAP'').
    \300\ See letter from ASA; CEC 2022; and Davis Polk.
    \301\ See letters from ICGN; Infinite; and PG 2022.
    \302\ See letter from Dimensional Infinite; and PG 2022.
    \303\ Letter from Aon HCS.
    \304\ See letters from Georgiev; and McGuireWoods.
    \305\ See letter from SCG.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the final rules to require registrants to include 
net income in their tabular disclosure. As discussed above,\306\ 
registrants would also be required to provide a clear description of 
the relationship of net income to executive compensation actually paid, 
in narrative or graphical form, or a combination of the two.
---------------------------------------------------------------------------

    \306\ See supra Section II.A.2.iii.
---------------------------------------------------------------------------

    Although, as noted by some commenters, net income itself may not be 
frequently used by registrants directly in setting compensation, we 
believe that net income is closely related to other profitability 
measures that we believe, based on Commission staff experience, may be 
used by registrants in setting compensation, while also being widely 
understood and standardized, as a required disclosure item under 
Regulation S-X, U.S. GAAP, and IFRS. The inclusion of net income as an 
additional financial performance measure could complement the market-
based performance measure of TSR, and, to the extent that TSR does not 
(in the view of management) fully reflect a company's performance, 
could help to provide investors more ready access to an additional key 
measure of the company's recent financial performance. As noted in the 
Reopening Release, to the extent that net income would otherwise be 
considered by investors when evaluating the alignment of pay with 
performance, its inclusion in the table may lower the burden of 
analysis for those investors.
    We also believe that the standardized disclosure of net income 
could assist investors in generally understanding and analyzing the 
relationship between pay and performance. While, as noted by some 
commenters, net income may not be relevant for all registrants at all 
times,\307\ including it may allow investors to have a standard 
baseline from which to analyze a registrant's pay-versus-performance 
disclosure. Moreover, by requiring a Company-Selected Measure and 
giving registrants the ability to disclose additional registrant-
specific measures, we believe registrants can avoid concerns raised by 
commenters that financial performance would be overemphasized or 
disclosure overly standardized \308\ by the required disclosure of net 
income.
---------------------------------------------------------------------------

    \307\ See supra notes 298-300 and accompanying text.
    \308\ See supra notes 304-305 and accompanying text.
---------------------------------------------------------------------------

    The final rules do not require disclosure of income or loss before 
income tax expense, as considered in the Reopening Release. Net income 
and income or loss before income tax expense are highly 
correlated,\309\ so we believe requiring both could lead to 
unnecessarily duplicative disclosure, which could have raised questions 
for investors trying to understand what, if any, meaningful differences 
there were between the measures. This potentially duplicative 
disclosure also would have required registrants to prepare additional 
relationship disclosure (about the relationship between income or loss 
before income tax and executive compensation actually paid), which 
would have created an additional burden on registrants, and may have 
been less clear for investors. By requiring only one of the two net 
income measures, we also partially address the concern that adding both 
net income and income or loss before income tax expense could 
``substantially lengthen'' the pay-versus-performance disclosure. In 
addition, we believe net income may, based on statistics provided by a 
commenter, be used by significantly more companies in linking pay to 
performance than income or loss before income tax expense.\310\
---------------------------------------------------------------------------

    \309\ Based on staff analysis of data from Compustat, net income 
and income or loss before income tax expense are roughly 95 percent 
correlated.
    \310\ See letter from CEC 2022.
---------------------------------------------------------------------------

3. Tabular List of the Registrant's ``Most Important'' Performance 
Measures
i. Amendments Considered in the Reopening Release
    In the Reopening Release, we requested comment on requiring 
registrants to provide a ranked tabular list of the five \311\ most 
important measures that they use to link executive compensation 
actually paid during the fiscal year to company performance, over the 
time horizon of the disclosure. We requested comment on the inclusion 
of such a ranked list, in part, in response to commenters who stated 
that the proposal should be revised to require disclosure of the 
quantitative metrics or key performance targets companies actually use 
to set executive pay.\312\ We noted that this disclosure, if required, 
would be supplemental to the existing CD&A disclosure, which requires 
registrants to disclose ``all material elements of the compensation 
paid,'' including, for example, which ``specific items of corporate 
performance are taken into account in setting compensation policies and 
making compensation decisions,'' but does not specifically mandate 
disclosure of the performance measures that determined the level of 
recent NEO compensation actually paid. We noted that, under the 
considered approach, registrants would be able to cross-reference to 
existing disclosures elsewhere in the applicable disclosure document 
that describe the various processes and calculations that go into 
determining NEO compensation as it relates to these performance 
measures, if they elected to do so.
---------------------------------------------------------------------------

    \311\ The Reopening Release provided that, if the registrant 
considers fewer than five performance measures when it links 
executive compensation actually paid during the fiscal year to 
company performance, the registrant would be required to disclose 
only the number of measures it actually considers.
    \312\ See, e.g., letters from AFL-CIO 2015; CII 2015; Public 
Citizen 2015; and SBA-FL.
---------------------------------------------------------------------------

ii. Comments
    A number of commenters supported the inclusion of a ranked 
list.\313\ Some of the commenters who supported the ranked list also 
suggested additional

[[Page 55156]]

disclosures to supplement the list itself, including requiring ``clear 
description of the relationship between the measures and executive 
compensation,'' \314\ the metrics and methodology used to calculate the 
measures,\315\ and the ``percentage of total compensation paid at the 
vesting date'' with respect to each of the measures included in the 
list.\316\ In addition, some commenters supported requiring or 
permitting environmental, social and governance (``ESG'') metrics to be 
included in the ranked list.\317\ One commenter also specifically 
supported using a tabular format for the list, stating that it would 
help make company-to-company comparisons.\318\
---------------------------------------------------------------------------

    \313\ See letters from As You Sow 2022; Better Markets; Better 
Markets et al.; CalSTRS; Ceres and Ceres Accelerator for Sustainable 
Capital Markets, dated Mar. 4, 2022 (``Ceres''); CII 2022; 
Dimensional; Infinite; ICGN; Mark C (stating that the list ``would 
give investors greater transparency into [registrants'] policies as 
well as more tangible metrics by which to make their investment 
decisions''); PRI; Public Citizen 2022; and Responsible Asset 
Allocator Initiative at New America, and The Predistribution 
Initiative, dated Mar. 3, 2022 (``RAAI''); see also letter from 
AFREF (supporting the ranked list as an alternative to not 
disclosing `all' performance measures).
    \314\ Letter from PRI.
    \315\ See letter from ICGN.
    \316\ Letter from Infinite.
    \317\ See letters from As You Sow 2022; Better Markets; Ceres; 
PRI; Public Citizen 2022; and RAAI.
    \318\ See letter from ICGN.
---------------------------------------------------------------------------

    A number of other commenters opposed the ranked list,\319\ with 
some indicating that its ranking requirement would be difficult to 
satisfy, as registrants do not rank their measures in the compensation 
setting process and measures can interact in determining pay in complex 
ways. Some commenters objected that the list oversimplifies the 
compensation setting process, particularly because there could be 
difficulty ranking multiple measures, which might be related or hold 
equal importance at any given time.\320\ Others indicated the list and 
associated clarifications and explanations would increase the length 
and complexity of disclosure and associated burdens with little or no 
corresponding benefit.\321\ In contrast, one commenter indicated that 
it was not aware of any additional costs to disclose the five most 
important performance measures, and that the disclosure of sensitive or 
competitive information should not be necessary to provide the 
list.\322\ One commenter suggested that the ranked list was beyond the 
scope of the Dodd-Frank Act mandate,\323\ and others noted that similar 
disclosure is already available in the CD&A.\324\
---------------------------------------------------------------------------

    \319\ See letters from Aon HCS; ASA; CEC 2022; Davis Polk 2022; 
IBC 2022; McGuireWoods; NAM 2022; NIRI 2022; PG 2022; SCG; and TCA 
2022.
    \320\ See letters from Aon HCS; Davis Polk 2022; IBC 2022; LGIM; 
NAM 2022; and SCG.
    \321\ See letters from Aon HCS; CEC 2022; Davis Polk 2022; and 
IBC 2022.
    \322\ See letter from ICGN.
    \323\ See letter from SCG.
    \324\ See letters from CEC 2022; Davis Polk 2022; McGuireWoods; 
and SCG.
---------------------------------------------------------------------------

    There were also a number of commenters who commented on the ``most 
important'' concept, which we considered applying both to the ranked 
list and the Company-Selected Measure (discussed below). Two commenters 
suggested that defining the ``most important'' measures would be 
burdensome for companies,\325\ particularly given that many companies 
overlap and interrelate the measures they use to set compensation. One 
commenter, who opposed the requirement to include a Company-Selected 
Measure, stated that, if a ``most important'' concept is included in 
the final rules, the Commission should not define ``most important'' on 
behalf of registrants.\326\ However, another commenter suggested that 
the Commission make explicit that the ``most important'' measures are 
those that drove the outcome of compensation payments, not those that 
were the most important in compensation decision-making.\327\ Some 
commenters suggested that the Commission clarify whether certain 
market-linked measures could be considered the ``most important'' 
measures,\328\ with one suggesting that companies should be able to 
select the measure they believe to be most important ``regardless of 
whether that measure is one that it uses in a performance or market 
condition in the context of an incentive plan.'' \329\ One commenter 
suggested that the ``most important'' concept would be improved, ``if 
the definition includes the registrant's assessment that the measure 
will assist investors in better understanding how the registrant's pay 
programs contribute to the company's long-term shareholder return,'' 
\330\ while another suggested that the standard to evaluate ``most 
important'' should be ``most useful'' for the company.\331\
---------------------------------------------------------------------------

    \325\ See letters from Davis Polk 2022 and NAM 2022.
    \326\ See letter from Davis Polk 2022.
    \327\ See letter from Infinite.
    \328\ See letters from Georgiev and Infinite.
    \329\ Letter from Davis Polk 2022 (opposing the requirement to 
include a Company-Selected Measure, but stating that, if it is 
required, the measure should be able to be one that is not linked to 
a performance or market condition). See also Executive Compensation 
and Related Person Disclosure Release No. 33-8732A (Aug. 29, 2006) 
[71 FR 53158] at n. 167 (discussing the use of performance 
conditions and market conditions in equity incentive plans).
    \330\ Letter from CII 2022.
    \331\ See letter from ICGN.
---------------------------------------------------------------------------

    A number of commenters supported allowing the companies' ``most 
important'' measures to be non-financial measures.\332\
---------------------------------------------------------------------------

    \332\ See letters from AFREF; As You Sow 2022; Better Markets; 
CalSTRS; Ceres; CII 2022; Georgiev; PRI; and RAAI. See also letter 
from LWC (stating that companies should be required to discuss ESG 
metrics, and if ESG metrics are not used by the company, ``the 
company should be required to explain why not'').
---------------------------------------------------------------------------

    Two commenters specifically commented on the time period over which 
the ``most important'' measures should be measured: one supported using 
the measure that was the ``most important'' over the time horizon of 
the disclosure,\333\ while the other suggested that the ``most 
important'' evaluation should be made annually.\334\
---------------------------------------------------------------------------

    \333\ See letter from CII 2022.
    \334\ See letter from Davis Polk 2022.
---------------------------------------------------------------------------

    A few commenters were concerned that requiring companies to 
disclose a specific ``most important'' measure may lead companies to 
provide disclosure that highlights the measure that makes the company 
look the best.\335\
---------------------------------------------------------------------------

    \335\ See letters from AFL-CIO 2022; AFREF; and Mark C.
---------------------------------------------------------------------------

iii. Final Amendments
    The final rules require registrants provide a list of their most 
important financial performance measures used by the registrant to link 
executive compensation actually paid during the fiscal year to company 
performance (``Tabular List''), and permit registrants to include non-
financial performance measures in the Tabular List if such measures are 
among their most important performance measures.\336\ However, in 
response to comments received on the Reopening Release, certain of the 
requirements for this list differ from the approach discussed in the 
Reopening Release.
---------------------------------------------------------------------------

    \336\ See 17 CFR 229.402(v)(6). We are clarifying that the 
measures required to be included in the registrant's list of its 
most important financial measures are ``financial performance 
measures,'' given that the language in Section 14(i) specifically 
references financial performance. For purposes of Item 402(v) of 
Regulation S-K, as adopted,''financial performance measures'' means 
measures that are determined and presented in accordance with the 
accounting principles used in preparing the issuer's financial 
statements, any measures that are derived wholly or in part from 
such measures, and stock price and total shareholder return. A 
financial performance measure need not be presented within the 
financial statements or otherwise included in a filing with the 
Commission to be included in the Tabular List or be the Company-
Selected Measure. See 17 CFR 229.402(v)(2)(vi). ``Non-financial 
performance measures'' are performance measures other than those 
that fall within the definition of financial performance measures.
---------------------------------------------------------------------------

    First, in response to comments, we are not requiring the Tabular 
List to be ranked. As noted by a number of commenters, numerically 
ranking measures may be difficult for companies, given the frequent 
interplay between different measures within a company's compensation 
program. We believe an unranked list will provide investors with 
insights into companies' executive compensation programs by still 
presenting them with the ``most important'' measures, while avoiding 
potentially burdensome calculations

[[Page 55157]]

and analysis that could be involved in specifically designating a 
first, second, third, etc. ``most important'' measure. We are not 
requiring registrants to provide the methodology used to calculate the 
measures included in the Tabular List. We believe such a requirement 
would be burdensome on registrants, particularly when the measures are 
already well understood by investors or otherwise disclosed. However, 
registrants should consider if such disclosure would be helpful to 
investors to understand the measures included in the Tabular List, or 
necessary to prevent the Tabular List disclosure from being confusing 
or misleading.
    Second, under the final rules, the ``most important'' determination 
is made on the basis of looking only to the most recently completed 
fiscal year, as opposed to ``the time horizon of the disclosure,'' as 
described in the Reopening Release. We believe this approach will 
alleviate commenters' concerns that identifying the ``most important'' 
measures would be difficult, particularly when companies have 
overlapping or interrelating measures, by narrowing the universe of 
measures to be considered when selecting the ``most important'' to 
those used in the prior year (instead of the prior five years). In 
addition, we believe focusing the disclosure on the registrant's ``most 
recently completed fiscal year'' will accommodate changes in 
compensation programs and in the compensation related to specific 
measures over time, and avoid situations where a registrant is 
disclosing measures that are no longer used in, or important to, its 
executive compensation program, but would still be ``most important'' 
based on the measure's usage in prior years disclosed in the table.
    Finally, although the Reopening Release considered a list that 
would include the five most important measures, the final rules we are 
adopting require disclosure of at least three,\337\ and up to seven 
financial performance measures,\338\ and also permit registrants to 
include non-financial performance measures in that list. We believe 
that providing registrants with flexibility in the number of measures 
they can include in the list may also lessen the difficulty, noted by 
commenters, of identifying a registrant's ``most important'' measures. 
For example, a registrant with three, four, five, or six equally ``most 
important'' measures would not need to increase or decrease their 
``most important'' measure disclosure to specifically disclose five 
measures. We acknowledge that, for certain issuers, this concern may 
still remain due to the minimum of three and limit of seven measures 
imposed by the final rules; however we are of the view that providing 
an upper bound for the list will reduce the risk of lengthy, overly 
complicated lists, which would fail to advance the statutory objective 
of providing clear and simple comparisons of pay with performance. In 
addition, we believe allowing an unlimited number of measures could in 
some cases result in misleading or confusing disclosures by obscuring 
which performance measures are principally driving compensation 
actually paid.
---------------------------------------------------------------------------

    \337\ If the registrant considers fewer than three financial 
performance measures when it links executive compensation actually 
paid during the fiscal year to company performance, under the final 
rules and as considered in the Reopening Release, the registrant 
will be required to disclose only the number of measures it actually 
considers. Registrants that do not use any financial performance 
measures to link executive compensation actually paid to company 
performance would not be required to present a Tabular List.
    \338\ Based on staff experience, the majority of companies use 
fewer than seven metrics, in total, in their incentive plans. See 
also, e.g., Meridian Compensation Partners, LLC, 2020 Trends and 
Developments in Executive Compensation (April 30, 2020), available 
at https://www.meridiancp.com/wp-content/uploads/Meridian-2020-Trends-and-Developments-Survey-Final.pdf (``Meridian 2020 Survey'') 
(indicating that, while the measures used in long-term and annual 
incentive plans are often different, only 2% of 108 companies 
surveyed by Meridian used three or more performance measures in 
their long-term incentive plans or their annual incentive plans); 
and Aon plc, The Latest Trends in Incentive Plan Design as Firms 
Adjust Plans Amid Uncertainty (October 2020), available at https://humancapital.aon.com/insights/articles/2020/the-latest-trends-in-incentive-plan-design-as-firms-adjust-plans-amid-uncertainty (``Aon 
2020 Study'') (surveying the CEO short- and long-term incentive 
plans at a sample of the S&P 500, across all industries, and finding 
that for short-term incentive plans, ``[a]ll industries, excluding 
energy, reveal most companies use one to two metrics'' and that 
``[a]cross all sectors of the S&P 500, companies, on average, use 
two metrics for long-term incentives''). Given this, we believe a 
range of at least three and up to seven metrics should give almost 
all companies flexibility in listing their ``most important'' 
measures, even if they determine that all of their financial 
performance measures are the ``most important.''
---------------------------------------------------------------------------

    As discussed in the Reopening Release, the final rules specify that 
measures required to be included in the Tabular List are financial 
performance measures that, in the registrant's assessment, represent 
the most important financial performance measures used by the 
registrant to link compensation actually paid during the fiscal year to 
company performance. As discussed in the Reopening Release, we believe 
that a list of the measures that the registrant assesses to be the 
``most important'' may enable investors to more easily assess which 
performance measures actually have the most impact on compensation 
actually paid and make their own judgments as to whether that 
compensation appropriately incentivizes management. In addition, we 
believe this list will provide investors with helpful context for 
interpreting the pay-versus-performance disclosure, more generally, 
particularly when analyzing the other measures included in the table, 
by showing which (if any) of those measures are considered 
``important'' by the registrant, in determining pay. While we recognize 
that some commenters supported permitting non-financial performance 
measures to be included in the list, the final rules specify that the 
only required disclosures in the Tabular List are ``financial 
performance measures'' given the ``financial performance'' language in 
Section 14(i). However, in response to commenters, the final rules 
provide that registrants have the option of including non-financial 
performance measures in the Tabular List. Registrants may do so only if 
such measures are included in their three to seven most important 
performance measures, and they have disclosed at least three (or fewer, 
if the registrant only uses fewer) most important financial performance 
measures. Regardless of whether registrants elect to disclose non-
financial performance measures in their Tabular List, they still may 
only disclose a maximum of seven measures in the list.
    Under the final rules, registrants may disclose the Tabular List in 
three different ways.\339\ First, registrants may present one list with 
at least three, and up to seven, performance measures, which in the 
registrant's assessment represent the most important performance 
measures used by the registrant to link compensation actually paid to 
the registrant's NEOs, for the most recently completed fiscal year, to 
company performance, similar to the ranked list contemplated in the 
Reopening Release.
---------------------------------------------------------------------------

    \339\ See 17 CFR 229.402(v)(6)(i).
---------------------------------------------------------------------------

    Second, registrants may break up the Tabular List disclosure into 
two separate lists: one for the PEO and one for the remaining NEOs. 
Third, registrants may break up the Tabular List disclosure into 
separate lists for the PEO and each NEO. If the registrant elects to 
provide the Tabular List disclosure in multiple lists (the second or 
third options, described above), each list must include at least 
three,\340\ and

[[Page 55158]]

up to seven, financial performance measures. As in situations where a 
registrant elects to provide one Tabular List, registrants electing to 
provide the Tabular List disclosure in multiple lists may include non-
financial performance measures in such lists if such measures are among 
their most important performance measures. Requiring the Tabular List 
to include measures related to both PEO and NEO compensation is 
consistent with the approach taken throughout Item 402(v) of Regulation 
S-K and we believe this consistency in disclosure will make the 
disclosure more readily understandable to investors.
---------------------------------------------------------------------------

    \340\ If the registrant considers fewer than three financial 
performance measures when it links compensation actually paid to the 
specific NEO (or group of NEOs) included in the list, during the 
fiscal year to company performance, the registrant will be required 
to disclose only the number of measures it actually considers.
---------------------------------------------------------------------------

    As noted above, commenters suggested that such a list was beyond 
the scope of the Dodd-Frank Act mandate, and that similar disclosure is 
already available in the CD&A.\341\ We believe the Tabular List would 
further the objectives of the Section 14(i) mandated disclosure, as it 
provides another avenue for investors to understand the relationship 
between executive compensation actually paid and the registrant's 
financial performance. It is within our authority to specify the form 
and content of this disclosure as well as to require additional 
information to enhance the Dodd-Frank Act mandated disclosures. While 
it is possible that some registrants provide similar disclosure in the 
CD&A, we note that the CD&A requires disclosure of performance measures 
that are ``material elements of the registrant's compensation of named 
executive officers,'' \342\ not the ``most important'' measures used by 
the registrant to link executive compensation actually paid to company 
performance. There would be an overlap between those two disclosure 
requirements when the ``most important'' measures are also ``material 
elements of the registrant's compensation of named executive 
officers''; however, they are not necessarily the same. Even in 
situations where the performance measures included in the Tabular List 
are already included in CD&A disclosure, we believe that the 
presentation of the measures in the Tabular List should allow investors 
to more readily understand what measures in the registrant's view are 
the ``most important'' to its compensation program, and thus better 
understand the relationship between registrant performance and 
executive compensation, as the statute provides.
---------------------------------------------------------------------------

    \341\ See letters from CEC 2022; Davis Polk 2022; McGuireWoods; 
and SCG.
    \342\ Item 402(b) of Regulation S-K.
---------------------------------------------------------------------------

    Finally, as considered in the Proposing Release, under the final 
rules, registrants may cross-reference to other disclosures elsewhere 
in the applicable disclosure document that describe the registrant's 
processes and calculations that go into determining NEO compensation as 
it relates to these performance measures, if they elect to do so.
4. Requirement To Disclose a Company-Selected Measure
i. Amendments Considered in the Reopening Release
    The Reopening Release requested comment on requiring registrants to 
disclose a Company-Selected Measure--a measure that in the registrant's 
assessment represents the most important performance measure (that is 
not already included in the table) used by the registrant to link 
executive compensation actually paid during the fiscal year to company 
performance, over the time horizon of the disclosure. We considered 
adding this requirement in order to both provide additional useful 
disclosure to investors regarding the measures the registrant actually 
used to set compensation, and to lessen the likelihood that the 
mandated measures in the tabular disclosure would misrepresent or 
provide an incomplete picture of how pay relates to performance. We 
believed that requiring disclosure of a Company-Selected Measure would 
not be overly burdensome on registrants, as, by definition, the 
Company-Selected Measure would be a measure already considered by 
registrants when making executive compensation determinations, and may 
already be discussed, in a different form, in the CD&A.
ii. Comments
    A number of commenters provided feedback on potential disclosure of 
a Company-Selected Measure, as discussed in the Reopening Release. Some 
commenters supported mandatory disclosure of a Company-Selected 
Measure,\343\ with one suggesting that the Company-Selected Measure (or 
Measures) should be the only mandated performance measure(s).\344\ One 
commenter, who generally favored requiring registrants to disclose 
``all'' measures used by registrants in linking executive compensation 
paid to performance, suggested that the Company-Selected Measure should 
be limited to financial measures, to provide an ``alternative'' to TSR, 
and suggested that companies should be permitted to omit the Company-
Selected Measure if they do not have a single measure used to assess 
financial performance for compensation purposes.\345\ Another commenter 
suggested requiring the disclosure of multiple Company-Selected 
Measures, such as three such measures, with corresponding peer group 
disclosure to prevent registrants from ``cherry-pick[ing] measures.'' 
\346\ Other commenters suggested that the Company-Selected Measure 
should be based on the compensation paid to the PEO, not all of the 
NEOs.\347\
---------------------------------------------------------------------------

    \343\ See letters from As You Sow 2022; Better Markets; CalPERS 
2022; CalSTRS; Dimensional; Georgiev; Infinite; ICGN; Nareit 
(specifically supporting the fact that it would provide REITs with 
flexibility to disclose a measure more relevant for them); PG 2022; 
PRI; RAAI; Teamsters; and Troop.
    \344\ See letter from NAM 2022.
    \345\ See letter from Georgiev.
    \346\ Letter from Dimensional; see also letter from Georgiev 
(suggesting registrants be permitted to include multiple Company-
Selected Measures).
    \347\ See letter from Davis Polk 2022 (opposing the mandatory 
disclosure of a Company-Selected Measure, but stating that, if it is 
required, it should be based on compensation paid to the PEO) and 
Infinite.
---------------------------------------------------------------------------

    Some commenters suggested that the Company-Selected Measures be 
disclosed alongside the methodology used to calculate it,\348\ with two 
commenters specifically suggesting the Company-Selected Measure must be 
``auditable/assurable'' \349\ or accompanied by ``an explanation of its 
calculation and a complete GAAP reconciliation, if possible.'' \350\ 
Two commenters specifically said that, if ESG metrics are used as 
Company-Selected Measures, additional information about the metrics 
used should be disclosed.\351\
---------------------------------------------------------------------------

    \348\ See letters from AFREF; CII 2022; and ICGN.
    \349\ Letter from ICGN.
    \350\ Letter from Teamsters.
    \351\ See letters from Dimensional and PRI.
---------------------------------------------------------------------------

    A number of commenters opposed the mandatory inclusion of a 
Company-Selected Measure,\352\ stating that the idea that there is one 
``most important'' measure ``oversimplifies'' the compensation setting 
process,\353\ and that different measures cannot be considered in 
``isolation.'' \354\
---------------------------------------------------------------------------

    \352\ See letters from Aon HCS; ASA; CEC 2022; Davis Polk 2022; 
IBC 2022; McGuireWoods; and TCA 2022 (stating that the Company-
Selected Measure should be ``allow[ed] for,'' while other prescribed 
measures should be eliminated).
    \353\ Letter from IBC 2022.
    \354\ Letter from CEC 2022.
---------------------------------------------------------------------------

    As discussed above, a number of commenters supported allowing the 
companies' ``most important'' measures to be non-financial 
measures,\355\ with

[[Page 55159]]

some supportive of allowing non-financial measures to be a registrant's 
Company-Selected Measure.\356\ Other commenters opposed either allowing 
non-financial measures to be included as Company-Selected Measures, 
indicating that doing so ``would be at odds with both the language and 
intent of Section 953(a),'' \357\ or requiring or encouraging companies 
to incorporate ESG metrics in setting executive pay.\358\
---------------------------------------------------------------------------

    \355\ See supra note 332. See also letter from Davis Polk 2022 
(opposing the mandatory disclosure of a Company-Selected Measure, 
but stating that, if it is required, ``it should be permitted to 
encompass factors other than measures that relate to financial 
performance'').
    \356\ See letters from AFREF; CII 2022; Ceres; and PRI.
    \357\ See letter from Center for Capital Markets 
Competitiveness, dated Mar. 4, 2022.
    \358\ See letter from Dimensional.
---------------------------------------------------------------------------

    Commenters were divided on whether Company-Selected Measures should 
be permitted to be changed from year to year, and if so, what 
disclosure should be required. One commenter was directly opposed to 
regular changes in the Company-Selected Measure, stating the measure 
should be required to remain the same for at least five years, in order 
to avoid companies rationalizing the ``best'' measure each year.\359\ 
Other commenters supported allowing annual changes to the Company-
Selected Measure, so long as accompanying disclosure about the reason 
for the change or a period of disclosure of the `old' and `new' 
measures was provided.\360\ One commenter alternatively suggested that 
the Company-Selected Measure should be the ``most important'' measure 
over a given period, and not the ``most important measure'' for all 
five years in the table.\361\
---------------------------------------------------------------------------

    \359\ See letter from Better Markets et al.
    \360\ See letters from CalPERS 2022; CII 2022; Davis Polk 2022 
(opposing the mandatory disclosure of a Company-Selected Measure, 
but stating that, if it is required, it should allow for variability 
over different years); ICGN; and Troop.
    \361\ See letter from PG 2022.
---------------------------------------------------------------------------

    One commenter suggested that, if the ``most important'' measure is 
already included in the tabular disclosure, the next-most important 
measure should be included as the Company-Selected Measure,\362\ while 
another commenter (who generally opposed the inclusion of the Company-
Selected Measure) stated that, if it is a measure otherwise required to 
be disclosed in the table, the Company-Selected Measure should be able 
to be an already-included measure.\363\
---------------------------------------------------------------------------

    \362\ See letter from PDI.
    \363\ See letter from Davis Polk 2022.
---------------------------------------------------------------------------

iii. Final Amendments
    The final rules require registrants to disclose a Company-Selected 
Measure in the table required under new 17 CFR 229.402(v)(1). The 
Company-Selected Measure must be a financial performance measure 
included in the Tabular List, which in the registrant's assessment 
represents the most important performance measure (that is not 
otherwise required to be disclosed in the pay-versus-performance table 
required under new Item 402(v) of Regulation S-K) used by the 
registrant to link compensation actually paid to the registrant's NEOs, 
for the most recently completed fiscal year, to company performance. If 
the registrant's ``most important'' measure is already included in the 
tabular disclosure, the registrant would select its next-most important 
measure as its Company-Selected Measure. As discussed above,\364\ 
registrants would also be required to provide a clear description of 
the relationship of the Company-Selected Measure to executive 
compensation actually paid, in narrative or graphical form, or a 
combination of the two.\365\
---------------------------------------------------------------------------

    \364\ See supra Section II.A.2.iii.
    \365\ As with the Tabular List, we are also not requiring 
registrants to provide the methodology used to calculate the 
Company-Selected Measure. We believe such a requirement would be 
overly burdensome on registrants, particularly when the measure is 
already well understood by investors or otherwise disclosed. 
However, registrants should consider if such disclosure would be 
helpful to investors to understand the Company-Selected Measure, or 
necessary to prevent the Company-Selected Measure disclosure from 
being confusing or misleading.
---------------------------------------------------------------------------

    We believe that providing a quantified Company-Selected Measure, 
along with the Tabular List, will provide investors with useful context 
for understanding the measures actually used by registrants in their 
compensation programs. In order to allow investors to understand the 
measure that is most important, we are only requiring registrants to 
provide one Company-Selected Measure. However, we recognize some 
registrants may have additional performance measures (including non-
financial measures) that they believe are ``important'' measures and 
that could warrant quantified disclosure. We note that, under the Plain 
English principles (discussed below \366\), registrants may provide 
additional performance measures as new columns in the table. However, 
such additional disclosures may not be misleading or obscure the 
required information, and the additional performance measures may not 
be presented with greater prominence than the required disclosure.\367\ 
If a registrant elects to provide any additional performance measures 
in the table, each additional measure must also be accompanied by a 
clear description of the relationship between executive compensation 
actually paid to the registrant's PEO, and, on average, to the other 
NEOs, and that measure.\368\ We believe clarifying that registrants 
have the flexibility to include additional measures will, to some 
degree, alleviate concerns raised by some commenters in response to the 
Reopening Release that selecting one Company-Selected Measure was 
overly simplistic and did not reflect how companies actually approach 
their compensation programs, while also providing registrants the 
opportunity to provide context to the other mandatory measures 
disclosed in the table.
---------------------------------------------------------------------------

    \366\ See infra Section II.F.3.
    \367\ Consistent with the Plain English principles, if a 
registrant elects to include multiple additional measures in the 
table, it should consider whether the addition of those measures 
modifies the disclosure in such a way that the disclosure becomes 
misleading, the required information in the table becomes obscured, 
or the additional measures are presented with greater prominence 
than the required disclosure. In addition, in situations where 
registrants elect to describe multiple measures because they believe 
multiple measures are equally the ``most important,'' they would 
still be required to select one Company-Selected Measure, but could 
provide explanatory disclosure, for example, about why additional 
measures are added and the reason that the Company-Selected Measure 
was selected.
    \368\ See 17 CFR 229.402(v)(5).
---------------------------------------------------------------------------

    As the Company-Selected Measure must be a measure included in the 
Tabular List,\369\ the determination of ``most important'' that 
registrants must use for selecting Company-Selected Measures is the 
same as the determination they must use for selecting required measures 
for the Tabular List (i.e., the ``most important'' determination is 
made based on the most recently completed fiscal year and the measures 
required to be disclosed are financial measures of performance). We are 
limiting the measures required to be included in the Tabular List (and 
to be included as the Company-Selected Measure) to financial 
performance measures given the statutory language referencing ``the 
relationship between executive compensation actually paid and the 
financial performance of the issuer.'' \370\ We recognize that some 
registrants may consider one or more non-financial performance measures 
to be their most important measures for executive compensation 
purposes. In addition to the option under the final rules to include 
such measures in the Tabular list, under the Plain English principles, 
those registrants can supplement their mandatory pay-versus-performance 
disclosure with disclosure

[[Page 55160]]

about those non-financial performance measures, as discussed 
below.\371\
---------------------------------------------------------------------------

    \369\ See 17 CFR 229.402(v)(2)(vi).
    \370\ 15 U.S.C. 78n(i) (emphasis added).
    \371\ See infra Section II.F.3.
---------------------------------------------------------------------------

    The table will include the numerically quantifiable performance of 
the issuer under the Company-Selected Measure for each covered fiscal 
year. For example, if the Company-Selected Measure for the most recent 
fiscal year was total revenue, the company would disclose its 
quantified total revenue performance in each covered fiscal year. The 
Company-Selected Measure could change from one filing to the next, and 
we acknowledge that some commenters were concerned that registrants may 
change their Company-Selected Measure in order to present the 
relationship of pay to performance in a positive light.\372\ However, 
we believe limiting the Company-Selected Measure to compensation linked 
to performance for the most recently completed fiscal year will provide 
investors with visibility into the registrant's current executive 
compensation program, and avoid situations in which the Company-
Selected Measure is not a measure that is currently used by the 
registrant (i.e., when a measure is only the ``most important'' measure 
based on historical usage). In addition, as is the case for the Tabular 
List, we believe limiting the Company-Selected Measure to the most 
recent fiscal year will allow registrants to more easily calculate and 
assess which measure is the ``most important.''
---------------------------------------------------------------------------

    \372\ See letters from Better Markets et al. (suggesting that 
the Company-Selected Measure should remain the same for five years 
to prevent firms from using a measure that best justifies 
compensation in a given year); see also letters from CalPERS 2022 
(suggesting that if the Company-Selected Measure is changed, the 
prior and current Company-Selected Measures should both be reported 
for some period of time).
---------------------------------------------------------------------------

    Similarly to the Tabular List, we do not believe it would be 
appropriate to limit the Company-Selected Measure to a measure relating 
only to the PEO's compensation, because our understanding is that 
Congress intended for the rules to provide disclosure about both PEOs 
and the remaining NEOs.
    We are not mandating that the methodology used to calculate the 
Company-Selected Measure be included in the registrant's disclosure. 
However, as discussed above,\373\ registrants will be required to 
provide a narrative, graphical, or combined narrative and graphical 
description of the relationships between executive compensation 
actually paid to the PEO, and, on average, the other NEOs, and the 
Company-Selected Measure, and may cross-reference to other disclosures 
elsewhere in the applicable disclosure document that describe the 
processes and calculations that go into determining NEO compensation as 
it relates to the Company-Selected Measure, if they elected to do so. 
In addition, registrants are permitted to supplement their Company-
Selected Measure disclosure, so long as any additional disclosure is 
clearly identified as supplemental, not misleading and not presented 
with greater prominence than the required disclosure.
---------------------------------------------------------------------------

    \373\ See supra Section II.A.2.iii.
---------------------------------------------------------------------------

    Further, we recognize that a registrant's Company-Selected Measure, 
or additional measures included in the table, may be non-GAAP financial 
measures. Under existing CD&A requirements, if a company discloses a 
target level that applies a non-GAAP financial measure in its CD&A, the 
disclosure will not be subject to the general rules regarding 
disclosure of non-GAAP financial measures, but the company must 
disclose how the number is calculated from its audited financial 
statements.\374\ Because the disclosure required by the final rules is 
intended, among other things, to supplement the CD&A, we believe it is 
appropriate to treat non-GAAP financial measures provided under Item 
402(v) of Regulation S-K consistently with the existing CD&A 
provisions. As a result, the final rules specify that disclosure of a 
measure that is not a financial measure under generally accepted 
accounting principles will not be subject to Regulation G and Item 
10(e) of Regulation S-K; however, disclosure must be provided as to how 
the number is calculated from the registrant's audited financial 
statements.
---------------------------------------------------------------------------

    \374\ See Instruction 5 to Item 402(b) of Regulation S-K. The 
general non-GAAP financial measure provisions are specified in 
Regulation G [17 CFR 244.100 through 102] (``Regulation G'') and 
Item 10(e) of Regulation S-K [17 CFR 229.10(e)] (``Item 10(e) of 
Regulation S-K'').
---------------------------------------------------------------------------

E. Time Period Covered

1. Proposed Amendments
    We proposed requiring all registrants, other than SRCs, to provide 
the pay-versus-performance disclosure for the five most recently 
completed fiscal years, and requiring SRCs to provide disclosure for 
the three most recently completed fiscal years. We also proposed 
providing transition periods for registrants: SRCs would only be 
required to provide the Item 402(v) of Regulation S-K disclosure for 
the last two fiscal years in the first applicable filing after the 
rules became effective; and all other registrants would be required to 
provide the disclosure for three fiscal years, in the first applicable 
filing after the rules became effective, and to provide disclosure for 
an additional year in each of the two subsequent annual proxy filings 
where disclosure is required.
    The Proposing Release also provided that the pay-versus-performance 
disclosure would only need to be provided for years in which a 
registrant was a reporting company pursuant to Section 13(a) of the 
Exchange Act \375\ or Section 15(d) of the Exchange Act \376\ 
(``Section 15(d)''), consistent with the phase-in period for new 
reporting companies in their Summary Compensation Table 
disclosure.\377\
---------------------------------------------------------------------------

    \375\ 15 U.S.C. 78m(a).
    \376\ 15 U.S.C. 78o(d).
    \377\ See Instruction 1 to 17 CFR 229.402(c) and Instruction 1 
to 17 CFR 229.402(n).
---------------------------------------------------------------------------

2. Comments
    Several commenters supported the proposed disclosure periods,\378\ 
while several others generally opposed them.\379\ Some commenters who 
opposed the proposed disclosure periods stated that the periods were 
too short to measure management's performance; \380\ while others 
argued the periods were too long, creating burdensome costs for 
registrants, and were inconsistent with other approaches taken in the 
proxy statement.\381\
---------------------------------------------------------------------------

    \378\ See letters from CII 2015; CFA; Farient; LWC; OPERS; 
Quirin; SVA; and TIAA.
    \379\ See letters from AON; BorgWarner; CEC 2015; Celanese; Hay; 
Hyster-Yale; McGuireWoods; NACCO; PNC; SCG; and WorldatWork.
    \380\ See Letters from Hyster-Yale and NACCO.
    \381\ See letters from BorgWarner; Celanese; Hay; and 
WorldatWork.
---------------------------------------------------------------------------

    Commenters suggested a number of different alternative time 
periods. Some commenters suggested permitting registrants to 
voluntarily disclose additional years in the tabular disclosure,\382\ 
while others opposed permitting additional years of disclosure.\383\ 
Some other commenters recommended the Commission use a three-year 
period,\384\ with some of those commenters noting that three-year 
periods will have less NEO turnover, meaning registrants will need to 
make less explanatory disclosure.\385\ One commenter suggested we only 
require the disclosure for one year.\386\ Another commenter suggested 
allowing registrants to set the time period

[[Page 55161]]

covered, with a minimum requirement, such as three years.\387\ Finally, 
one commenter did not propose a specific time period, but rather 
suggested the longer the period the better.\388\
---------------------------------------------------------------------------

    \382\ See letters from CFA; NACD 2015; Andrea Pawliczek, dated 
Mar. 4, 2022; and Simpson Thacher.
    \383\ See letters from Barnard 2015 and Quirin.
    \384\ See letters from AON; Celanese; FSR; Hay; Honeywell; 
McGuireWoods; SCG; and WorldatWork; see also letters from Davis Polk 
2015 and Davis Polk 2022 (each recommending a one-year period, but 
suggesting a three-year period as an alternative to their 
suggestion).
    \385\ See letters from AON and SCG.
    \386\ See letters from Davis Polk 2015 and Davis Polk 2022.
    \387\ See letter from Hall.
    \388\ See letter from Hermes.
---------------------------------------------------------------------------

    Commenters were also divided on the suggested transition period. 
Some commenters supported the transition period,\389\ while one 
commenter opposed it.\390\ Others questioned whether there would be 
significant enough costs to justify applying a transition period.\391\ 
One commenter specifically supported a transition period for newly 
public companies.\392\
---------------------------------------------------------------------------

    \389\ See letters from BRT; CFA; Hook; McGuireWoods; and TIAA.
    \390\ See letter from Barnard 2015.
    \391\ See letters from CII 2015 and Hermes.
    \392\ See letter from Pearl.
---------------------------------------------------------------------------

    Commenters offered a few alternatives to the proposed transition 
period, including a one-year transition period, not requiring reporting 
until the anniversary of the effective date of the rule,\393\ and a 
longer transition period.\394\
---------------------------------------------------------------------------

    \393\ See letters from BRT and NIRI 2015.
    \394\ See letter from Pearl.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the time periods as proposed. We believe that 
requiring registrants, other than SRCs, to provide pay-versus-
performance disclosure for a five year period will provide a meaningful 
period over which a relationship between annual measures of pay and 
performance over time can be evaluated. Further, we are requiring that 
the disclosure be in order beginning with the most recent fiscal year. 
We believe that requiring a shorter time period, for all registrants, 
may not provide investors with enough data to evaluate the pay-versus-
performance relationship, while requiring a longer period may be overly 
burdensome to registrants. We also believe that the scaled disclosure 
requirement under which SRCs may elect to provide three years of pay-
versus-performance disclosure will provide investors with an 
appropriate time horizon over which to observe a relationship between 
pay and performance, while also remaining consistent with the scaled-
disclosure approach generally applied to SRCs under our executive 
compensation rules. While SRCs generally are only required to provide 
two years of executive compensation disclosure in filings with the 
Commission, because the final rules include a transition period that 
permits an existing SRC to provide two years of disclosure, instead of 
three, in the first applicable filing after the rules become effective, 
and three years of disclosure in subsequent filings, we do not believe 
requiring three years of pay-versus-performance data will be unduly 
burdensome on SRCs.\395\
---------------------------------------------------------------------------

    \395\ See infra Section II.G (discussing the required 
disclosures for SRCs).
---------------------------------------------------------------------------

    We are also adopting the transition periods and the requirement 
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, as proposed. We believe both of 
these provisions will mitigate concerns expressed by some commenters 
regarding the costs of the potential disclosure, while also, over time, 
providing investors with a meaningful way to evaluate a registrant's 
period pay-versus-performance disclosure. In order to give companies 
adequate time to implement the new disclosures, we are providing that 
companies are required to comply with Item 402(v) of Regulation S-K in 
proxy and information statements that are required to include the Item 
402 of Regulation S-K disclosure for fiscal years ending on or after 
December 16, 2022.
    With respect to some commenters' suggestions that we should permit 
registrants to voluntarily provide additional years of disclosure, as 
noted below, under the Plain English principles, the final rules will 
permit registrants to provide additional years of disclosure, so long 
as doing so would not be misleading and would not obscure the required 
information.

F. Permitted Additional Pay-Versus-Performance Disclosure

1. Proposed Amendments
    We proposed applying the Plain English principles in 17 CFR 
240.13a-20 and 17 CFR 240.15d-20 to the pay-versus-performance 
disclosures. We noted that, under those principles, registrants would 
be permitted to provide additional information beyond what is 
specifically required by the rules so long as the information is not 
misleading and would not obscure the required information. As discussed 
in the Proposing Release, we note 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.'' \396\
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    \396\ See Executive Compensation and Related Person Disclosure, 
Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 8, 2006)], 
at Section II.C.6.
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2. Comments
    Some commenters supported applying the Plain English principles to 
the pay-versus-performance disclosure, noting that their application 
would be beneficial for both investors and the financial 
community.\397\
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    \397\ See letters from McGuireWoods and PG 2015; see also letter 
from Hermes (supporting a ``plain English'' requirement for the pay-
versus-performance disclosure, but questioning whether its 
application ``can be mandated through regulation'').
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3. Final Amendments
    The final amendments allow registrants to provide additional pay-
versus-performance information beyond what is specifically required by 
Item 402(v) of Regulation S-K, so long as doing so would not be 
misleading and would not obscure the required information. For example, 
registrants that are already providing voluntary pay-versus-performance 
disclosures may generally continue to provide such disclosures in their 
present format, or could include disclosure of long-term performance 
metrics measured over periods longer than a single fiscal year.\398\ 
Subject to these same principles, registrants will be permitted to 
include additional compensation and performance measures, or additional 
years of data, in the newly required table. Any supplemental measures 
of compensation or financial performance and other supplemental 
disclosures provided by registrants must be clearly identified as 
supplemental, not misleading, and not presented with greater prominence 
than the required disclosure. For example, depending on the facts and 
circumstances, a registrant could use a heading in the table indicating 
that the disclosure is supplemental, or include language in the text of 
its filing stating that the disclosure is supplemental. As noted above, 
to the extent additional performance measures are included in the 
table, these must also be accompanied by a clear description of their 
relationship to executive compensation actually paid to the PEO

[[Page 55162]]

and to the average such compensation of the other NEOs. As discussed in 
the Proposing Release, and noted by commenters, we believe applying the 
Plain English principles to the pay-versus-performance disclosure will 
facilitate investors' understanding and decision-making with respect to 
the pay-versus-performance disclosure.
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    \398\ As noted above, the placement and presentation of the 
information required by the final rules relative to existing 
disclosures may not obscure the required disclosures, place the 
required disclosures in a less prominent position, or otherwise 
mislead or confuse investors. In addition, a registrant should 
consider whether retaining its existing pay-versus-performance 
disclosure would be duplicative of the disclosures required by the 
final rules, and, if so, it may need to consider mitigating any such 
duplication.
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G. Required Disclosure for Smaller Reporting Companies

1. Proposed Amendments
    The Proposing Release would have required SRCs to provide 
disclosure under Item 402(v) of Regulation S-K, but the disclosure 
would be scaled for those companies, consistent with SRCs' existing 
scaled executive compensation disclosure requirements. Specifically, as 
proposed, SRCs would:
     Only be required to present three, instead of five, fiscal 
years of disclosure under new Item 402(v) of Regulation S-K;
     Not be required to disclose amounts related to pensions 
for purposes of disclosing executive compensation actually paid;
     Not be required to present peer group TSR;
     Be permitted to provide two years of data, instead of 
three, in the first applicable filing after the rules became effective; 
and
     Be required to provide disclosure in the prescribed table 
in XBRL format beginning in the third filing in which it provides-pay-
versus performance disclosure.
    In the Reopening Release, the Commission indicated that it was 
considering requiring SRCs to disclose the income or loss before income 
tax expense and net income measures, but not the Company-Selected 
Measure or the list of their five most important measures.
2. Comments
    Some commenters supported fully exempting SRCs from the pay-versus-
performance disclosure requirements, stating that the disclosure 
requirements would be disproportionally burdensome to SRCs; \399\ 
executive disclosure issues are less acute at SRCs; \400\ and TSR is a 
more problematic measure for SRCs due to the relative illiquidity and 
volatility of SRCs' shares.\401\ One commenter suggested that the 
Commission exempt SRCs from the disclosure requirements for five years, 
so that the Commission could first analyze the impact of the disclosure 
requirements on larger registrants.\402\ Another commenter suggested 
that the pay-versus-performance disclosure be voluntary for SRCs.\403\
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    \399\ See letters from CCMC 2015; Mercer; Pearl; TCA 2015; and 
TCA 2022.
    \400\ See letter from CCMC 2015.
    \401\ See letters from Mercer and Pearl.
    \402\ See letters from NIRI 2015 and NIRI 2022.
    \403\ See letter from ICGN.
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    Other commenters stated that we should not exempt SRCs from the 
disclosure requirements.\404\ One commenter opposed to exempting SRCs 
indicated that a lack of transparency could have negative market 
effects for SRCs.\405\ In addition, one commenter specifically 
supported requiring SRCs to disclose income or loss before income tax 
expense, net income, the Company-Selected Measure, and the list of the 
five most important measures.\406\
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    \404\ See letters from AB; Better Markets; CalPERS 2015; 
CalSTRS; CII 2015; Eileen Morrell, dated Mar. 6, 2022 (``Morrell''); 
SBA-FL; and Troop.
    \405\ See letter from CalPERS 2015.
    \406\ See letter from CII 2022.
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    With respect to the timing of the disclosure, one commenter, who 
supported SRCs being subject to the full pay-versus-performance 
disclosure requirement, suggested a one year ``grace period.'' \407\ 
Another commenter suggested that SRCs provide five years of data, but 
that we provide SRCs with a three year transition period requiring two 
years of data in the first applicable filing after the rules became 
effective, and increasing until the fourth applicable filing after the 
rules become effective, when all five years of data would be 
required.\408\
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    \407\ See letter from AB.
    \408\ See letter from Hermes.
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    As discussed above, a number of commenters supported requiring all 
registrants to use Inline XBRL to tag their pay-versus-performance 
disclosure,\409\ with one specifically stating that all filers are now 
familiar with Inline XBRL.\410\ On the other hand, one commenter 
specifically suggested, in response to the Proposing Release, that we 
exempt SRCs from any XBRL tagging requirement.\411\
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    \409\ See letters from CII 2022; Huddart; ICGN; and XBRL US.
    \410\ Letter from XBRL US.
    \411\ See letter from Hay.
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3. Final Amendments
    We are adopting the scaled disclosure requirements for SRCs as 
described in the Proposing Release (and with respect to the net income 
measure, the Reopening Release). For the reasons noted above,\412\ we 
believe requiring SRCs to provide three instead of five years is 
appropriate, and is aligned with SRCs' existing scaled executive 
compensation disclosure requirements. While the three-year period 
applicable for the disclosure is longer than what SRCs currently are 
required to disclose in the Summary Compensation Table, we believe the 
pay-versus-performance calculations, or the information required to 
make the calculations, for the additional year would generally be 
available in SRCs' disclosures from prior years.
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    \412\ See supra Section II.E.3.
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    We also believe that requiring SRCs to provide peer group TSR, a 
Company-Selected Measure, a Tabular List, or disclose amounts related 
to pensions would be unduly burdensome for SRCs, which, unlike larger 
registrants, are not otherwise required to present the TSR of a peer 
group or disclosure of how executive compensation relates to 
performance in a CD&A, and are subject to scaled compensation 
disclosure that does not include pension plans. Finally, we believe a 
transition period that would permit SRCs to provide two years of data, 
instead of three, in the first applicable filing after the rules become 
effective is appropriate, as is a phase-in period to allow SRCs to 
provide the required Inline XBRL data beginning in the third filing in 
which it provides pay-versus-performance disclosure, instead of the 
first.

III. Other Matters

    If any of the provisions of these rules, or the application thereof 
to any person or circumstance, is held to be invalid, such invalidity 
shall not affect other provisions or application of such provisions to 
other persons or circumstances that can be given effect without the 
invalid provision or application.
    Pursuant to the Congressional Review Act,\413\ the Office of 
Information and Regulatory Affairs has designated these rules as not a 
``major rule,'' as defined by 5 U.S.C. 804(2).
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    \413\ 5 U.S.C. 801 et seq.
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IV. Compliance Dates

    In order to give companies adequate time to implement these 
disclosures, we are requiring registrants to begin complying with Item 
402(v) of Regulation S-K in proxy and information statements that are 
required to include Item 402 disclosure for fiscal years ending on or 
after December 16, 2022.

V. Economic Analysis

A. Background

    We are adopting these final rules to satisfy the statutory mandate 
of Section 14(i). The Senate Report that accompanied the statute 
references shareholder interest in the relationship

[[Page 55163]]

between executive pay and performance as well as the general benefits 
of transparency of executive pay practices.\414\ As discussed above, we 
believe that the statute is intended to provide further disclosures 
concerning a registrant's executive compensation program for 
shareholders to consider when making related voting decisions, such as 
decisions with respect to the shareholder advisory vote on executive 
compensation, votes on other compensation matters, and director 
elections.
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    \414\ 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 Senate Report supra note 
4.
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    The final rules require the disclosure of information that is 
largely already reported under current disclosure rules, but that is 
currently not computed or presented in the way the final rules will 
require. This repackaging of some of the information from existing 
disclosures into the required pay-versus-performance disclosure is 
intended to allow investors to more quickly or easily process the 
information accurately.
    The final rules require registrants to present the values of 
prescribed measures of executive compensation and financial performance 
for each of their five most recently completed fiscal years (three 
years for SRCs) in a standardized table in proxy or information 
statements in which executive compensation disclosure is required. 
Registrants will also be required to provide ``clear descriptions'' of 
the relationships between the compensation and performance measures in 
the table (and between TSR and peer group TSR), but will be allowed to 
choose the format used to present the relationships, such as graphical 
or narrative descriptions (or a combination of the two). The final 
rules will also allow registrants to supplement the required elements 
of the disclosure with additional measures or additional years of data, 
subject to certain restrictions. Registrants will be required to 
provide the disclosure in a structured data language using Inline XBRL.
    The final rules reflect several modifications relative to the 
proposed rules in response to comments received. For example, one area 
of significant comment on the Proposing Release was the proposal's 
reliance on TSR (and, for registrants other than SRCs, peer group TSR) 
as the exclusive measure of financial performance used to present the 
relation of pay with performance.\415\ The Reopening Release discussed, 
solicited comment on, and analyzed the economic effects of some 
possible additional measures of financial performance that the 
Commission was considering requiring. The final rules introduce two of 
these additional measures to the table: net income and, for registrants 
other than SRCs, a Company-Selected Measure. In addition, the final 
rules require registrants other than SRCs to provide a Tabular List of 
the most important financial performance measures used to link 
executive compensation actually paid, for the most recent fiscal year, 
to company performance. The additions will broaden the picture of 
registrant performance presented in the disclosure, providing 
additional detail and context that could enhance the usefulness of the 
disclosure by certain registrants or for certain investors. The 
additions will also entail some additional compliance costs and could 
make it more difficult for investors to quickly review the disclosure.
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    \415\ See supra notes 229 and 230.
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    Many commenters to the Proposing Release also raised concerns that, 
under the proposed approach, the year to which company performance 
would be attributed and the year in which associated pay would be 
recognized would frequently be mismatched,\416\ which could 
significantly limit the usefulness of the proposed disclosure. To 
address these comments, the final rules require equity awards to be 
revalued more frequently than had been proposed in order to better 
align pay and any related performance, at the expense of somewhat 
greater costs to registrants of computing the prescribed measure of 
pay.
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    \416\ See infra note 631.
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    We are mindful of the costs and benefits of the final rules. The 
discussion below addresses the economic effects of the final rules, 
including their anticipated costs and benefits, as well as the likely 
effects of the final rules on efficiency, competition, and capital 
formation.\417\ The final rules 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 
the final rules.
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    \417\ Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] 
requires the Commission, when engaging in rulemaking where it is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. Further, Section 23(a)(2) of the 
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when 
making rules under the Exchange Act, to consider the impact that the 
rules would have on competition, and prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act.
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B. Baseline

    To assess the economic impact of the final rules, 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.
1. Affected Parties
    We consider the impact of the final rules on investors and 
registrants (and their NEOs). The final rules will apply to all 
companies that are registered under Section 12 of the Exchange Act 
\418\ (``Section 12'') and are therefore subject to the Federal proxy 
rules, except EGCs. The final rules will 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) of the Exchange Act \419\ 
(``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.\420\
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    \418\ 15 U.S.C. 78l.
    \419\ 15 U.S.C. 78l(g).
    \420\ Registrants subject to the final rules will be required to 
make pay-versus-performance disclosure under Item 402(v) of 
Regulation S-K 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) of the Exchange Act [15 
U.S.C. 78n(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 or bylaws, or otherwise imposed by law 
in the state of incorporation or stock-exchange (if listed), not the 
Federal securities laws. For example, NYSE, NYSE American, and 
Nasdaq require the solicitation of proxies for annual meetings of 
shareholders. A Section 12(b) of the Exchange Act [15 U.S.C. 78l(b)] 
(``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 Item 402(v) of 
Regulation S-K 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 Item 402(v) of Regulation S-K due to the requirement to 
file and disseminate an information statement under Section 14(c).

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[[Page 55164]]

    We estimate that approximately 4,530 registrants will be subject to 
the final rules, including approximately 1,860 SRCs.\421\ The 
proportion of SRCs among the affected registrants is expected to be 
similar to that which was reported at the time of the Proposing 
Release.\422\ Among all registrants subject to the Federal proxy rules, 
we estimate that there are approximately 1,275 EGCs, of which 
approximately 1,065 are also SRCs, none of which will be subject to the 
final rules.\423\
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    \421\ These estimates are based on a review of calendar year 
2021 EDGAR filings. The final rules will apply to BDCs to the extent 
they are internally managed (i.e., have named executive officers 
within the meaning of Item 402 of Regulation S-K) and are not EGCs. 
We estimate that there are approximately seven affected BDCs, which 
are included in the estimate of affected registrants.
    \422\ Based on 2021 filings, SRCs represent about 41% (1,860 out 
of 4,530) of the affected issuers, while the Proposing Release 
reported that, based on 2013 filings, about 2,430 out of 6,075, or 
40%, of the affected issuers were expected to be SRCs. See Proposing 
Release at 30. The Commission amended the smaller reporting company 
definition effective September 2018, with the effect of expanding 
the number of registrants that qualified as SRCs. See Amendments to 
the Smaller Reporting Company Definition, Release No. 33-10513 (June 
28, 2018) [83 FR 31992 (July 10, 2018)]. However, EGCs are not 
subject to the final rules, and the number of EGCs subject to the 
Federal proxy rules, including SRCs that are also EGCs, has grown 
more than three-fold since the time of the Proposing Release (from 
about 360, as reported in the Proposing Release, to about 1,275 
based on our review of 2021 filings), offsetting any increase in the 
proportion of SRCs subject to the final rules.
    \423\ These estimates are based on a review of calendar year 
2021 EDGAR filings.
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2. Existing Disclosures and Analyses
    The registrants that will be subject to the final rules must 
currently comply with Item 402 of Regulation S-K, which requires the 
disclosure of extensive information about the compensation of NEOs, 
and, except in the case of SRCs, with Item 201(e) of Regulation S-K, 
which requires graphical disclosure of registrant TSR and peer group 
TSR. They are also subject to financial statement and disclosure 
requirements under Regulation S-X. The underlying information necessary 
to provide the required pay-versus-performance disclosure is, with 
limited exceptions discussed below, already encompassed by these 
existing disclosure requirements. However, the existing disclosures 
might not present the underlying information in a format that allows 
investors to readily assess the alignment of pay and performance.
    Under the final rules, the definition of executive compensation 
actually paid for a fiscal year is, generally,\424\ total compensation 
as reported in the Summary Compensation Table for that year (i) less 
the change in the actuarial present value of pension benefits,\425\ 
(ii) less the grant-date fair value of any stock and option awards 
granted during that year, (iii) plus the pension service cost for the 
year and, in the case of any plan amendments (or initiations), the 
associated prior service cost (or less any associated credit), and (iv) 
plus the change in fair value of outstanding and unvested stock and 
option awards during that year (or as of the vesting date or the date 
the registrant determines the award will not vest, if within the year) 
as well as the fair value of new stock and option awards granted during 
that year as of the end of the year (or as of the vesting date or the 
date the registrant determines the award will not vest, if within the 
year). Adjustments (i) and (iii) with respect to pension plans will not 
apply to SRCs because they are not otherwise required to disclose 
executive compensation related to pension plans.
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    \424\ The required deductions and additions in computing 
executive compensation actually paid are provided in greater detail 
in Section II.C above.
    \425\ 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.
---------------------------------------------------------------------------

    Under the baseline, investors generally should already have the 
required data to compute a reasonable estimate of executive 
compensation actually paid as defined in the final rules, even though 
registrants are not required to compute or disclose this measure. 
Specifically, under existing requirements of Item 402 of Regulation S-
K, registrants must report, in the Summary Compensation Table, the 
value of total compensation and each of its components,\426\ including 
the aggregate grant-date fair value of equity awards and, for 
registrants other than SRCs, the total change (if positive) in 
actuarial present value of pension benefits, for each NEO. The total 
compensation and amounts required to be subtracted from this total in 
the computation of executive compensation actually paid for each NEO, 
or adjustments (i) and (ii) referenced above, are thus already 
available in the Summary Compensation Table.\427\
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    \426\ For registrants that are not SRCs, 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 dollar value of any non-equity incentive plan 
award earnings, 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.
    \427\ While the time period applicable for existing Item 402 of 
Regulation S-K disclosures (two years for SRCs and three years for 
other affected registrants) is shorter than will be required for the 
pay-versus-performance disclosure (three years for SRCs 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. New registrants would not be 
required to report data for years in which they were not reporting 
companies.
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    The amounts that must be added back in this computation, or 
adjustments (iii) and (iv) referenced above, are not required to be 
directly reported under existing disclosure requirements, but can be 
estimated based on existing disclosures. In particular, Item 402 of 
Regulation S-K requires further disclosure about equity awards and 
pension plans, such as, for non-SRCs, the Grant of Plan-Based Awards 
Table and the Pension Benefits Table and the associated narrative and 
footnotes, which include the detailed terms of these components of 
compensation and certain valuation assumptions. Using these existing 
disclosures and other public data, it is possible for investors to make 
reasonable (though perhaps not identical) estimates of the annual and 
vesting-date fair values of outstanding stock and option grants. In 
fact, various third parties, such as proxy advisory service providers 
and compensation consultants, currently make similar computations using 
existing disclosures in order to construct alternative pay measures as 
part of the services they provide to certain investors and/or 
registrants.\428\ Market participants other

[[Page 55165]]

than those providing actuarial services may have less experience with 
the computations required with respect to pension plans. However, it is 
still possible to compute an estimate of pension service cost for the 
year (plus the prior service cost, or credit, associated with any plan 
amendments or initiations) by using existing disclosures and public 
data to construct the required actuarial assumptions and 
computations.\429\
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    \428\ See, e.g., Institutional Shareholder Services, ISS United 
States Compensation Policies: Frequently Asked Questions (updated 
Dec. 17, 2021), available at https://www.issgovernance.com/file/policy/active/americas/US-Compensation-Policies-FAQ.pdf (``ISS 
FAQ'') (describing their computation of ``realizable pay'' as ``all 
non-incentive compensation paid [and] the value of equity or cash 
incentive awards earned or, if the award remains on-going, revalued 
at target level as of the end of the measurement period''); Glass 
Lewis, Pay-for-Performance Methodology & FAQ (Oct. 2020), available 
at https://www.glasslewis.com/wp-content/uploads/2020/10/2020-NA-Compensation-Overview-FAQs.pdf (``Glass Lewis Methodology'') 
(describing compensation computations in which the company 
``performs its own stock and option valuations and excludes any cash 
severance or changes in pension value''); Equilar, Pay for 
Performance [Brochure] (Nov. 2020), available at https://www.equilar.com/pay-for-performance (providing screenshots of the 
their pay for performance profile, which presents compensation 
computed in numerous different ways, including under multiple 
definitions of ``realizable pay'' that would require the revaluation 
of equity awards after the grant date).
    \429\ While service costs associated with defined benefit plans 
are currently disclosed in financial statement footnotes, these 
costs are currently not disaggregated by individual. Pension plan 
benefit formulas and certain pension-related assumptions (such as 
discount rates) are currently disclosed in proxy statements or 
financial statement footnotes. Additional assumptions required to 
compute service costs, such as expectations with respect to 
retirement age, mortality, and future compensation growth, may not 
be reported or may differ for this purpose from assumptions 
presented in, or implied by, existing disclosures. While an outsider 
may not be as well positioned to estimate some of these required 
inputs as management, deriving reasonable assumptions should be 
possible based on broader population statistics and trends.
---------------------------------------------------------------------------

    That said, these computations can be complex and investors would 
bear costs to make such computations or obtain them from third parties. 
Further, if investors or third parties were to estimate executive 
compensation actually paid based on existing disclosures, these 
estimates may differ from each other and from similar estimates made by 
registrants themselves. For example, because registrants are not 
currently required to disclose the equity valuation assumptions that 
they would apply at any time after the grant date (which may differ 
from the grant-date assumptions), investors may not know how the 
registrant would apply its discretion in choosing from a range of 
reasonable assumptions to compute fair values at these other 
dates.\430\ Estimates constructed by or on behalf of investors may also 
differ from registrant estimates if simplifications are made in order 
to more easily produce estimates for a large number of 
registrants.\431\
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    \430\ For SRCs, which are not required to provide the Grant of 
Plan-Based Awards Table and accompanying narrative and footnotes, 
investors may also not know all of the detailed terms of each equity 
award, which could affect the accuracy of fair value estimates 
constructed by, or on behalf of, investors.
    \431\ See, e.g., Charlie Pontrelli (Equilar), Proxy Advisors and 
Pay Calculations (Sept. 29, 2019), Harv. L. F. on Corp. Governance 
Blog, available at https://corpgov.law.harvard.edu/2019/09/29/proxy-advisors-and-pay-calculations (noting that ``it is important to 
carefully consider the details of the [alternative pay] calculation 
in order to avoid misleading conclusions,'' and citing the example 
of a situation in which an alternative pay measure was constructed 
using a different option valuation model than that used by a company 
in its disclosures).
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    Information about registrant financial performance is readily 
available to investors under the baseline. The final rules require the 
disclosure of historical TSR, peer group TSR, and net income for up to 
five years. Disclosure of historical TSR and TSR of a particular peer 
group is already required under Item 201(e) of Regulation S-K: 
specifically, this item 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.\432\ The final rules allow registrants to choose to use 
either the peer group required under Item 201(e) of Regulation S-K or, 
if the registrant uses a peer group in benchmarking its compensation, 
the peer group disclosed in its CD&A in its pay versus performance 
disclosure. In the latter case, however, 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 SRCs are not required to 
comply with Item 201(e) of Regulation S-K or CD&A disclosure 
requirements and yet would still have to report their own TSR under the 
final rules, data about their returns is publicly available. The final 
rules do not require SRCs to present the TSR of a peer group. Finally, 
all of the affected registrants are currently required to disclose net 
income as part of their financial reports filed in Form 10-K, including 
three years of data for registrants other than SRCs, and two years of 
data for SRCs, with additional history generally available in previous 
filings.
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    \432\ Item 201(e) of Regulation S-K 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) of Regulation S-K 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.
---------------------------------------------------------------------------

    We expect that the quantitative disclosure of Company-Selected 
Measures called for in the new disclosures is also generally 
encompassed by existing financial statement disclosure requirements or 
voluntarily disclosed in existing proxy statements. However, if 
registrants do not already disclose historical quantitative data for 
these measures over the past five years, the required disclosure may 
provide new information relative to the baseline to the extent that any 
computations required to derive the value of these measures from 
reported financial data may not always be straightforward for investors 
to replicate. The disclosure of a Company-Selected Measure may also 
provide investors with new information in the form of any insight 
gained based on the registrant's choice of which of the measures 
reported in the CD&A in this or previous years was deemed to be the 
most important with respect to the most recent fiscal year.
    While the bulk of the information about compensation and registrant 
performance to be included in the new disclosure is currently available 
to investors elsewhere, not all of this information is accessible for 
large-scale analysis under the baseline. Currently, every affected 
registrant is, or will soon be, subject to Inline XBRL tagging 
requirements for a subset of its other Commission disclosures, 
including the financial statements and financial statement 
footnotes.\433\ Thus, information that is already available from these 
sources--such as net income, some Company-Selected Measures or 
statistics used to compute these measures, and information in footnotes 
regarding inputs and assumptions used to compute pension liabilities 
and stock-based compensation expense--is already tagged and thus 
readily machine-readable. However, other information that will be 
reflected in the required pay-versus-performance disclosure, such as 
the compensation measures, as well as most of the information required 
to compute these measures, is not currently tagged,\434\ and could 
therefore become more readily available for analysis as a result of the 
final rules.
---------------------------------------------------------------------------

    \433\ See 17 CFR 229.601(b)(101) and 17 CFR 232.405 (for 
requirements related to tagging operating company and BDC financial 
statements (including footnotes and schedules), audit reports, and 
BDC prospectus disclosures, in Inline XBRL); 17 CFR 229.601(b)(104) 
and 17 CFR 232.406 (for requirements related to tagging cover page 
disclosures in Inline XBRL); and 17 CFR 229.601(b)(107) and 17 CFR 
232.408 (for requirements related to tagging filing fee exhibit 
disclosures in Inline XBRL).
    \434\ Information currently provided in response to Item 201(e) 
of Regulation S-K, Item 402 of Regulation S-K, or voluntarily in 
proxy statements is not currently required to be tagged.
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    For the affected registrants other than SRCs, Item 402 of 
Regulation S-K requires a description in the CD&A of how the 
registrant's compensation policy relates pay to performance, if

[[Page 55166]]

material to the registrant's compensation policies and decisions. This 
description must include information about any performance targets that 
are a material element of a company's executive compensation policies 
or decisions.\435\ While the final rules will newly require registrants 
other than SRCs to name the top three to seven most important 
performance measures used by the registrant to link NEO pay to 
performance in the most recent fiscal year, these registrants likely 
already disclose these measures in the CD&A under existing 
requirements. However, as in the case of the Company-Selected Measure, 
the Tabular List may provide new information relative to the baseline 
in the form of any insight gained based on the registrant's choice of 
which of the measures reported in the CD&A were deemed to be the most 
important with respect to the last completed fiscal year.
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    \435\ A registrant may omit target levels with respect to 
specific quantitative or qualitative performance-related factors 
involving confidential trade secrets or confidential commercial or 
financial information from the CD&A only if the disclosure of these 
target levels would result in competitive harm. See Instruction 4 to 
Item 402(b) of Regulation S-K.
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    Registrants are not currently required to disclose, in a side-by-
side fashion, or report the actual historical relationship between, any 
measures of executive compensation and registrant financial 
performance. As discussed in the Proposing Release, 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.\436\ Such voluntary 
disclosures remain a minority practice, with the rate of such 
disclosures declining somewhat since the time of the Proposing 
Release,\437\ and they remain highly varied.\438\ Whether or not they 
directly disclose the relationship of pay with performance, some 
registrants disclose alternative measures of pay to demonstrate the 
variation in the value of pay after it is granted, but, again, this is 
a minority practice and the measures used vary.\439\ Thus, even when 
voluntary disclosures are provided, their comparability is limited, 
which can make them difficult for investors to use.\440\ Commenters and 
other observers have also raised concerns that registrants choose to 
present measures that make the alignment of pay and performance appear 
more favorable.\441\
---------------------------------------------------------------------------

    \436\ See Proposing Release at 32. See also, e.g., letters from 
CAP; CEC 2015; Hall; and PG 2015.
    \437\ In 2013, 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 their 
CD&A; in 2021, the same firm found that 24% of the 200 large public 
companies examined included disclosures comparing pay and 
performance. See Proposing Release at n. 120 and Meridian 
Compensation Partners, 2021 Corporate Governance & Incentive Design 
Survey (Fall 2021), available at https://www.meridiancp.com/wp-content/uploads/2021/09/Meridian-2021-Governance-and-Design-Survey-2.pdf (``Meridian 2021 Report''). A different compensation 
consulting firm found in 2021 that 14.1% of the 100 large public 
companies examined included a pay for performance graph in their 
most recent proxy statements, down from 21.6% five years earlier. 
See Equilar, Preparing for Proxy Season 2022 (Nov. 2021), available 
at https://info.equilar.com/preparing-for-proxy-season-2022-report-request.
    \438\ See, e.g., Meridian 2021 Report at 22.
    \439\ See, e.g., Meridian 2021 Report at 23 (stating that 24% of 
the 200 large registrants reviewed included ``realized'' or 
``realizable pay'' disclosure, with 58% of these using ``realizable 
pay'').
    \440\ See, e.g., Kosmas Papadopoulos & John Roe (ISS Analytics), 
Realizable Pay: Insights into Performance Alignment (Apr. 29, 2019), 
Harv. L. Sch. F. on Corp. Governance Blog, available at https://corpgov.law.harvard.edu/2019/04/29/realizable-pay-insights-into-performance-alignment/ (``ISS Realizable Pay Article'') (stating 
that ``[d]ifferent companies and different compensation consultants 
arrived at different ways of calculating and presenting these 
alternative [pay] measures, making it very difficult for investors 
to systematically use these disclosures in the analysis of pay and 
performance--much to the frustration of investors and companies 
alike''). See also, e.g., letters from As You Sow 2015; CAP; and 
Public Citizen 2015.
    \441\ See, e.g., letters from AFREF (stating that ``companies 
have chosen misleading metrics to justify excessive executive 
compensation in the past'') and As You Sow 2015 (stating that 
``every company cherry-picks data that makes it appear in the best 
possible light''); and Dave Michaels, Misleading CEO Pay-for-
Performance Numbers Target of SEC, Bloomberg (Dec. 17, 2013), 
available at https://www.bloomberg.com/news/articles/2013-12-17/misleading-ceo-pay-for-performance-numbers-target-of-sec.
---------------------------------------------------------------------------

    Certain investors also 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. 
Compared to voluntary disclosures by registrants, these third-party 
analyses are available for a larger number of registrants, and apply 
more consistent methodologies across registrants. However, this 
consistency has led to criticism that the analyses are not 
appropriately tailored to the circumstances of different kinds of 
registrants.\442\ Further, these analyses are only available to 
investors who pay for these services, and the computations and 
analytical approaches used vary across the third-party information 
providers.\443\ Some other investors generate their own pay-versus-
performance analyses for the registrants in their portfolios, using a 
variety of approaches.\444\ Given the resources required, smaller 
investors, particularly retail investors, are the least likely, under 
the baseline, to subscribe to third party services or to do their own 
detailed pay-versus-performance computations for each of their 
holdings.
---------------------------------------------------------------------------

    \442\ See, e.g., Compensia, The New ISS Pay-for-Performance 
Methodology--A Closer Look at the Gathering Storm (Jun. 12, 2017), 
available at https://compensia.com/the-new-iss-pay-for-performance-methodology-a-closer-look-at-the-gathering-storm/.
    \443\ See, e.g., Glass Lewis Methodology and Institutional 
Shareholder Services, Pay-for-Performance Mechanics (Dec. 2021), 
available at https://www.issgovernance.com/file/policy/active/americas/Pay-for-Performance-Mechanics.pdf (``ISS Methodology''), 
for the quantitative methodologies for evaluating pay and 
performance alignment used by two major proxy advisory firms.
    \444\ See, e.g., disclosures about the evaluation of executive 
compensation by the California Public Employees Retirement System 
(``CalPERS''), available at https://www.calpers.ca.gov/docs/executive-compensation-analysis-framework.pdf (``CalPERS 
Methodology'') (describing an analysis involving CEO realizable pay 
and TSR, in each case for the company as well as its peers); as 
compared to the corresponding disclosures by Northern Trust Asset 
Management, available at https://www.northerntrust.com/content/dam/northerntrust/pws/nt/documents/investment-management/scorecard-methodology.pdf (``Northern Trust Methodology'') (describing an 
analysis involving the grant date value of CEO pay and nine unique 
fundamental performance indicators in addition to TSR, in all cases 
for the company as well as its peers). See also letter from 
BlackRock (providing detail on its say-on-pay analysis framework).
---------------------------------------------------------------------------

    As was the case at the time of the Proposing Release, there 
continues to be no consensus around the best approach to analyzing the 
alignment of pay and performance, and we do not have complete 
information about the approaches used by all investors. However, the 
varied statistics and analyses that we can observe \445\ investors 
using may still shed some light on the type of information that they 
find to be useful for this purpose, particularly as many of the third-
party analyses have evolved over time based on shareholder demand. For 
example, while many third party and shareholder analyses use a measure 
of pay based on grant date valuations of stock and options,\446\ 
potentially because this has historically been the most readily 
available measure,\447\ most of the recent

[[Page 55167]]

analyses that we have observed also include a ``realizable pay'' 
measure.\448\ While there are various approaches to defining and 
computing ``realizable pay,'' it is generally intended to capture both 
pay that has been realized by an executive in the period as well as an 
updated value, to reflect actual company performance, of outstanding 
equity awards that could potentially be realized in the future.\449\ A 
recent survey by one proxy advisory firm found that 84 percent of 
investors support the use of an outcomes-based pay measure such as 
realizable pay in a quantitative pay-for-performance evaluation,\450\ 
further demonstrating investor demand for such computations.
---------------------------------------------------------------------------

    \445\ We note that the analyses that are disclosed in detail, 
and which we are therefore able to observe, are likely among the 
more sophisticated that are currently in use.
    \446\ See, e.g., ISS FAQ; Northern Trust Methodology; and Glass 
Lewis, Understanding Glass Lewis' Approach to Say on Pay Analysis, 
available at https://www.glasslewis.com/say-on-pay/, (last accessed 
Jun. 29, 2022) (``Glass Lewis Overview'').
    \447\ See, e.g., Mercer, The Role of Realized and Realizable Pay 
in Disclosure and Beyond (2014), available at Mercer LLC's website 
(last accessed Aug. 9, 2022) (``Mercer Realizable Pay Article'') 
(stating that many investors ``favor [the use of realized and 
realizable pay] as an appropriate way to measure and analyze 
executive pay'' but that ``[w]hen shareholders assess their 
companies' executive pay levels, they do so using the information 
most readily available, which includes the . . . summary 
compensation table and past performance'').
    \448\ See, e.g., letter from BlackRock; CalPERS Methodology; ISS 
FAQ; and Glass Lewis Overview. Beginning in 2020, Glass Lewis 
changed its compensation analytics partner, and may no longer be 
reporting realizable pay in its proxy research reports for the US 
market, though it does report a measure of realized pay; it is 
unclear to us whether this shift is temporary or permanent. See, 
e.g., Glass Lewis Sample Proxy Research Reports available at https://www.glasslewis.com/sample-proxy-papers (last accessed May 15, 2022) 
(including some samples for the US market that include realizable 
pay data and others that do not). See also Northern Trust Asset 
Management, Executive Compensation Guide for Proxy Voting and 
Engagements (Nov. 2018), available at https://cdn.northerntrust.com/pws/nt/documents/investment-management/exec-compensation-guide-digital.pdf (stating that companies should ``showcase realized 
versus realizable pay, preferably over five annualized performance 
periods'' in their disclosures, even though, per note 444 above, 
this shareholder focuses on grant date pay in its analysis of pay-
for-performance alignment).
    \449\ Definitions vary as to whether, for example, options are 
valued at fair value or intrinsic value and pay is realized when 
awards are vested or exercised. See, e.g., Mercer Realizable Pay 
Article and ISS Realizable Pay Article.
    \450\ See Institutional Shareholder Services, 2017-2018 Policy 
Application Survey: Summary of Results (Oct. 19, 2017), available at 
https://www.issgovernance.com/file/policy/2017-2018-Policy-Application-Survey-Results-Summary.pdf.
---------------------------------------------------------------------------

    With respect to performance measures, the analyses by or on behalf 
of investors that we observe all use TSR as a primary measure of 
performance.\451\ However, most also supplement TSR with other measures 
of financial performance.\452\ For example, some of the performance 
measures presented by third parties as part of pay-for-performance 
analyses in recent years include operating cash flow growth; earnings 
per share growth; growth in earnings before interest, taxes, 
depreciation and amortization (``EBITDA''); return on equity; return on 
invested capital; return on assets; and various ratios and growth rates 
using ``economic value added.'' \453\ The inclusion of these measures 
may demonstrate investors' interest in additional measures of 
performance, particularly with respect to profitability, when 
considering compensation. Shareholder demand for such information is 
further supported by a recent survey by one proxy advisory firm, in 
which 84 percent of investors surveyed supported the continued 
reporting of some of the profitability measures listed above as part of 
the proxy advisory firm's proxy research in the area of pay-for-
performance.\454\
---------------------------------------------------------------------------

    \451\ See, e.g., letter from BlackRock; CalPERS Methodology; 
Glass Lewis Methodology; ISS FAQ; and Northern Trust Methodology.
    \452\ See, e.g., letter from Blackrock; Glass Lewis Methodology; 
ISS FAQ; and Northern Trust Methodology.
    \453\ See, e.g., Glass Lewis Methodology (listing the following 
performance measures besides TSR: change in operating cash flow, 
earnings per share growth, return on equity, and return on assets, 
with ``change in operating cash flow'' replaced with ``tangible book 
value per share growth'' for companies in the Banks, Diversified 
Financials and Insurance sectors, and with ``growth in funds from 
operations'' for certain REITs); and ISS Methodology (listing the 
following performance measures besides TSR: EVA Margin, EVA Spread, 
EVA Momentum vs. Sales, EVA Momentum vs. Capital, return on equity, 
return on assets, return on invested capital, and EBITDA growth, 
with EBITDA growth replaced by cash flow growth in certain 
industries). ``Economic value added'' (or ``EVA,'' which is a 
registered trademark of Stern Value Management, Ltd) is equal to net 
operating profit after taxes, less a cost of capital charge.
    \454\ See Institutional Shareholder Services, 2019 Global Policy 
Survey: Summary of Results (Sept. 11, 2019), available at https://www.issgovernance.com/file/policy/2019-2020-iss-policy-survey-results-report.pdf.
---------------------------------------------------------------------------

    Overall, we have observed, and commenters have identified, an 
increasing sophistication in how investors are evaluating executive 
compensation disclosures \455\ as well as an increasing refinement in 
how registrants are crafting these disclosures,\456\ particularly after 
about a decade of experience with ``say-on-pay'' votes. However, 
despite the significant amount of information about executive 
compensation disclosed by registrants under the baseline, investors 
have expressed some discontent with current disclosures. For example, 
commenters have indicated that existing disclosures can be challenging 
to review, in that investors find it difficult to collect or interpret 
the information in which they are interested.\457\ Commenters also 
highlighted shareholder concerns about the length and complexity of 
existing compensation disclosures.\458\ These disclosures have 
generally increased in length since the time of the Proposing 
Release.\459\
---------------------------------------------------------------------------

    \455\ See, e.g., letters from AFL-CIO 2022; IBC 2022; and PG 
2022 (stating that ``the SEC's proposal, in contrast, appears to be 
out of step with these more sophisticated approaches of relating pay 
and performance'').
    \456\ See, e.g., letters from Blackrock; NIRI; Pearl; and SCG.
    \457\ See, e.g., letters from AFL-CIO 2022; Better Markets et 
al.; Dimensional; Barbara S. Mortenson, dated May 30, 2015; Public 
Citizen; SVA; and Teamsters. See also Council of Institutional 
Investors, CII Roundtable Report: Real Talk on Executive 
Compensation (March 27, 2018), available at https://www.cii.org/special_reports, at 10 (discussing concerns with the transparency of 
executive compensation).
    \458\ See, e.g., letters from Allison; CCMC; and Ross. See also 
Stanford University, RR Donnelley & Equilar, 2015 Investor Survey: 
Deconstructing Proxy Statements--What Matters to Investors (Feb. 
2015), available at https://www.sec.gov/comments/4-681/4681-3.pdf 
(``Stanford 2015 Investor Survey'').
    \459\ See, e.g., Equilar, Preparing for Proxy Season 2020 
(November 2019), available at https://info.equilar.com/2019-0201-Proxy-Report-2020 (stating that the average CD&A length among the 
100 large companies reviewed grew by almost 500 words from 2014 to 
2017). Part of the increase in length of existing disclosures may be 
due to other regulatory mandates that have been adopted in the 
interim. See, e.g., Pay Ratio Disclosure, Release No. 33-9877 (Aug. 
5, 2015) [80 FR 50103]; and Disclosure of Hedging by Employees, 
Officers and Directors, Release No. 33-10593 (Dec. 20, 2018) [84 FR 
2402].
---------------------------------------------------------------------------

3. Executive Compensation Practices
    The structure of executive compensation, and how it varies across 
the affected registrants, will influence the effects of the final rules 
and how those effects will vary across registrants. For example, 
because the final rules require that equity awards and compensation 
related to pension plans be reflected differently than in the Summary 
Compensation Table, the prevalence and variation in usage and design of 
these items in executive compensation packages may affect the benefits 
of the disclosures as well as the burden involved in making the 
required calculations to provide the disclosures. Similarly, variation 
in the number and nature of performance metrics in executive 
compensation plans may also affect the variation in costs and benefits 
of the final rules across registrants.
    The final rules require that executive compensation actually paid 
include the annual change in fair value, through year-end or the 
vesting date, if earlier, of any outstanding stock and option awards. A 
majority of CEO direct compensation is delivered in the form of such 
equity awards, and their contribution to the total value of such 
compensation at the grant date has grown in recent years.\460\ The use 
of

[[Page 55168]]

stock grants,\461\ and the frequency of such grants to the CEO, by some 
of the potentially affected registrants is reported in the table 
below.\462\
---------------------------------------------------------------------------

    \460\ See, e.g., Gallagher, CEO and Executive Compensation 
Practices Report: 2021 Edition (Oct. 2021), available at https://
www.ajg.com/us/executive-compensation-report-2021/ (``Gallagher 2021 
Study'') (stating that the portion of total direct compensation 
represented by equity awards grew to 71% in 2020 from 65% in 2016 
for CEOs of registrants in the Russell 3000 index).
    \461\ Throughout this release, the term ``stock grant'' or 
``stock award'' is used to refer to the award of instruments such as 
common stock, restricted stock, restricted stock units, phantom 
stock, phantom stock units, common stock equivalent units or any 
other similar instruments that do not have option-like features.
    \462\ 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 requested by Execucomp clients. 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 ``PEO'' used in this 
release and in the final rules.

                   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.........................................         1,694           497           393           580
Stock Grants to 2020 CEO:
    % of CEOs Granted Stock in 2020.....................          81.0          87.5          85.0          82.2
Among subset of firms for which 2020 CEO was also CEO in
 2019 and 2018:
    % of CEOs Granted Stock 0 out of Past 3 Years (2018-         11.2%          8.7%          8.3%         11.7%
     2020)..............................................
    % of CEOs Granted Stock 1 out of Past 3 Years (2018-          5.9%          4.6%          6.3%          5.5%
     2020)..............................................
    % of CEOs Granted Stock 2 out of Past 3 Years (2018-         16.6%         14.2%         19.1%         16.3%
     2020)..............................................
    % of CEOs Granted Stock 3 out of Past 3 Years (2018-         66.3%         72.5%         66.3%         66.5%
     2020)..............................................
Stock Grants to Other 2020 NEOs:
    % of Firms that Granted Stock to Any NEO other than           86.8          92.6          90.3          88.4
     CEO in 2020........................................
    Among Firms that Made Such Grants, Average Number of           4.2           4.0           3.9           3.9
     Other NEOs Granted Stock in 2020...................
----------------------------------------------------------------------------------------------------------------

    Per the first row of each panel of Table 1, roughly 80 to 90 
percent of registrants, both large and small, make use of stock grants 
to CEOs and other NEOs in a given year. The last row of the first panel 
of Table 1 indicates that about two-thirds of registrants, and slightly 
more among the largest registrants, make such grants to the CEO every 
year. The prevalence and frequency of stock grants have not changed 
markedly since the time of the Proposing Release.\463\
---------------------------------------------------------------------------

    \463\ See Proposing Release at Table 1.
---------------------------------------------------------------------------

    The use of option grants,\464\ and the frequency of such grants to 
the CEO, by some of the potentially affected registrants is reported in 
the table below.\465\
---------------------------------------------------------------------------

    \464\ Throughout this release, the term ``option'' is used to 
refer to instruments such as stock options, stock appreciation 
rights and similar instruments with option-like features.
    \465\ See supra note 462.

                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.........................................         1,694           497           393           580
Option Grants to 2020 CEO:
    % of CEOs Granted Options in 2020...................          22.4          31.2          20.9          20.9
Among subset of firms for which 2020 CEO was also CEO in
 2019 and 2018:
    % of CEOs Granted Options 0 out of Past 3 Years               61.5          50.4          59.8          67.7
     (2018-2020)........................................
    % of CEOs Granted Options 1 out of Past 3 Years               13.0          12.3          15.8          12.4
     (2018-2020)........................................
    % of CEOs Granted Options 2 out of Past 3 Years               14.7          20.7          14.5          10.6
     (2018-2020)........................................
    % of CEOs Granted Options 3 out of Past 3 Years               10.8          16.6           9.9           9.3
     (2018-2020)........................................
Option Grants to Other 2020 NEOs:
    % of Firms that Granted Options to Any NEO other              31.2          42.1          28.5          29.1
     than CEO in 2020...................................
    Among Firms that Made Such Grants, Average Number of           3.1           3.3           3.1           2.8
     Other NEOs Granted Options in 2020.................
----------------------------------------------------------------------------------------------------------------

    Per the first row of the first panel of Table 2, roughly 30 percent 
of the largest registrants, and about 20 percent of smaller 
registrants, grant options to their CEOs in a given year. This 
represents a significant drop, of greater than half, in the use of 
options to incentivize CEOs across all categories since the time of the 
Proposing Release.\466\ The decline in option grants to CEOs has 
largely been offset by an increase in the number and size of 
performance-contingent stock grants,\467\ marking the continuation of a 
trend also discussed in the Proposing Release.\468\ Per the first row 
of the second panel of Table 2, the granting of options to any other 
NEO is a bit more prevalent, with

[[Page 55169]]

roughly 40 percent of the largest and about 30 percent of smaller 
registrants using such grants in a given year, but these rates have 
also dropped significantly since the time of the Proposing 
Release.\469\ In contrast to stock grants, option grants are also less 
frequent; per the last row of the first panel of Table 2, about 10 to 
15 percent of registrants grant options to the CEO every year.
---------------------------------------------------------------------------

    \466\ See Proposing Release at Table 2, reporting that 64.1%, 
49.0%, and 43.1% of S&P 500, S&P MidCap 400, and S&P SmallCap 600 
constituents respectively granted options to their CEO in 2012.
    \467\ See, e.g., Pay Governance, S&P 500 CEO Compensation 
Increase Trends (Jan. 13, 2021), available at https://www.paygovernance.com/viewpoints/s-p-500-ceo-compensation-increase-trends-4; and Gallagher, CEO and Executive Compensation Practices 
Report: 2020 Edition (February 2021), available at https://
www.ajg.com/us/news-and-insights/2021/feb/ceo-executive-compensation-practices-report-2020/.
    \468\ See Proposing Release at n. 133 and the accompanying text 
(discussing the increased prevalence of performance-contingent 
equity grants).
    \469\ See Proposing Release at Table 2.
---------------------------------------------------------------------------

    Because the final rules require the valuation of equity awards 
annually until the time of vesting, we have also considered the 
variation in vesting schedules. Equity awards may be subject to time-
based or performance-based vesting, or a combination of the two. Awards 
with time-based vesting may vest in full at the end of their vesting 
period (``cliff vesting'') or in increments over the period of vesting 
(``graded vesting'').
    Market practices regarding vesting schedules have remained 
relatively consistent since the time of the Proposing Release.\470\ We 
estimate that about 45 percent of stock grants are subject to time-
based vesting, though this has declined slightly (by about three 
percentage points) since the time of the Proposing Release with the 
growth in reliance on performance-contingent stock.\471\ Of the time-
vesting stock awards, roughly one-third have cliff-vesting schedules 
while the vast majority of the remaining have graded vesting in annual 
increments.\472\ For the stock awards that vest based on achieving 
performance conditions (approximately 55 percent of stock awards), the 
vast majority have cliff-vesting schedules.\473\ Approximately ten 
percent of awards with performance-based vesting also have an 
additional time-based vesting period at the end of the performance 
period.\474\ For option awards, the vast majority have time-based, 
graded vesting in annual increments.\475\ Given the decline in option 
awards (which tend to have graded vesting schedules) and the increasing 
prevalence of performance-contingent stock (which tends to cliff-vest) 
discussed above, there has been a corresponding increase in cliff-
vesting overall.\476\
---------------------------------------------------------------------------

    \470\ See Proposing Release at 35 for additional estimates with 
respect to vesting structures at and prior to the time of the 
Proposing Release based on third-party studies. We were unable to 
obtain updated third-party studies, but have instead provided 
statistics based on staff analysis of available data. These 
statistics are largely consistent with the estimates presented in 
the Proposing Release.
    \471\ This estimate is based on staff analysis of data about 
equity grants by 1,100 large registrants from 2018 to 2020 (or, for 
estimates around the time of the Proposing Release, from 2012 to 
2015) from the ISS IncentiveLab Database.
    \472\ Id. About 95% of the awards with graded vesting vest in 
annual increments. Results are similar if we compute such an 
estimate around the time of the Proposing Release.
    \473\ See supra note 471. About 85% (about 80% around the time 
of the Proposing Release) of the awards with performance-based 
vesting cliff-vest.
    \474\ See supra note 471. Results are similar if we compute such 
an estimate around the time of the Proposing Release.
    \475\ See supra note 471. About 95% of the option grants have 
time-based vesting, of which about 85% have graded vesting, of which 
about 95% vest in annual increments. Results are similar if we 
compute such estimates around the time of the Proposing Release.
    \476\ See supra note 471. At the time of the Proposing Release, 
roughly 45% of new equity awards cliff-vested; this rate has now 
increased to about 55%.
---------------------------------------------------------------------------

    For affected registrants other than SRCs, compensation related to 
pension plans is also measured differently in executive compensation 
actually paid, as reported under the final rules, than it is in the 
Summary Compensation Table. The use of pension plans and the years of 
credited service at some of the potentially affected registrants are 
reported in the table below.\477\
---------------------------------------------------------------------------

    \477\ See supra note 462.

                        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.........................................         1,694           497           393           580
2020 Pension Plans:
    % of CEOs with Pension Plans........................          22.5          36.4          24.4          14.3
Among Firms with CEO Plans, Median Years of Credited              19.3          21.5          17.6          16.9
 Service in Pension Plan................................
% Firms with Pension Plans for any NEO other than CEO...          29.0          45.7          29.5          19.1
Among Firms with Other NEO Plans, Average Number of                2.8           2.9           2.7           2.5
 Other NEOs with Pension Plans..........................
----------------------------------------------------------------------------------------------------------------

    There has been a decrease of about ten percentage points in the 
prevalence of pension plans for CEOs or other NEOs since the time of 
the Proposing Release.\478\ Per Table 3, such pension plans, and, for 
those with pension plans, a higher number of years of creditable 
service, remain more common among larger registrants. For the affected 
registrants other than SRCs, the final rules require that executive 
compensation actually paid include only the service cost for the year 
(and any prior service cost, or credit, associated with plan amendments 
or initiations), a value which is not currently required to be reported 
at this disaggregated level and which will usually differ from the 
total change in actuarial value of pension benefits included 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 earned 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 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.
---------------------------------------------------------------------------

    \478\ See Proposing Release at Table 3.
---------------------------------------------------------------------------

    Besides the decreased prevalence of option awards and pension 
plans, and the increased reliance on performance contingent-stock 
awards, there have also been changes since the time of the Proposing 
Release in the performance metrics used by registrants in their 
incentive plans. For example, as noted in the Reopening Release, there 
appears to have been a decline in the use of TSR as the sole metric 
used in long-term

[[Page 55170]]

incentive plans, in those cases where the awards' vesting or quantities 
are contingent on one or more performance metrics.\479\ Among large 
companies, most use one to three financial metrics in their CEO's long-
term incentive plan, with two metrics being the most common 
number.\480\ The most commonly used metric among these companies is 
still TSR, followed by profitability measures (particularly measures of 
operating income), and then scaled profitability measures (such as 
return on equity or return on invested capital).\481\ Commenters 
pointed out that the metrics used are often non-GAAP financial 
measures.\482\
---------------------------------------------------------------------------

    \479\ See, e.g., Meridian 2020 Survey (summarizing responses to 
a survey from 108 companies, and discussing, among other 
developments, a decline in the use of TSR as the sole performance 
metric in long-term incentive plans, from 47% in 2016 to 30% in 
2020, and the recent use by some companies of TSR as a modifier to 
results initially determined by one or more other financial 
metrics). However, as a result of the difficulty in setting absolute 
or accounting performance targets given recent uncertainty due to, 
e.g., the COVID-19 pandemic, some market participants predict at 
least a temporary increase in the reliance on relative TSR as a 
performance metric. See, e.g., Aon 2020 Study.
    \480\ See, e.g., Meridian Compensation Partners, LLC, 2021 
Trends and Developments in Executive Compensation (April 30, 2020), 
available at https://www.meridiancp.com/insights/2021-meridian-trends-and-developments-survey/ (``Meridian 2021 Survey'') 
(summarizing responses to a survey from 309 large companies, and 
indicating that 35%, 51%, and 12% of the respondents used one, two, 
and three metrics respectively in long-term incentive plans); and 
Aon 2020 Study (presenting, in Figure 8, the number of metrics used 
in the CEO's long-term incentive plan among S&P 500 companies, 
broken down by industry, with an average of two metrics used in 
every industry).
    \481\ See, e.g., Meridian 2021 Survey (summarizing responses to 
a survey from 309 large companies, and indicating that TSR is the 
most commonly used long-term incentive performance metric, with use 
reported by 60% of the respondents); and Aon 2020 Study (indicating, 
in Figure 9, that TSR is the most commonly used metric in the CEO's 
long-term incentive plan among S&P 500 companies in most industries, 
where the use of TSR ranges from 22% to 61% of companies depending 
on the industry). Even when TSR is not used as an explicit 
performance metric, we note that these incentives are usually 
delivered in the form of stock awards, whose value will vary with 
the stock price.
    \482\ See, e.g., letters from As You Sow 2022; CII 2022; IBC 
2022; Nareit; Pawliczek; and Teamsters. See also Nicholas Guest, 
S.P. Kothari, and Robert Pozen, Why Do Large Positive Non-GAAP 
Earnings Adjustments Predict Abnormally High CEO Pay? Acct. Rev. 
(forthcoming 2022), available at https://doi.org/10.2308/TAR-2019-0003.
---------------------------------------------------------------------------

    Some commenters indicated that another recent change in 
compensation practices has been an increased linkage of pay to ESG 
performance.\483\ Our research confirms that this appears to be a 
growing practice, but that consideration of ESG metrics does not often 
seem to be tied to specific quantitative goals and that ESG metrics are 
generally used in short-term incentive plans.\484\ These plans, such as 
annual bonus programs, generally make up a significantly smaller 
portion of total executive pay as compared to long-term incentive 
plans.\485\ As in the case of metrics for long-term incentive plans, 
among large companies, most use one to three financial metrics in their 
CEO's short-term incentive plan, with two financial metrics being the 
most common.\486\ The most commonly used metric among these companies 
is profitability (particularly measures of operating income), followed 
by revenues, and then measures of cash flow.\487\ It is also common to 
include business unit performance goals and non-financial metrics, such 
as measures of individual performance, strategic goals, or ESG 
metrics.\488\ There may be overlap in the measures used in executive's 
short-term incentive plans and those used in their long-term incentive 
plans, but more often than not these metrics are different.\489\
---------------------------------------------------------------------------

    \483\ See, e.g., letters from Aon HCS; CII 2022; Georgiev; and 
Infinite.
    \484\ See, e.g., Meridian Compensation Partners, LLC, 2021 Study 
on Environmental, Social and Governance Metrics in Incentive Plans 
(Oct. 7, 2021), available at https://www.meridiancp.com/wp-content/uploads/2021/10/Meridian-2021-ESG-Survey.pdf (reporting the results 
of a review of the proxy statements of 315 large U.S. companies for 
the use of ESG metrics in incentive plans).
    \485\ See, e.g., Gallagher 2021 Study (reporting, in Figure 1.4, 
that for Russell 3000 companies in the year 2020, long term 
incentives represented 71% of the value of total direct compensation 
to CEOs, compared to 17% of such value being attributed to annual 
bonuses).
    \486\ See, e.g., Meridian 2021 Survey (summarizing responses to 
a survey from 309 large companies, and indicating that 37%, 46%, and 
11% of the respondents used one, two, and three financial metrics 
respectively in short-term incentive plans); and Aon 2020 Study 
(presenting, in Figure 1, the number of financial metrics used in 
the CEO's short-term incentive plan among S&P 500 companies, broken 
down by industry, with an average of two metrics used in every 
industry except Energy, with an average of three metrics, and Real 
Estate, with an average of one metric).
    \487\ See, e.g., Meridian 2021 Survey and Aon 2020 Study.
    \488\ Id.
    \489\ See, e.g., Pearl Meyer & Partners, LLC, Overlap of 
Executive Incentive Plan Performance Measures: Is the Concern 
Warranted? (December 2019), available at https://www.pearlmeyer.com/overlap-executive-incentive-plan-performance-measures-concern-warranted.pdf.
---------------------------------------------------------------------------

    There is no consensus in the market on the number of metrics that 
should be used in designing executive compensation, with some 
advocating for the use of more metrics \490\ and others advocating for 
fewer.\491\
---------------------------------------------------------------------------

    \490\ See, e.g., letter from Better Markets 2022 (stating that 
any issuer using less than five performance metrics is ``likely 
focusing NEO performance on too small a group of metrics''); and 
Radhakrishnan Gopalan, John Horn, and Todd Milbourn, Comp Targets 
That Work, Harvard Bus. Rev., Sept. 2017, at 102, available at 
https://hbr.org/2017/09/comp-targets-that-work (indicating that 
using too few metrics can ``create opportunities to manage to the 
targets'' and suggesting that companies use multiple metrics that 
are not too closely correlated).
    \491\ See, e.g., Norges Bank Investment Management, CEO 
Remuneration Position Paper (Apr. 7, 2017), available at https://www.nbim.no/en/the-fund/responsible-investment/our-voting-records/position-papers/ceo-remuneration (stating that shares awarded to a 
CEO should not be subject to any performance conditions, which ``are 
often ineffective and may result in unbalanced outcomes''); and 
Council of Institutional Investors, Policies on Executive 
Compensation (Sept. 17, 2019), available at https://www.cii.org/files/ciicorporategovernancepolicies/20190918NewExecCompPolicies.pdf 
(``CII 2019 Policies'') (criticizing the ``numerous and wide-
ranging'' metrics that contribute to the complexity of performance-
based pay).
---------------------------------------------------------------------------

    Overall, it is clear that the structure of executive compensation 
continues to evolve, as noted by commenters,\492\ and further changes 
may be on the horizon. For example, recent tax law changes \493\ and 
concerns about the complexity and effectiveness of performance-
contingent stock awards \494\ could encourage registrants to reduce 
their reliance on such awards. Uncertainty in the wake of the COVID-19 
pandemic \495\ and lower say-on-pay approval \496\ at large companies 
in recent years, as compared to previous years, could also drive 
changes in compensation structure,

[[Page 55171]]

though it remains difficult to predict whether these factors will have 
lasting effects and what such effects are likely to be.
---------------------------------------------------------------------------

    \492\ See, e.g., letters from CEC 2022; Davis Polk; and SCG.
    \493\ See IRS Notice 2018-68, 2018-36 I.R.B. 418 (regarding, 
among other things, the revision to Section 162(m) that removed the 
exception for qualified performance-based compensation in 
determining the amount of remuneration for any covered employee that 
would not be deductible by a registrant for tax purposes). See also 
Kevin Murphy & Michael Jensen, The Politics of Pay: The Unintended 
Consequences of Regulating Executive Compensation, 3 J. L. Fin. & 
Acct. 189 (2018) (stating that amendments to Section 162(m) passed 
in 2017 would reduce or eliminate negative consequences of this 
rule, such as the ``recent (and ill-advised) escalation of 
performance-share plans''). However, recent studies have generally 
not found evidence of significant changes in compensation structure 
in reaction to this change in tax law. See infra note 596.
    \494\ See, e.g., Marc Hodak, Are Performance Shares Shareholder 
Friendly? 31 J. App. Corp. Fin., No. 3, 126 (Summer 2019); and CII 
2019 Policies.
    \495\ See, e.g., Pay Governance, The COVID-19 Pandemic's 
Fleeting and Lasting Impact on Executive Compensation (Apr. 2022), 
available at https://www.paygovernance.com/viewpoints/the-covid-19-pandemics-fleeting-and-lasting-impact-on-executive-compensation.
    \496\ See, e.g., Semler Brossy, 2022 Say on Pay & Proxy Results 
(May 26, 2022), available at https://semlerbrossy.com/insights/2022-say-on-pay-report/ (documenting a decline in say-on-pay voting 
support at S&P 500 companies in 2021 and 2022 relative to previous 
years).
---------------------------------------------------------------------------

C. Discussion of Economic Effects

    The final rules require registrants to present, in one location, 
information that for the most part is disclosed in various other 
locations (and using different computations) under existing rules, and 
to tag the new disclosure using a machine-readable data language 
(Inline XBRL). The anticipated benefits and costs of the final rules 
are therefore driven by the impact that this additional format for 
presenting information may have on investors and registrants, rather 
than by the disclosure of new underlying informational content that 
investors could not already access or that would require registrants to 
collect significant new data. The economic benefits and costs of the 
final rules, including impacts on efficiency, competition and capital 
formation, are discussed below. We also discuss the relative benefits 
and costs of significant, reasonable alternatives to the implementation 
choices reflected in the final rules.
1. Introduction
    As discussed in the Proposing Release, compensating executive 
officers with pay that varies with registrant performance may encourage 
executive officers, through financial incentives, to exert effort and 
make decisions that create shareholder value. However, there are also 
potential negative consequences 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 projects if they are unwilling to 
take the chance that the project 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 \497\ 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 remains mixed as to whether prevailing compensation structures 
are optimal, are too closely linked to company performance, or should 
be more sensitive to company performance.\498\ Thus, it is unclear 
whether changes that would more closely link executive pay with 
registrant performance than current compensation structures would have 
a positive, a negative, or no impact on shareholder value creation.
---------------------------------------------------------------------------

    \497\ Some argue that optimal compensation would maximize 
broader stakeholder value, not just the value of shareholders, while 
others respond that long-term shareholder value incorporates effects 
on other stakeholders. See, e.g., letter from TCA 2022.
    \498\ See, e.g., Alex Edmans, Xavier Gabaix & Dirk Jenter, 
Executive Compensation: A Survey of Theory and Evidence, in Benjamin 
Hermalin & Michael Weisbach (eds.), Handbook Econ. Corp. Gov. 
(2017), at 383-539 (``Edmans et al. 2017 Survey Paper'') 
(summarizing theoretical and empirical research on executive 
compensation, including on its sensitivity to performance, and 
noting that the results are mixed, and that ``[e]ven seemingly 
fundamental questions, such as the causal effect of pay on firm 
outcomes, . . . remain largely unanswered''). For seminal studies 
presenting differing views, see, e.g., Alex Edmans & Xavier Gabaix, 
Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting 
Theories. 15 Eur. Fin. MGMT (2009), at 486-496; Michael Jensen & 
Kevin Murphy, Performance Pay and Top-Management Incentives. 98 J. 
Pol. Econ 225 (1990); and Lucian Bebchuk & 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.\499\ Even if the performance 
measure were not subject to such concerns, it could be difficult to 
match registrant performance with the associated executive actions and, 
perhaps, related 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 a registrant's 
expected profits related to this executive 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 registrant, even though he or she may not commence employment and 
begin receiving compensation until the following year. The alignment of 
an executive's financial incentives with registrant performance can 
also be difficult to evaluate without also considering holdings of 
vested equity which link an executive's wealth accumulation to the 
performance of the company whether or not they were obtained as 
compensation.\500\ Such issues may lead to concerns with any 
standardized approach to presenting the relationship between pay and 
performance.
---------------------------------------------------------------------------

    \499\ See, e.g., Marianne Bertrand & Sendhil Mullainathan, Are 
CEOS Rewarded for Luck? The Ones Without Principals Are, 116 Q. J. 
of Econ. 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.
    \500\ See, e.g., Kevin J. Murphy, Executive Compensation: Where 
We Are, and How We Got There, Handbook Econ. Fin., Volume 2 (George 
Constantinides, Milton Harris & Ren[eacute] Stulz eds., 2013), at 
211-356 (``Murphy 2013 Study'') (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 the uncertainty and challenges involved in evaluating the 
relation of pay with performance, pay-versus-performance alignment is 
likely important to investors. In fact, academic research concludes 
that the incentives created for executives through the linkage of their 
pay with registrant performance outcomes may be the most value-relevant 
feature of current executive compensation plans, beyond even the level 
of executive pay.\501\ Accordingly, investors may consider the 
optimality of pay-versus-performance alignment as part of their 
evaluation of executive compensation packages when making voting 
decisions relating to the compensation of the NEOs and the election of 
directors, as well as when making investment decisions.\502\
---------------------------------------------------------------------------

    \501\ See, e.g., Edmans et al. 2017 Survey Paper (stating that 
``[the] level of pay receives the most criticism, but usually 
amounts to only a small fraction of firm value. Badly structured 
incentives, on the other hand, can easily cause value losses that 
are orders of magnitudes larger.'').
    \502\ See, e.g., Stanford 2015 Investor Survey (stating 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).
---------------------------------------------------------------------------

2. Benefits
    For the most part, the final rules require a different presentation 
of certain existing information rather than the disclosure of new 
underlying informational content. The primary benefits of the final 
rules relative to the

[[Page 55172]]

baseline will therefore depend on the extent to which the computations 
provided or the format used for the required disclosure makes it easier 
or less costly for investors to evaluate how executive compensation 
relates to registrant performance.
    As discussed above, investors currently have access to detailed 
information disclosed by registrants with respect to executive 
compensation and registrant financial performance, but some investors 
have expressed dissatisfaction with existing disclosures. Data from the 
currently required, standardized tables and accompanying information 
may require further computation and analysis before investors can 
evaluate actual historical pay-versus-performance alignment under the 
baseline. Also, voluntary disclosures that provide more direct measures 
of the historical pay-versus-performance relationship are provided by a 
minority of registrants and lack standardization and comparability, as 
discussed in the Baseline section above. The more standardized 
quantitative analyses of pay-versus-performance alignment provided by 
the major proxy advisory firms to their clients, as well as the 
analyses undertaken by certain large institutional investors on their 
own, demonstrate shareholder demand for additional computations 
regarding this relationship, beyond existing disclosures.\503\
---------------------------------------------------------------------------

    \503\ See, e.g., supra notes 443 and 444.
---------------------------------------------------------------------------

    Investors may therefore benefit from the final rules to the extent 
that the new presentation of data required by these final rules lowers 
their burden of analysis in evaluating the executive compensation 
policies of the affected registrants. If the repackaging of some of the 
information from existing disclosures into the required pay-versus-
performance disclosure, and the Inline XBRL tagging of this disclosure, 
allows investors to more quickly or easily process the information 
accurately, the final rules may generate productive efficiencies by 
preventing duplicative analytical effort by investors. If the 
disclosure helps investors 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 final rules should make it much easier for an investor 
reviewing a proxy statement to relate registrant performance with 
concurrent changes in the value of compensation, because the amount 
disclosed as executive compensation actually paid will more closely 
track these changes than currently required compensation disclosure. 
Further, for a number of reasons, the disclosure required under the 
final rules is expected to be significantly more comparable across 
registrants and across time than existing required disclosures in the 
CD&A regarding how pay relates to performance as well as current 
voluntary pay-versus-performance disclosures. This enhanced 
comparability will likely enable more efficient processing of the 
information. For example, the consistent tabular format will likely 
make the information easier to find, and standardization of the 
measures of pay, TSR, and net income will allow investors to understand 
what these measures represent without having to examine varying 
definitions used by different registrants. In addition, prescribing 
particular measures of pay and performance reduces the ability of 
registrants to only include measures that lead to more favorable pay-
versus-performance disclosures, which, in turn, would reduce their 
utility and comparability. The specific definition of executive 
compensation actually paid under the final rules also enhances the 
comparability of the disclosures, as discussed in more detail below, as 
it treats similar economic situations relatively consistently, allowing 
investors to more easily evaluate the disclosure in the context of the 
disclosure of other registrants.
    Some commenters agreed that such disclosures may reduce the time, 
effort, and/or cost required to review proxy statements,\504\ with 
several noting that the proposed disclosure could be used by investors 
to more easily review disclosures to identify which registrants' 
compensation arrangements they should investigate in greater 
detail.\505\ Also, many commenters supported the importance of the 
consistency and comparability of the disclosures.\506\
---------------------------------------------------------------------------

    \504\ See, e.g., letters from Farient; Hermes; LGIM; OPERS; SVA; 
and TIAA.
    \505\ See, e.g., letters from Hermes and OPERS.
    \506\ See, e.g., letters from American Tower; As You Sow 2015; 
Barnard 2015; Barnard 2022; CalSTRS; CAP; CFA; CII 2015; Farient; 
Hermes; Hook; KPMG; OPERS; PDI; PRI; Quirin; Teamsters; and TIAA.
---------------------------------------------------------------------------

    On the other hand, a number of commenters indicated that meaningful 
comparability of pay-versus-performance disclosure is not feasible or 
not desirable given, for example, the degree of variation in the 
circumstances of registrants and the vast, differing array of 
considerations that go into their compensation programs.\507\ We 
acknowledge that perfect comparability may be impossible to achieve, 
and that some registrants may choose to supplement the required 
disclosures to better communicate their specific situation. However, 
compensation and performance, and their alignment, also cannot be 
properly evaluated in a vacuum. Broader economic conditions and the 
labor market for executive talent have significant effects on the 
appropriate level and performance-sensitivity of pay.\508\ Pay-versus-
performance disclosures that can be compared across registrants should 
facilitate investors' consideration of these factors. Registrants 
already have substantial flexibility to provide tailored disclosures in 
proxy statements with respect to the relation of pay with performance. 
However, as discussed above, many investors are obtaining standardized 
third-party analyses of pay-versus-performance across different 
registrants, or constructing their own, which demonstrates demand for 
more consistent, comparable disclosure.
---------------------------------------------------------------------------

    \507\ See, e.g., letters from BorgWarner; Celanese; Exxon; FSR; 
NAM 2015; NIRI 2015; SCG; SCSGP; and Simpson Thacher.
    \508\ See, e.g., Edmans et al. 2017 Survey Paper.
---------------------------------------------------------------------------

    Some commenters indicated that, whether or not comparability is 
desirable, the proposed amendments would not actually provide 
disclosures that could be compared across registrants.\509\ These 
commenters stated that the proposed disclosure would not be comparable 
because, for example, equity granting and vesting practices vary across 
registrants,\510\ valuation assumptions may vary across 
registrants,\511\ and there is no single way to uniformly measure 
performance across different registrants.\512\ We expect that the 
revised definition of executive compensation actually paid will 
increase the comparability of this measure across registrants with 
different compensation structures. In particular, for outstanding 
equity awards between their grant and vesting date, the change in value 
reported as part of this measure for a particular year is equal to the 
change in fair value during that particular year, and therefore may be 
associated with performance during the same year. This is true 
regardless of the grant and vesting patterns, such that similar 
economic exposure for

[[Page 55173]]

executives across different registrants should be reflected more 
similarly than under the proposed amendments, even when the formal 
structure differs.
---------------------------------------------------------------------------

    \509\ See, e.g., letters from Celanese; Hodak; Honeywell; IBC 
2015; SCSGP; and Simpson Thacher.
    \510\ See, e.g., letters from Celanese; Hodak; SCSGP; and 
Simpson Thacher.
    \511\ See, e.g., letters from IBC 2015 and Simpson Thacher.
    \512\ See, e.g., letters from Celanese and Honeywell.
---------------------------------------------------------------------------

    With respect to the concern about the lack of comparability of 
performance measures, several commenters agreed with our view that, 
despite certain concerns discussed below, TSR is the most comparable 
financial performance measure available.\513\ Given that TSR is 
nonetheless an imperfect measure, the inclusion of peer group TSR, net 
income, and at least one Company-Selected Measure may provide useful 
context for investors when comparing the disclosed performance across 
registrants. Finally, with respect to the concern about varying 
valuation assumptions, the disclosure of equity award valuation 
assumptions when they differ materially from the disclosures of 
assumptions as of the grant date may help investors to identify if a 
particular registrant's approach to these assumptions appears to be an 
outlier. Overall, as noted above, perfect comparability is difficult to 
achieve. However, the final rules are intended to provide some basic 
standardized elements that can be more easily reviewed and compared 
across registrants. At the same time, they also include more tailored 
elements that may better reflect registrants' individual circumstances, 
such as additional registrant-specific context, significant latitude in 
how registrants describe the relationships between the measures in the 
prescribed table, and the option of supplemental disclosures in case, 
in the registrant's view, additional detail or clarifications would be 
helpful.
---------------------------------------------------------------------------

    \513\ See, e.g., letters from Davis Polk 2022; Hodak; and TIAA.
---------------------------------------------------------------------------

    The overall size of the potential benefit to investors depends on 
the extent to which the required disclosure approximates or contributes 
to any of the calculations and analyses that investors would choose to 
perform in order to process the existing disclosures. That is, the 
benefits of consistency and comparability will apply only to the extent 
that investors find the prescribed measures to be useful. While the 
specific extent of benefits is difficult to ascertain, commenters as 
well as our observations of current analyses by or on behalf of 
investors provide support that the disclosures are likely to be useful 
to investors.
    For example, the new measure of executive compensation actually 
paid will reflect new required computations (based on information in 
existing disclosures) that may be particularly relevant in the context 
of evaluating the relationship of pay with performance. These 
computations may make information of interest to investors more readily 
available than it is under the baseline. Commenters indicating that 
investors would find the proposed measure of executive compensation 
actually paid to be useful generally cited potential benefits discussed 
in the Proposing Release, such as the fact that this measure would 
reflect the change in value of equity awards based on performance 
outcomes after they are granted,\514\ that it would focus on economic 
exposure due to compensation committee intent and not executives' 
personal investment decisions,\515\ that it would reflect all elements 
of compensation for completeness and comparability,\516\ and that it 
would eliminate noise caused by the revaluation of pension benefits 
earned in prior periods.\517\ The revised definition of executive 
compensation actually paid preserves all of these features, while also 
mitigating concerns raised by a large number of commenters about a 
likely timing mismatch between the proposed measure of pay and the 
associated performance.\518\ By requiring the revaluation of equity 
awards every year, the revised measure significantly improves the 
degree of matching between the period to which a change in pay is 
ascribed and the period of the associated performance, which should 
make the measure substantially more useful for investors.\519\
---------------------------------------------------------------------------

    \514\ See, e.g., letters from CII 2015; LGIM; Pawliczek; and 
TIAA.
    \515\ See, e.g., letters from AFL-CIO 2015; CII 2015; Hall; 
OPERS; and Public Citizen.
    \516\ See, e.g., letters from AFL-CIO 2015; Barnard 2015; 
Barnard 2022; and OPERS.
    \517\ See, e.g., letters from Hall and TIAA.
    \518\ See Section IV.C.4.iii below for more detail on these 
concerns.
    \519\ See, e.g., letter from TIAA (noting that addressing the 
alignment issue ``would greatly improve the clarity and value of the 
disclosure for investors'').
---------------------------------------------------------------------------

    The revised measure is also very similar to the concept of 
realizable pay, discussed above. A number of commenters indicated that 
a realizable pay measure would be particularly appropriate for 
evaluating the alignment of pay and performance.\520\ While definitions 
of realizable pay vary,\521\ they reflect, like executive compensation 
actually paid, an attempt to measure the change in value of an 
executive's pay package--including outstanding awards that have not yet 
been realized--after the grant date, as performance outcomes are 
experienced. We believe that the increasing consideration of realizable 
pay (as computed by third parties) by investors when evaluating pay and 
performance alignment \522\ is evidence that a measure with similar 
features,\523\ such as the adopted measure of executive compensation 
actually paid, is likely to be useful to investors in this 
context.\524\
---------------------------------------------------------------------------

    \520\ See, e.g., letters from CEC 2015; Pearl; PG 2015; PG 2022; 
and SCSGP (citing the conclusions of a broader working group led by 
the Conference Board). Others recommended the adopted approach or 
other variations similar to realizable pay. See letters from CAP; 
Farient; Hodak; Infinite; TCA 2015; and TCA 2022.
    \521\ Realizable pay generally reflects the end-of-period value 
of outstanding equity awards as well as the value of any cash and 
equity awards realized during the period, with a focus on equity 
awards that were granted within a particular horizon. Differences 
across definitions include whether outstanding options are valued at 
fair value or intrinsic (``in-the-money'') value, and whether the 
value of performance- or time-based awards is recognized when 
earned, when vested, or at the end of the period. See, e.g., ISS 
Realizable Pay Article.
    \522\ See supra note 454.
    \523\ Differences between realizable pay measures and the 
adopted definition of executive compensation actually paid and 
associated costs and benefits for this purpose are discussed in more 
detail in Section IV.C.4.iii below.
    \524\ To the extent that some investors may be interested in 
considering the relationship of performance with a measure of pay 
that reflects the grant date 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. As discussed above, some of the existing 
pay-for-performance analyses by, or on behalf of, investors use such 
a measure, though most of the analyses that we observe also 
supplement this with a realizable pay measure. See supra notes 446 
and 448.
---------------------------------------------------------------------------

    Although investors could estimate executive compensation actually 
paid using existing disclosures, and may already be making similar 
estimates on their own or relying on third party estimates of related 
measures, they may benefit from these computations becoming readily 
available in the prescribed compensation measure. The newly disclosed 
computations could reduce duplicative analytical effort by replacing or 
validating related investor or third party estimates. In addition, some 
investors or third parties hired by investors may be interested in 
leveraging the disclosures to more easily compute slightly different 
pay measures, whether these are the measures they currently use under 
the baseline or refined versions of these measures that are more 
feasible to construct due to the availability of the new disclosures, 
or in using parts of the required computations for other purposes.\525\ 
In such cases they are

[[Page 55174]]

likely to benefit from the required footnote disclosure of the 
adjustments made to compute executive compensation actually paid and 
the disclosure of equity valuation assumptions, if materially different 
from the grant date assumptions. Also, requiring that the disclosure be 
provided in a structured data language may benefit investors interested 
in extracting and analyzing some or all of the data in the disclosure 
across a large number of filings.
---------------------------------------------------------------------------

    \525\ See, e.g., letters from CII 2015 (stating that 
``[s]ophisticated investors will make different adjustments to the 
compensation information. . . they are given''); and As You Sow 2015 
(expressing interest in a cumulative measure of executive 
compensation actually paid, which we note could be constructed from 
the annual measures that will be disclosed).
---------------------------------------------------------------------------

    With respect to the performance information required in the new 
disclosures, 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. Commenters expressed 
a number of concerns with the use of TSR in particular in evaluating 
executive performance, such as its sensitivity to external factors 
outside of the control of executives,\526\ a possible emphasis on 
short-term performance,\527\ and the possibility of strategies that 
could artificially inflate TSR.\528\ However, we are not aware of, and 
commenters did not identify, any standard, singular measure that would 
be a uniformly better alternative, and some commenters noted that TSR 
would be a useful measure. In particular, commenters that indicated 
that investors would find TSR to be useful noted that it is the 
ultimate measure of corporate success and shareholder value creation 
\529\ and it is widely comparable across registrants.\530\ We agree 
with these commenters that, despite its limitations, TSR is likely to 
be a useful measure in this context, particularly because it 
incorporates information about a variety of facets of registrant 
performance, including market expectations of the future impact of 
current executive actions, and it is responsible for a significant 
amount of the variation in compensation outcomes experienced by 
executives. Specifically, academic studies indicate that changes in the 
value of equity awards after the grant date, with the movement of stock 
prices, are the primary channel though which pay is linked to 
registrant performance.\531\ TSR is mechanically a significant 
determinant of executive pay outcomes, as it is the most commonly used 
metric in long-term incentive plans, and, more importantly, a majority 
of CEO compensation is awarded in the form of equity awards, whose 
value is closely tied to stock prices even when TSR is not explicitly 
used as a performance metric.\532\ Current market practices provide 
further evidence that TSR is likely to be useful to investors in this 
context: every investor and third-party analysis of pay-for-performance 
that we have observed incorporates TSR as a primary performance 
measure.\533\
---------------------------------------------------------------------------

    \526\ See, e.g., letters from AFL-CIO 2015; Aspen; CalPERS 2015; 
CEC 2015; Celanese; Dimensional; FSR; Hay; IBC 2015; IBC 2022; 
McGuireWoods; Mercer; NACCO; NIRI 2015; NIRI 2022; PDI; Pearl; 
Samuelson; and SBA-FL.
    \527\ See, e.g., letters from AFREF; ASA; Blackrock; BRT 2015; 
CCMC 2015; CEC 2015; Coalition; FedEx 2015; FSR; Hall; IBC 2015; IBC 
2022; Mercer; NACCO; NACD 2015; NAM 2015; NIRI 2015; Samuelson; SCG; 
Simpson Thacher; and WorldatWork.
    \528\ See, e.g., letters from Better Markets; Hodak; IBC 2022; 
McGuireWoods; NACCO; Pearl; and PDI.
    \529\ See, e.g., letters from AFL-CIO 2015; CII 2015; Farient; 
Hermes; Hodak; and OPERS.
    \530\ See, e.g., letters from Barnard 2015; Barnard 2022; CII 
2015; Davis Polk 2022; Hodak; and TIAA.
    \531\ See, e.g., Edmans et al. 2017 Survey Paper (presenting 
evidence that ``the vast majority of executive incentives stem from 
revaluations of stock and option holdings, rather than changes in 
annual pay''); and Murphy 2013 Study (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). See 
also letter from Hodak (stating that, for the average company, 
``upwards of 80 percent of the real variation in the value of pay 
would derive from unvested equity'').
    \532\ See Section IV.B.3 above. One commenter stated that the 
Proposing Release did not provide ``any compelling evidence that 
[TSR] is a metric commonly used by companies to measure performance 
or in setting compensation.'' See letter from CCMC 2015. Section 
IV.B.3 above provides more detail on the significant use of TSR as a 
performance metric as well as the heavy reliance on equity awards, 
whose value is closely tied to TSR, in compensating executives. 
However, as discussed in this section, there is also other evidence 
that TSR may be an appropriate measure for this purpose.
    \533\ See supra note 451.
---------------------------------------------------------------------------

    However, even if TSR, despite the limitations noted above, is a 
particularly useful measure for the purpose of evaluating the relation 
of pay with registrant performance, it may not provide a complete 
picture of registrant performance. Further, relying solely on TSR to 
evaluate registrant and executive performance may even be misleading in 
certain situations, such as when expected outperformance is already 
reflected in the starting stock price,\534\ when a stock is thinly 
traded,\535\ or when market dynamics cause stock returns to become 
particularly disconnected from fundamental performance.\536\ The 
required disclosure of additional financial performance measures may 
help to address these concerns by broadening the picture of registrant 
performance presented in the disclosure, providing additional detail 
and context that could enhance the usefulness of the disclosure by 
certain registrants or for certain investors.
---------------------------------------------------------------------------

    \534\ See, e.g., letters from Aspen and SCSGP.
    \535\ See, e.g., letters from Hyster-Yale and NACCO.
    \536\ See, e.g., letters from McGuireWoods and SCG (citing the 
recent ``meme stocks'' phenomenon as an example of massive 
fluctuations in stock price which have little to do with fundamental 
performance).
---------------------------------------------------------------------------

    For example, several investors commented that the inclusion of TSR 
of a peer group would enhance the comparability of TSR,\537\ perhaps by 
providing a benchmark for some of the market- or industry-wide factors 
that may affect performance at each registrant. Some commenters 
indicated that the required inclusion of a Company-Selected Measure and 
net income would provide a more complete picture of registrant 
performance.\538\ More specifically, commenters stated that a Company-
Selected Measure would provide insight into the registrant's 
perspective \539\ and a facet of performance that is directly relevant 
for understanding compensation,\540\ and that net income would provide 
a more objective accounting benchmark that is not affected by items 
like non-GAAP adjustments \541\ and stock buybacks.\542\ Similarly, 
some commenters indicated that including a list of the most important 
performance measures used by the registrant to link compensation 
actually paid to company performance would provide useful context or a 
more complete view of pay-for-performance programs,\543\ and may 
therefore help address concerns that the pay-versus-performance 
disclosure could otherwise ``mislead'' investors.\544\ Finally, to the 
extent registrants include additional supplemental measures of 
performance, commenters indicated they generally expect investors to 
benefit from an even more complete picture of performance.\545\
---------------------------------------------------------------------------

    \537\ See, e.g., letters from OPERS and TIAA.
    \538\ See, e.g., with respect to the Company-Selected Measure, 
letters from Better Markets; CII 2022; and Dimensional; and with 
respect to net income, letters from CII 2022 and Teamsters.
    \539\ See, e.g., letter from AFL-CIO 2022.
    \540\ See, e.g., letters from CalPERS 2022; CalSTRS; and 
Infinite.
    \541\ See, e.g., letters from As You Sow 2022 and Teamsters.
    \542\ See, e.g., letters from Better Markets and CalSTRS.
    \543\ See, e.g., letters from AFREF; Better Markets; and CII 
2022.
    \544\ See, e.g., letters from AFREF and CII 2022.
    \545\ See, e.g., letters from AFL-CIO 2022; CalPERS 2015; CFA; 
CII 2022; and Hay.
---------------------------------------------------------------------------

    As discussed in the Baseline section above, all of the required 
performance information is generally already available in existing 
disclosures in annual reports or the CD&A of proxy statements. However, 
including this performance information in the pay-versus-performance 
disclosure may be useful to investors to the extent it limits the time 
they need to spend referring to other disclosures \546\ in order to 
interpret

[[Page 55175]]

the pay-versus-performance disclosure, or prevents some investors from 
overlooking important context about the broader performance or pay-for-
performance programs of a registrant. The required description, in 
graphical or narrative form, of the relationship between pay and the 
performance measures in the prescribed table is not anticipated to 
provide significant additional information beyond the contents of the 
table, but if it presents this information effectively, it may help 
investors to more easily interpret the disclosure.
---------------------------------------------------------------------------

    \546\ See, e.g., letters from AFL-CIO 2022 (stating that 
shareholders must currently ``comb through the narrative disclosure 
provided in the Compensation Discussion and Analysis and then 
separately match up the company's actual performance from financial 
statements''); and As You Sow 2015 (stating that they focus 
primarily on proxy statements from March to May, and would therefore 
support moving the Item 201(e) of Regulation S-K graph, which 
includes TSR and the TSR of a peer group, to the proxy statement 
from the annual report).
---------------------------------------------------------------------------

    If the required disclosure is useful to investors, the benefits are 
likely to vary across investors of different types. For example, it may 
be particularly beneficial to those investors who do not have access to 
third-party analyses, have fewer analytical resources, or are less 
adept at interpreting current disclosures on their own.\547\ That said, 
some such investors may limit their proxy statement review to items 
like a voluntarily-provided proxy summary section regardless of the 
existence of the new disclosure, in which case they are unlikely to 
benefit.\548\ Among investors with more resources or sophistication, 
some may benefit by being able to more quickly review proxy statements 
to determine which to investigate in more detail,\549\ and some may 
reduce their analytical burdens by relying on information from the new 
disclosure to replace, to validate, or to more easily construct the 
inputs for their existing analyses. To the extent third parties are 
able to similarly leverage information provided in the new disclosures 
in constructing their own quantitative analyses, they may pass on some 
of these benefits in the form of a lower cost or a more useful analysis 
to subscribing investors. On the other hand, some investors or the 
third parties they subscribe to may continue to independently construct 
their own analyses without using any elements of the new disclosure; 
these investors are unlikely to benefit from the disclosure.\550\ For 
all of the investors that would benefit from the disclosures, they are 
likely to benefit the most in the case of (i) registrants with 
particularly complex compensation plans, and where the alignment of pay 
and performance may therefore be difficult to assess, and (ii) 
registrants that do not already provide useful pay-versus-performance 
disclosure on a voluntary basis.
---------------------------------------------------------------------------

    \547\ See, e.g., letters from OPERS and Teamsters.
    \548\ See, e.g., letters from Axcelis and NIRI. See also Abt 
SRBI, Mandatory Disclosure Documents Telephone Survey, Commissioned 
by SEC's Office of Investor Education and Advocacy (July 30, 2008), 
available at https://www.sec.gov/pdf/disclosuredocs.pdf, at 38 
(presenting survey evidence that, among individual investors that 
read proxy statements, 43% reported spending less than 10 minutes 
reading proxy statements).
    \549\ See supra note 505.
    \550\ See, e.g., letters from Axcelis; IBC 2015; and SCG.
---------------------------------------------------------------------------

    Overall, the direct benefits of the final rules hinge on the new 
disclosures being relatively easy to review and including the 
information investors are most interested in when evaluating the 
relation of pay with performance. Therefore, if the included measures 
are significantly different from those investors would collect or 
construct on their own in order to evaluate executive compensation, or 
if the disclosure is too long or complicated to review quickly, 
benefits to investors could be limited. Some commenters expressed such 
concerns, indicating that the proposed disclosures would be of minimal 
or no benefit to investors.\551\ However, as discussed above, there is 
evidence that the revised measure of executive compensation actually 
paid and TSR are similar to measures currently used by many investors 
in quantitative analyses of pay and performance alignment, which 
suggests that these elements of the new disclosure are likely to be at 
least somewhat useful to investors. It is less clear to what extent the 
overall effect of the additional required performance measures will be 
to enhance the utility of the new disclosures to investors, recognizing 
that the usefulness of these components may be reduced by their 
contribution to the overall length and complexity of the 
disclosures,\552\ which may make it difficult to quickly interpret the 
basic elements of the disclosures. Any supplemental explanations 
registrants include may further increase the length and complexity of 
the new disclosures.\553\ That said, the tabular disclosure of the 
underlying data will provide a degree of consistency and comparability, 
which can aid investors in quickly processing the information.
---------------------------------------------------------------------------

    \551\ See, e.g., letters from BRT 2015; CAP; Celanese; FedEx 
2015; NAM 2015; and Pearl.
    \552\ See, e.g., letters from CEC 2015; McGuireWoods; Meridian; 
and TCA 2022.
    \553\ See, e.g., letters from Aon HCS; Aspen; CEC 2022; 
Celanese; Coalition; Exxon; Hyster-Yale; IBC 2022; NACCO; NAM 2015; 
NIRI 2015; NIRI 2022; and PNC.
---------------------------------------------------------------------------

    The final rules 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, 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),\554\ then benefits will arise to investors 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. The final rules 
could also indirectly benefit investors and registrants in the form of 
more optimal board composition, if, by virtue of the disclosure, 
shareholders make more informed voting decisions.
---------------------------------------------------------------------------

    \554\ 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 
shareholder value creation.
---------------------------------------------------------------------------

    The likelihood of such indirect effects is difficult to estimate 
because the ideal pay-versus-performance analysis, 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 disclosure is intended to facilitate 
investors' consideration of the alignment between pay and performance 
when making related voting decisions. Several commenters indicated that 
they anticipated that the proposed amendments would therefore result in 
improvements in compensation and/or corporate governance.\555\ However, 
because the final rules do not require the disclosure of significant 
new underlying informational content, and given the high level of 
existing attention to pay practices--including increased engagement on 
these matters with institutional investors, and the sophisticated 
methods and processes that many investors and third parties have 
developed for evaluating pay--we believe that it is unlikely that the 
final rules will play a significant role in encouraging more optimal 
pay packages or corporate governance. We therefore believe that the 
final rules are likely to

[[Page 55176]]

have no material beneficial effects on competition or capital 
formation.
---------------------------------------------------------------------------

    \555\ See, e.g., letters from Better Markets and Sacred Heart.
---------------------------------------------------------------------------

    Lastly, we note that the required pay-versus-performance disclosure 
will provide some incremental information relative to the underlying 
informational content already available to the public in other formats, 
but that the extent of this information is limited. For example, the 
valuation of equity awards such as options and performance-contingent 
stock involve certain assumptions and expectations, and registrants are 
not currently required to disclose valuation assumptions for most \556\ 
such awards on dates other than the grant date. Vesting-date values 
currently are provided for stock awards in the Stock Vested and Options 
Exercised Table, but the applicable fair values at times before these 
dates, other than the grant date, and for options at all dates other 
than the grant date, are not separately presented by registrants. That 
said, for some awards, additional assumptions are not required to 
compute their fair values at these other dates. Specifically, for stock 
awards, such as restricted stock, that only have service-based 
conditions, the fair value would generally simply equal the stock price 
at the time. For stock with performance-based conditions other than 
market conditions, determining the fair value would involve a 
reassessment of the probable outcome with respect to the performance 
metrics involved, but registrants are also required to reassess these 
probable outcomes each period for the purpose of financial statement 
reporting, and associated footnotes should provide insight into the 
registrant's evaluation to the extent the changes in estimates are 
material.
---------------------------------------------------------------------------

    \556\ A minority of option-like awards may be classified as 
liability awards under FASB ASC Topic 718, because of, e.g., certain 
cash settlement features or conditions or other features that are 
indexed to conditions other than a market, performance, or service 
condition. In such cases, the entity is required to revalue the 
award at fair value each period and to adjust its cumulative cost in 
the financial statements, and the associated valuation assumptions 
would generally be available in financial statement footnote 
disclosures.
---------------------------------------------------------------------------

    Computing the fair value of other awards, such as options and stock 
with market-based conditions, after the grant date would likely require 
new assumptions. Using existing disclosures, investors can themselves 
make estimates of the fair values of options and stock with market-
based conditions at dates beyond the grant date based on the disclosed 
terms of these awards, and by using publicly available data to make 
reasonable valuation assumptions.\557\ In contrast, a fair value 
estimate provided directly by the registrant would reflect its 
discretion in choosing a valuation methodology and estimating the 
inputs required, such as the expected option life and the expected 
volatility of the stock.\558\ The grant-date valuations provided by 
registrants already demonstrate, to some extent, how the registrants 
choose to apply their discretion in the valuation process.\559\ It is 
unclear to what extent investors would find information about what 
valuation assumptions registrants would apply at later dates, which 
would similarly reflect registrant discretion, to represent meaningful 
new information beyond what is available in existing disclosures 
(though investors may find the computations useful regardless of 
whether they reflect meaningful new information).
---------------------------------------------------------------------------

    \557\ 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.
    \558\ 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.
    \559\ 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 & Ron Kasznik, Do Firms Understate Stock-Based Compensation 
Expense Disclosed under SFAS 123? 11 Rev. Acc. Stud., No. 4, 429 
(2006). Notably, when evaluating executive compensation, two major 
proxy advisory firms 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 Glass 
Lewis Methodology and ISS Methodology.
---------------------------------------------------------------------------

    With respect to pensions, while aggregate service costs are 
reported in financial statement disclosures, and pension plan terms and 
assumptions are disclosed in detail, registrants are not currently 
required to separately report the service cost, or prior service cost 
due to any plan amendments or initiations, that is associated with each 
individual NEO, so the disclosure of these costs may reveal marginal 
new information about actuarial assumptions specific to the estimation 
of service costs for these individuals, such as any embedded 
assumptions about future compensation levels.
    Additional potential sources of new information for investors 
include the Company-Selected Measure and the Tabular List. As discussed 
above, if registrants do not already disclose the historical outcomes 
for their Company-Selected Measure over the past five years, the 
disclosure may provide new information to the extent that any required 
adjustments or computations required to derive the value of these 
measures from reported financial data may not always be straightforward 
for investors to replicate. Finally, both the Company-Selected Measure 
and the Tabular List may provide new information in the form of any 
insight gained based on the registrant's choice of which of the 
measures reported in the CD&A were deemed to be the most important with 
respect to the last completed fiscal year.
    Overall, the extent of new underlying informational content that 
could be made available in the disclosures is limited, and, while some 
investors may find the incremental information to be useful, it is 
unclear to what extent it would be meaningful to investors more 
broadly. We therefore believe that the potential benefits of the final 
rules derive primarily from the manner in which the information is 
presented rather than the disclosure of any significant new underlying 
informational content. The benefits of some specific implementation 
choices are discussed in more detail in the Implementation Alternatives 
section below.
3. Costs
    The primary costs of complying with the final rules reside largely 
with registrants and include the time and expense to make the required 
computations; to select the tailored components of the required 
disclosure; to design a format for the required descriptions and create 
these elements of the disclosure; to draft the footnotes and any 
supplementary disclosures that are deemed necessary; to apply Inline 
XBRL data tagging; and to ensure appropriate review, such as by 
management, in-house counsel, outside counsel and members of the board 
of directors. The costs will be mitigated by phasing in the time 
periods for the disclosure for both new and existing registrants, 
thereby limiting the computations required when first producing the 
disclosure, and providing scaled requirements and a phased-in tagging 
requirement for SRCs.
    In the Proposing Release, we indicated that we believed that the 
costs to registrants of complying with the proposed amendments likely 
would be relatively low, given that the required disclosures would not 
require the collection of any significant new information relative to 
the baseline and the required additional computations would be 
straightforward. Some commenters agreed that the compliance costs would 
be relatively low and/or

[[Page 55177]]

that the required computations would not be difficult.\560\ However, 
some other commenters indicated that the Proposing Release may not have 
fully accounted for the costs of the proposed disclosures,\561\ 
particularly with respect to the expense of producing new option 
valuations \562\ and supplemental disclosures that would be required to 
prevent confusion.\563\ Also, we acknowledge that the compliance costs 
associated with the final rules will generally be higher than those 
that would have been associated with the approach set forth in the 
Proposing Release, given the revised definition of executive 
compensation actually paid and the disclosures with respect to 
additional performance measures that were not included in the proposal. 
We have, accordingly, revised our burden estimates for purposes of the 
Paperwork Reduction Act of 1995 \564\ (``PRA''), as discussed below and 
in Section VI of this release. However, we believe that, given that the 
disclosures require the collection of minimal new information, the 
overall compliance costs of the final rules should be modest.
---------------------------------------------------------------------------

    \560\ See, e.g., letters from Aon HCS; Better Markets; Hodak; 
and Infinite.
    \561\ See, e.g., letters from NAM 2015; Pearl; and TCA 2015. 
Some other commenters raised general concerns about the costs of the 
proposal. See, e.g., letters from CEC 2022; NIRI; and WorldatWork.
    \562\ See, e.g., letter from Pearl.
    \563\ See, e.g., letter from TCA 2015.
    \564\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In particular, while some of the computations involved are more 
complex than simple arithmetic, existing models and established 
methodologies should aid in making the required calculations. For 
example, commenters indicated that the determination of pension service 
cost, disaggregated by executive, would require minimal effort by the 
actuaries who are already making the required computations to produce 
aggregate pension service cost for the financial statements.\565\ While 
there may be an incremental charge to obtain these estimates,\566\ or 
to make the required additional computations in the case of any plan 
amendments, we expect it to be low. The annual revaluation of 
restricted stock and performance-contingent stock should only require 
consideration of the prevailing stock price and any updates with 
respect to the probable outcome of performance conditions, which are 
already reassessed as of the end of each fiscal year for financial 
reporting purposes.\567\ Finally, the annual revaluation of options (as 
well as any stock with market-based conditions) can generally be 
accomplished by reevaluating the appropriate inputs and entering these 
into the existing valuation models used to calculate currently 
disclosed values. Several commenters indicated that this process would 
be tedious and generate administrative burdens,\568\ and that the 
appropriate models as well as inputs may need to be reconsidered when 
revaluing option awards beyond the grant date.\569\
---------------------------------------------------------------------------

    \565\ See, e.g., letters from Mercer and Towers.
    \566\ See, e.g., letters from AON and NACCO.
    \567\ See FASB ASC Topic 718-10-30. See also letter from CAP.
    \568\ See, e.g., letters from Cook; KPMG; Pearl; and 
WorldatWork.
    \569\ See, e.g., letters from CAP; TCA 2015; and TCA 2022.
---------------------------------------------------------------------------

    We acknowledge that the revaluation of options, which will be 
required more frequently under the final rules than under the proposal, 
will likely be the most computationally-intensive requirement of the 
final rules. However, a minority of registrants utilizes option awards 
in compensating NEOs, and we agree with several commenters who 
indicated that annual computations of fair value of outstanding equity 
awards would not be overly burdensome.\570\ Option valuation is a well-
established discipline, and existing models and software,\571\ as well 
as reliance on third-party experts when necessary, should aid the 
registrants that grant options to their NEOs in making the required 
calculations. Further, on an ongoing basis, the value of executive 
compensation actually paid will only need to be computed for a single 
fiscal year at a time (and, given the phase-in of requirements, for 
three fiscal years at inception, or two fiscal years in the case of 
SRCs), limiting the total computations required in order to update the 
disclosure each year. Also, as discussed above, some investors, or 
third parties on behalf of investors, are currently making similar 
computations. While the required computations may represent a burden 
for registrants, they may reduce such duplicative efforts and place 
responsibility for the calculations in the hands of registrants, who 
are best positioned to produce them.
---------------------------------------------------------------------------

    \570\ See, e.g., letters from Hodak; Infinite; TCA 2015; and TCA 
2022.
    \571\ See, e.g., letters from Hodak and ICGN.
---------------------------------------------------------------------------

    Several commenters raised concerns about the extent of supplemental 
disclosure that would be required to clear up ``misconceptions'' that 
could result from the required elements of the proposed 
disclosure.\572\ While we expect that some registrants may choose to 
provide supplemental disclosure, such as to clarify the required 
disclosure, and that producing such disclosure will be associated with 
further compliance costs, we believe that the revised definition of 
executive compensation actually paid should reduce the need for 
clarifying disclosures because, relative to the proposed measure of 
pay, it is less likely to require the reporting of pay in a different 
period than the associated performance.\573\
---------------------------------------------------------------------------

    \572\ See, e.g., letters from CCMC 2022; CEC 2015; and FSR. See 
also letters from BlackRock; Celanese; Cook; Exxon; NAM 2015; NAM 
2022; NIRI 2015; TCA 2015; and TCA 2022.
    \573\ See, e.g., letter from Cook (providing sample language 
that may have been required to address such a mismatch).
---------------------------------------------------------------------------

    Commenters to the Reopening Release also raised concerns about the 
cost to include the additional information with respect to performance 
measures contemplated in that release. The final rules include 
modifications that should limit these costs. For example, some 
commenters indicated that the inclusion of net income and income or 
loss before income tax expense would increase the length and/or cost of 
disclosure.\574\ The final rules require the inclusion of net income, 
but not income or loss before income tax expense, which should limit 
the size and costs of the associated disclosure. Similarly, some 
commenters indicated that the selection of a single Company-Selected 
Measure would be difficult \575\ and result in substantial additional 
cost \576\ to registrants, in part because of the prominence of this 
single measure and the resulting scrutiny required from board members 
and senior management, with input from outside advisors. The final 
rules require the inclusion of a Company-Selected Measure, but 
registrants will be permitted to include additional supplemental 
measures in the table, which may mitigate burdens in cases where it is 
difficult to isolate a single most important measure.
---------------------------------------------------------------------------

    \574\ See, e.g., letters from FedEx 2022; McGuireWoods; NAM; and 
TCA 2022.
    \575\ See, e.g., letters from Aon HCS; CEC 2022; Davis Polk 
2022; LGIM; and NAM.
    \576\ See, e.g., letter from Davis Polk 2022.
---------------------------------------------------------------------------

    Finally, some commenters indicated that the list of the top five 
most important performance measures contemplated in the Reopening 
Release would be difficult to produce,\577\ particularly because of the 
difficulty in ranking such measures, and that it would increase the 
length and complexity of disclosure \578\ due to the additional 
explanations registrants might consider necessary for clarification. 
The final rules do not

[[Page 55178]]

include a ranking requirement and allow a variable number (from three 
to seven) of the most important measures, which may make it easier for 
registrants to find a more natural break-point in isolating a group of 
the measures they consider to be most important. This additional 
flexibility may thereby also limit the amount of additional explanatory 
disclosure that registrants choose to provide.
---------------------------------------------------------------------------

    \577\ See, e.g., letters from ASA; Davis Polk 2022; LGIM; 
McGuireWoods; NAM 2022; and SCG.
    \578\ See, e.g., letters from Aon HCS; CEC 2022; Davis Polk 
2022; and IBC 2022.
---------------------------------------------------------------------------

    We also note that the number of relationships that the final rules 
will require registrants to describe in narrative or graphical form has 
increased to seven, for registrants other than SRCs, from the three 
that would have been required per the Proposing Release. For SRCs the 
number has increased from two to four. In particular, a registrant must 
describe the relationship of each required performance measure (TSR, 
net income, and, for non-SRCs, the Company-Selected Measure) with the 
PEO's compensation actually paid as well as with the average such pay 
of the other NEOs, and (for non-SRCs) they must also describe the 
relationship of TSR to peer group TSR. We acknowledge that these 
additional requirements will increase compliance costs, but we expect 
that the descriptions can be scaled depending on their relevance to a 
particular registrant. For example, if TSR or net income have little 
correlation, or only a spurious correlation,\579\ with pay at a 
particular registrant, and is not a metric used in their compensation 
plans, a simple statement to this effect may suffice.
---------------------------------------------------------------------------

    \579\ A spurious correlation, in the context of statistics and 
related fields, is an apparent association between two variables 
that occurs, e.g., by coincidence, and not because of a causal 
relationship.
---------------------------------------------------------------------------

    Overall, the expansion of the disclosures with respect to 
performance measures will increase the compliance costs of the final 
rules relative to the requirements reflected in the Proposing Release, 
but, as discussed above, these disclosures may provide helpful context 
to investors.
    As discussed above, registrants will be required to file the pay-
versus-performance disclosure in certain proxy or information 
statements. While much of the disclosure will 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 (``Section 18'').\580\ Several 
commenters indicated that this may increase the cost to registrants of 
the disclosures,\581\ because of the need for additional assurance and 
because of litigation risks. However, we note that Section 18 does not 
provide for strict liability with respect to ``filed'' 
information.\582\
---------------------------------------------------------------------------

    \580\ 15 U.S.C. 78r.
    \581\ See, e.g., letters from Hodak; NAM 2015; and SCSGP.
    \582\ See Section 18. 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.
---------------------------------------------------------------------------

    Compliance costs associated with the final rules are likely to vary 
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. Registrants that include these elements in 
their executive compensation plans are therefore expected to require 
more computations to produce the disclosure.\583\ This is particularly 
the case for registrants that use options, both because the required 
computations are more involved, as discussed above, and also because 
options tend to vest ratably over time,\584\ so registrants may need to 
track and value many different tranches of options in a given year. As 
shown in Tables 2 and 3 in the Baseline section above, the use of both 
options and pensions has declined since the time of the Proposing 
Release, but each still has a prevalence of roughly 20 percent among 
S&P 1500 CEOs (and 30 percent among their other NEOs). Overall, though, 
the registrants for whom the computations will be more burdensome--
those with more complex compensation packages--are also generally those 
for which investors are expected to benefit most from the disclosure: 
in the absence of the disclosure, it is more difficult for investors to 
assess the alignment of pay and performance when compensation is more 
complex.
---------------------------------------------------------------------------

    \583\ See, e.g., letter from Cook (discussing the preparation of 
five sample disclosures based on the proposed requirements, and 
finding that there was ``considerably more time and effort required 
for companies that grant stock options and/or have pension plans'').
    \584\ See Section IV.B.3 above.
---------------------------------------------------------------------------

    Large companies are more likely than smaller ones to have pension 
plans and grant stock and option awards to executives.\585\ However, a 
significant fraction of mid-sized and smaller companies feature these 
components in their compensation plans as well.\586\ Thus, while the 
compliance costs are likely to be relatively low, these costs may be 
slightly more burdensome for those affected registrants that have 
complex compensation packages and yet are small enough that the costs 
of the disclosure are relatively more consequential in comparison to 
their size. That said, SRCs will be subject to scaled requirements 
consistent with their existing disclosure requirements, including fewer 
years of disclosure; no requirement to report peer group performance, a 
Company-Selected Measure, or a list of the most important performance 
measures; and the exclusion of items related to pension plans in 
computing executive compensation actually paid. SRCs are not currently 
required to comply with Item 201(e) of Regulation S-K, 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.
---------------------------------------------------------------------------

    \585\ Id.
    \586\ Id.
---------------------------------------------------------------------------

    Based on analysis for purposes of the PRA, as discussed in Section 
VI of this release, we estimate that the total incremental burden on 
all registrants of the final rules will be, annually, approximately 
95,800 hours for internal company time, and about $12.8 million for the 
services of outside professionals. These estimates represent an 
increase in estimated burden hours per affected registrant of about 87 
percent \587\ (from 15 to 28 hours) for non-SRCs, and about 13 percent 
\588\ (from 15 to 17 hours) for SRCs, relative to the estimates in the 
Proposing Release. As discussed above, these costs are expected to vary 
across registrants depending on the complexity of their compensation 
structures. Also, certain registrants--such as those whose executive 
compensation is not tied closely to TSR or net income--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.
---------------------------------------------------------------------------

    \587\ The incremental burden hours per filing estimated for PRA 
purposes is 28 hours for non-SRCs, compared to an estimate of 15 
hours in the Proposing Release, representing an increase of (28/15--
1) or about 87%.
    \588\ The incremental burden hours per filing estimated for PRA 
purposes is 17 hours for SRCs, compared to an estimate of 15 hours 
in the Proposing Release, representing an increase of (17/15--1) or 
about 13%.
---------------------------------------------------------------------------

    While the new disclosure requirements are intended to make it

[[Page 55179]]

easier for investors to assess the alignment of pay and performance, 
investors may instead bear increased information processing costs as a 
consequence of the final rules if they increase the length and 
complexity of existing disclosures without significantly adding to the 
ease of interpretation. Some commenters raised concerns that the 
proposed disclosures would result in such information overload.\589\ 
The likelihood and extent of such costs resulting from the final rules 
may be a function of the degree of supplementary disclosures 
registrants choose to provide, as well as the complexity of and 
variation in presentation formats. The risk of information overload may 
also be exacerbated by the required disclosures with respect to 
additional performance measures,\590\ which could provide helpful 
context for investors, or could end up complicating or obscuring the 
elements of the disclosure that would be most useful to investors. If 
the required disclosures complicate rather than facilitate the task of 
understanding executive pay policies, they may marginally decrease the 
informational efficiency of markets.
---------------------------------------------------------------------------

    \589\ See, e.g., letters from BlackRock; BRT 2015; CCMC 2015; 
CEC 2015; Meridian; and TCA 2015.
    \590\ See supra notes 574 and 578. See also letters from BRT 
2022 and IBC 2022.
---------------------------------------------------------------------------

    The final rules could confuse investors about the optimality of pay 
practices if they bring attention to a particular relationship that 
might not be relevant, given the facts and circumstances of a 
particular registrant, in evaluating the alignment of pay and 
performance at that particular registrant.\591\ As discussed above, 
there are challenges in measuring pay-versus-performance alignment 
which are likely to impact any standardized approach to presenting this 
relationship. However, the required inclusion of additional context in 
the disclosure may help to mitigate potential confusion. For example, 
the inclusion of net income, a Company-Selected Measure, and a Tabular 
List could be helpful in limiting confusion stemming from differences 
in the timing of an executive's accomplishments and when they may be 
reflected in TSR, to the extent that other performance measures may 
better align with executive performance in such cases. Further, 
including peer group TSR in the disclosure may help investors to 
identify when registrant TSR could be driven by market moves, sector 
opportunities, commodity prices, or other factors unrelated to 
managerial effort or skill. That said, the required disclosure may be 
less meaningful at a particular registrant if TSR, even relative to 
peers, is very different from the contribution of the given NEO to 
performance, or if the disclosed relationship between compensation and 
TSR does not (e.g., because of vested equity holdings that are not 
reflected in executive compensation actually paid) fully capture the 
economic relationship between the company's performance and the 
financial rewards to the NEO. Similarly, the required net income 
disclosure may be less meaningful at registrants at which net income is 
not particularly relevant to understanding executive performance.\592\
---------------------------------------------------------------------------

    \591\ See, e.g., letters from BlackRock; BorgWarner; CEC 2015; 
CCMC 2015; FSR; Honeywell; Hyster-Yale; NACCO; and Ross.
    \592\ See, e.g., letters from Aon HCS; ASA; CEC 2022; Davis Polk 
2022; Dimensional; FedEx 2022; IBC 2022; Nareit; NAM; NIRI 2022; PG 
2022; and TCA 2022.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, the potential for confusion 
is especially concerning given that the new disclosure may be of 
particular interest to less sophisticated investors, 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, as well as the 
ability of registrants to provide further explanatory disclosures. Some 
commenters agreed that this flexibility to supplement the disclosure 
would improve investors' understanding or mitigate potential 
confusion.\593\ However, such clarifying disclosures may be more likely 
to be provided when the disclosure is perceived by the registrant to 
incorrectly indicate the misalignment of pay and performance than when 
the disclosure is perceived to incorrectly indicate strong alignment. 
Further, as noted by other commenters, less sophisticated investors may 
be unlikely to consider these supplemental disclosures.\594\ While some 
commenters were not convinced that a Company-Selected Measure or list 
of most important performance measures would help in such cases,\595\ 
it is possible that these additional required elements of the 
disclosure may help mitigate confusion by providing a mandatory, 
prominent indicator of the broader performance landscape in the 
specific context of a given registrant.
---------------------------------------------------------------------------

    \593\ See, e.g., letters from CalPERS 2015; CAP; CFA; CII 2015; 
Farient; OPERS; and TIAA.
    \594\ See, e.g., letters from Aspen; CEC 2015; Celanese; FSR; 
and NACCO.
    \595\ See, e.g., letters from CCMC 2022; NAM 2022; and TCA 2022.
---------------------------------------------------------------------------

    The final rules could also lead to indirect costs if the required 
disclosures lead to changes in compensation packages that are not 
beneficial.\596\ Registrants may make changes to avoid disclosure that 
they perceive indicates the misalignment of pay and performance, 
whether that indication is valid or merely due to limitations of the 
standardized approach. 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,\597\ even in situations 
in which this would not be optimal.\598\ The inclusion of net income in 
the disclosure could mitigate this risk, or could instead encourage the 
use of net income as a performance metric in incentive programs, even 
when this is not beneficial.\599\ Commenters raised concerns that such 
pressures on compensation design could lead to compensation that 
incentivizes short-termism and/or the inappropriate homogenization of 
compensation plans.\600\ If such changes are indirectly encouraged by 
the final rules, they may entail costs to registrants and their 
shareholders. As in the case of any shifts towards more optimal 
compensation structures, discussed in the Benefits section above, the 
resulting pay packages may represent either a benefit or a cost to the 
NEOs themselves depending on whether or not the less

[[Page 55180]]

optimal compensation structure, including the level of compensation as 
well as the risk exposure, is preferred by the executives.
---------------------------------------------------------------------------

    \596\ See, e.g., letter from Brian Cadman, dated Feb. 18, 2022 
(discussing the potential unintended consequences of regulation of 
executive compensation disclosures). We note, however, that the 
research cited in this letter focuses on changes in a prior period, 
before registrants were regularly holding say on pay votes and 
engaging as heavily with investors on compensation. In contrast, 
more recent regulatory changes have not always been as impactful as 
expected, perhaps because of the offsetting effect of this 
heightened investor engagement on pay structure. See, e.g., Lisa De 
Simone, Charles McClure & Bridget Stomberg, Examining the Effects of 
the TCJA on Executive Compensation (Apr. 15, 2022). Kelley School of 
Business Research Paper No. 19-28, available at https://ssrn.com/abstract=3400877 (finding no evidence that the repeal of a long-
standing exception under Section 162(m) of the tax code that allowed 
companies to deduct executives' qualified performance-based 
compensation in excess of $1 million reversed a related shift in 
executive compensation away from cash compensation and towards 
performance pay).
    \597\ See, e.g., letters from CEC 2015; CCMC 2015; Hall; Hay; 
Hermes; Hodak; FSR; Georgiev; McGuireWoods; Mercer; Pearl; PNC; 
SCSGP; Simpson Thacher; and WorldatWork.
    \598\ See supra notes 498 and 499 regarding academic studies 
that find that a stronger link between pay and stock price 
performance may not be optimal. See also letter from Aspen 
(highlighting research indicating that financial incentives in 
general may be problematic ``when complex or creative mental tasks 
are required'').
    \599\ See, e.g., letters from NAM and SCG.
    \600\ See, e.g., letters from CEC 2022; Georgiev; Hay; NAM; and 
SCG.
---------------------------------------------------------------------------

    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 investors, 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 final rules do not require the disclosure of significant 
new information, and given the high level of existing attention to pay 
practices--including the increased engagement on these matters with 
institutional investors, and the sophisticated methods and processes 
that many investors and third parties have developed for evaluating 
pay--we believe that it is unlikely that the final rules will play a 
significant role in encouraging sub-optimal pay practices.\601\ We 
therefore believe that the final rules likely will have no material 
detrimental effects on competition or capital formation.
---------------------------------------------------------------------------

    \601\ See supra note 596.
---------------------------------------------------------------------------

    The costs of some specific implementation choices are discussed in 
more detail in the Implementation Alternatives section below.
4. Implementation Alternatives
    In this section, we present significant implementation alternatives 
and a discussion of their benefits and costs relative to the 
implementation choices in the final rules.
i. Registrants and Filings Subject to the Disclosure Requirement
    An alternative to the final rules would be to fully exempt SRCs 
from the disclosure requirement. Exempting SRCs generally would be 
consistent with the overall scaled disclosure requirements that apply 
to SRCs. While the final rules subject SRCs to scaled requirements in 
order to limit the incremental burdens such companies may face relative 
to other registrants, some such burdens remain. For example, SRCs are 
currently not required to disclose their TSR in annual reports, so they 
would face a higher burden than other registrants to calculate and 
include this measure in the pay-versus-performance disclosure. SRC pay-
versus-performance disclosure, under the final rules, may also benefit 
investors to a lesser degree than that for other registrants, because 
the scaled requirements reduce the content and comparability of the 
disclosures. Also, in the absence of CD&A disclosure, investors will 
have less information with which to interpret pay-versus-performance 
disclosures from these registrants. As discussed above, some commenters 
agreed that SRC pay-versus-performance disclosure would generate 
greater burdens and/or lesser benefits than that for other 
registrants.\602\
---------------------------------------------------------------------------

    \602\ See supra notes 405 to 407 and accompanying text.
---------------------------------------------------------------------------

    On the other hand, it is possible that investors may particularly 
benefit from the required pay-versus-performance disclosure for SRCs, 
precisely because these registrants currently provide less extensive 
disclosure about compensation. For example, some investors may believe 
that the long-term performance of younger, high-growth companies may be 
highly sensitive to the design of executive compensation. Such 
investors may be particularly interested in compensation structures at 
SRCs but may find it difficult to assess these structures in the 
absence of CD&A disclosure for SRCs. These investors may benefit from 
SRC pay-versus-performance disclosures, even if these disclosures are 
not directly comparable with the disclosures of other affected 
registrants. Further, the data that SRCs do currently disclose is less 
likely to be available in aggregate form from data vendors that collect 
such data from the proxy statements of larger companies. Investors that 
are interested in comparing executive compensation across SRCs may 
particularly benefit from the data in the pay-versus-performance 
disclosure being tagged in Inline XBRL, to the extent this makes the 
data more accessible or increases the likelihood that more commercial 
databases expand their coverage to such registrants.\603\ Some 
commenters agreed that there may be particular governance concerns at 
SRCs \604\ and that investors would benefit from pay-versus-performance 
disclosures by these registrants.\605\
---------------------------------------------------------------------------

    \603\ See Y. Cong, H. Du & M.A. Vasarhelyi, Are XBRL Files Being 
Accessed? Evidence from the SEC EDGAR Log File Dataset, 32 J. Info. 
Sys. 3 (concluding that ``small company investors not only access 
XBRL files but also prefer them to the non-XBRL files when both are 
available to download for a filing'').
    \604\ See, e.g., letters from Morrell and Troop.
    \605\ See, e.g., letters from Better Markets; CalPERS 2015; and 
CalSTRS.
---------------------------------------------------------------------------

    The final rules permit SRCs to present fewer years of information 
in the disclosure; to not include peer group performance, a Company-
Selected Measure, or a Tabular List; and to exclude items related to 
pension plans in computing executive compensation actually paid. While 
these scaled requirements may reduce the benefits of the disclosure, 
these accommodations should substantially limit the incremental burdens 
faced by SRCs in providing pay-versus-performance disclosure, while 
preserving some benefits to investors interested in executive 
compensation at such registrants.
    Another alternative with respect to the applicability of the final 
rules would be to expand the filings requiring pay-versus-performance 
disclosure, such as requiring that such disclosure accompany any Item 
402 of Regulation S-K 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 
final rules and broaden the disclosure requirement to include Section 
15(d) registrants other than EGCs. However, the required disclosure may 
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 adopted approach requires pay-versus-performance disclosure in 
proxy statements in each of these cases. As discussed above, one 
commenter agreed that this approach would provide ``relevant 
information'' when it is ``most useful.'' \606\ 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 
investors in making investment decisions, irrespective of any matters 
that are up for a vote.
---------------------------------------------------------------------------

    \606\ See letter from OPERS.
---------------------------------------------------------------------------

    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 TSR for such registrants may be less precise and less 
readily available, potentially making pay-versus-performance 
comparisons based on this measure less meaningful across such 
registrants. Also, as in the case of

[[Page 55181]]

SRCs, Section 15(d) registrants are not subject to Item 201(e) of 
Regulation S-K requirements for stock price performance disclosure. 
Similarly, Section 12(g) registrants may not be required to disclose 
Item 201(e) of Regulation S-K 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 SRCs, the TSR of a peer group for this purpose. One commenter 
supported requiring the new pay-versus-performance disclosure in all 
filings that discuss compensation, but this commenter also acknowledged 
that shareholders would most likely only read those materials assembled 
for an annual meeting,\607\ which would include the new disclosure 
under the final rules.
---------------------------------------------------------------------------

    \607\ See letter from Quirin.
---------------------------------------------------------------------------

ii. General Disclosure Requirements
    We have considered several reasonable alternatives to the general 
disclosure requirements of the final rules.
    Many commenters recommended a more principles-based approach that 
would permit registrants to determine which measures of pay and 
performance to disclose or how to disclose the relationship between 
these measures based on what they deem to be appropriate for their 
individual situations.\608\ Such an approach could have the potential 
to allow investors 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.
---------------------------------------------------------------------------

    \608\ See, e.g., letters from AB; ASA; Aspen; BlackRock; 
BorgWarner; BRT 2015; CCMC 2015; CCMC 2022; CEC 2015; CEC 2022; 
Celanese; Coalition; Exxon; FSR; Hall; Honeywell; Hyster-Yale; 
NACCO; Nareit; NAM 2022; NIRI 2015; NIRI 2022; PG 2015; Pearl; PNC; 
SCG; SCSGP; TCA 2015; TCA 2022; and WorldatWork.
---------------------------------------------------------------------------

    On the other hand, a principles-based approach may reduce 
comparability of the disclosure and could increase shareholder 
confusion because the choice of pay and performance measures, and the 
disclosure time horizon, may vary significantly across registrants. 
Also, a principles-based approach may allow registrants to selectively 
choose the measures or time horizon that result in the most favorable 
disclosure. Several commenters indicated that scrutiny by sophisticated 
investors and proxy advisory firms, as well as the incentive effect of 
say-on-pay votes, would motivate registrants to produce effective 
disclosures within the flexibility of a principles-based regime.\609\ 
However, we note that investors continue to express discontent with 
existing disclosures despite these factors.\610\ The adopted approach 
of specifying some uniform requirements for the disclosure, requiring 
certain elements that will vary across registrants (the Company-
Selected Measure and Tabular List), allowing registrants to choose the 
format for describing the relationship between different measures, and 
permitting the inclusion of additional measures, additional years of 
data, or other supplemental disclosure should promote comparability 
while preserving flexibility to tailor the disclosure to a registrant's 
individual situation. Registrants will also continue to have 
significant latitude in presenting additional compensation analyses, 
which provides further opportunity for registrants to clarify their 
unique circumstances and considerations in designing compensation.
---------------------------------------------------------------------------

    \609\ See, e.g., letters from BorgWarner and Honeywell.
    \610\ See Section IV.B.2 above.
---------------------------------------------------------------------------

    Conversely, we also considered prescribing a uniform format or some 
minimum requirements for the descriptions of the relationships between 
different measures. Under the final rules, registrants may apply a wide 
range of formats when presenting these relationships. For example, some 
registrants may discuss percentage changes in the measures in narrative 
form while others may present the levels of the measures in graphical 
form. Investors' ability to easily interpret and compare the disclosure 
across registrants could be 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. For example, with a prescribed format, 
registrants might not be able to scale a required description to 
reflect the relevance of a particular measure at that particular 
registrant, which could result in lengthy disclosure about 
relationships that are not meaningful. Under the final rules, the 
tabular disclosure of the annual values of the required compensation 
and performance measures should facilitate comparisons of the 
underlying content of the disclosures across registrants regardless of 
the format for the required descriptions. It is also possible that 
these descriptions could become more comparable as registrants gain 
experience with the requirements; as one commenter predicted, ``[o]ver 
time best practices will emerge, and investors will encourage companies 
to follow those best practices.'' \611\
---------------------------------------------------------------------------

    \611\ See letter from CFA.
---------------------------------------------------------------------------

    We also considered alternatives with respect to the extent of the 
required descriptions. As discussed above, the final rules require, for 
non-SRCs, the description of seven different relationships (and four in 
the case of SRCs) in graphical or narrative format. An alternative 
would be to not require the description of some of these relationships, 
such as that between net income and executive compensation actually 
paid of the PEO or the other NEOs. Such an approach could help to 
mitigate commenter concerns about the costs and length of the required 
disclosure,\612\ given that the description of a specific relationship 
might require the application of significant discretion and involve 
more space in the proxy statement than a particular column in the 
required table. Reducing the number of mandated descriptions may reduce 
the extent of disclosure in cases where the measures in question may 
not be relevant in the context of a particular registrant. A more 
focused set of required descriptions could reduce compliance costs and 
make it easier for investors to more quickly review the disclosures. 
The underlying measures would still be available in tabular form for 
investors to consider; for example, investors might refer to net income 
as a benchmark to gauge the adjustments in a non-GAAP profitability 
measure presented as a Company-Selected Measure. However, investors may 
benefit from understanding the registrant's perspective on each 
performance measure, and, as discussed above, we expect that the 
descriptions

[[Page 55182]]

can be scaled depending on their relevance to a particular registrant.
---------------------------------------------------------------------------

    \612\ See Section IV.C.3 above.
---------------------------------------------------------------------------

    We also considered alternative approaches to presenting the pay and 
performance data. For example, several commenters suggested that, 
instead of requiring the presentation of year-by-year data, we could 
require registrants to aggregate pay over a three to five year horizon 
and compute the cumulative TSR over a similar horizon, and then either 
present a single pair of statistics or a set of rolling values of these 
multi-year statistics.\613\ As noted by these commenters, such an 
approach could help to smooth any lumpiness in pay (such as when 
certain awards or payments are not made every year) or short-term 
volatility in the performance measure. However, it would also make it 
harder to discern how pay has been associated with year-by-year changes 
in performance. Further, for investors preferring this approach, a form 
of aggregate analysis should be relatively straightforward to construct 
from the disclosure required under the final rules, by adding the 
values of executive compensation actually paid over multiple years and 
comparing this to the cumulative TSR over that horizon. In contrast, 
presenting aggregate statistics would not reduce compliance costs over 
time because new computations for the latest fiscal year would still be 
required each year that the disclosure is produced.
---------------------------------------------------------------------------

    \613\ See, e.g., letters from Farient; Pearl; and Ross.
---------------------------------------------------------------------------

    Other commenters suggested that we require registrants to isolate 
pay granted in a particular year and provide an updated valuation of 
that pay, for each grant year in the time horizon of the disclosure, at 
the end of the latest fiscal year (or possibly at vesting), and relate 
those updated values to cumulative performance.\614\ Such a focus on 
the pay granted in a particular year, and how its value has changed, 
may provide insight specific to the compensation decisions by the board 
in each year. However, given that grants have overlapping performance 
periods, it may be difficult under this approach to judge the overall 
association of pay with performance, and the relationship between the 
performance in a particular period and all of the associated pay.
---------------------------------------------------------------------------

    \614\ See, e.g., letters from CAP and PG 2015.
---------------------------------------------------------------------------

    We also considered alternatives with respect to the required 
structuring of the disclosures. Alternatives to the adopted approach 
include not requiring that the underlying data disclosed in tabular 
form be provided using a structured data language (i.e., tagged in 
Inline XBRL), requiring more or less of the information to be tagged, 
or requiring a different structured data language. Not requiring that 
the disclosure be provided in a structured data language would reduce 
the costs of compliance. Some commenters indicated that the tagging 
requirements would increase the costs and time to produce the 
disclosure or delay the filing process.\615\ The affected registrants 
are familiar with Inline XBRL because they are required to provide 
information in other filings in this data language, but the exact 
specifications differ and, with limited exception, they are not 
required to provide any structured data in proxy or information 
statements.\616\ The Inline XBRL requirements would impose additional 
burdens on registrants, beyond what they currently spend on producing 
structured 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. In addition, a few commenters 
anticipated some difficulties because staff preparing proxy statements 
would be unfamiliar with Inline XBRL.\617\ One commenter stated the 
cost of XBRL tagging can be up to tens of thousands of dollars.\618\ A 
few commenters remarked that the costs of XBRL tagging outweigh the 
benefit to investors,\619\ and questioned whether there was sufficient 
evidence that such structured data was being used by, or would benefit, 
investors.\620\
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    \615\ See, e.g., letters from CCMC 2015; Celanese; FedEx 2015; 
Hay; IBC 2015; and NACCO.
    \616\ BDCs were not previously required to provide their 
financial statements and financial statement footnotes in XBRL or 
Inline XBRL, and may thus be less familiar with data tagging than 
other registrants. However, all BDCs will be required to provide 
their financial statements and financial statement footnotes, as 
well as certain prospectus disclosures, in Inline XBRL from, at 
latest, February 1, 2023. Some BDCs may choose to incorporate 
prospectus disclosures by reference to their proxy or information 
statements, in which case those proxy or information statements 
would include Inline XBRL tagging. See Securities Offering Reform 
for Closed-End Investment Companies, Release No. IC-33836 (Apr. 8, 
2020) [85 FR 28853 (May 5, 2020)]. We estimate that there are 
approximately seven BDCs that would be required to produce the pay-
versus-performance disclosure.
    \617\ See, e.g., letters from NACCO; Hyster-Yale; and XBRL US.
    \618\ See letter from CCMC 2015.
    \619\ See, e.g., letters from CCMC 2015; Celanese; and NIRI 
2015.
    \620\ See, e.g., letters from CCMC 2015 and NIRI 2015.
---------------------------------------------------------------------------

    Since the time of the Proposing Release, the market has had 
significantly more experience with structured data languages, including 
XBRL. We expect that this experience, along with the adoption of Inline 
XBRL, will reduce the costs of implementing the requirements and 
enhance the quality of the data made available.\621\ While costs will 
remain, the Inline XBRL requirements should facilitate the extraction 
of the tagged data across large numbers of filings. These requirements 
may therefore benefit investors interested in analyzing and comparing 
the information in the disclosure across large numbers of registrants 
or, eventually, a large number of years.\622\ The tagging of 
compensation information under the final rules may be particularly 
beneficial to investors, in that several widely-used commercial 
databases collect compensation data only for large companies.\623\ Some 
commenters agreed that tagging the disclosures would enhance the 
benefits to investors, by increasing the efficiency with which large 
amounts of data could be filtered and analyzed,\624\ by enhancing the 
ability of investors to compare the data across companies or over 
time,\625\ and by allowing investors to obtain this data efficiently or 
at lower cost.\626\ There is also increased evidence that structured 
data is used by investors and generates benefits. For example, one 
study found that XBRL has helped to reduce the informational advantage 
of large institutions over small ones, in that small institutions' 
trading

[[Page 55183]]

responsiveness to Form 10-K information and stock-picking skills 
improved relative to large institutions after the adoption of 
XBRL.\627\ Other studies provide evidence consistent with XBRL tagging 
of financial statement disclosures leading to an increase in stock 
price informativeness (i.e., the extent to which market prices reflect 
company-specific information).\628\
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    \621\ See, e.g., Michael Cohn, AICPA Sees 45% Drop in XBRL Costs 
for Small Companies, Accounting Today (Aug. 15, 2018), available at 
https://www.accountingtoday.com/news/aicpa-sees-45-drop-in-xbrl-costs-for-small-reporting-companies (retrieved from Factiva 
database) (observing a 45% decline in average cost and a 69% decline 
in median cost of annual XBRL requirements for SRCs from 2014 to 
2017); see also Ariel Markelevich, The Quality and Usability of XBRL 
Filings in the US, 5 Int'l. J. Acct. Tax 2 (2017) (with findings 
suggesting that, ``starting in 2012, there has been a steady 
improvement in the quality and usability of the XBRL filings in most 
aspects . . . consistent with the notion of companies moving along a 
learning curve and improving the quality and usability of the XBRL 
data as they gain more experience tagging'').
    \622\ Some investors 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 a structured data language, such investors 
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 structured data 
requirement is likely to be lower for such investors than for those 
primarily interested in the data to be tagged.
    \623\ For example, the Standard & Poor's Execucomp database 
covers the S&P 1500 and some additional registrants, and the ISS 
IncentiveLab database covers about 1,100 registrants, with coverage 
in both of these cases representing well under half of the affected 
registrants.
    \624\ See, e.g., letters from CalPERS 2015 and XBRL US.
    \625\ See, e.g., letters from AFL-CIO 2015; CII 2015; Public 
Citizen; SBA-FL; and XBRL US.
    \626\ See, e.g., letters from CalPERS 2015 and XBRL US.
    \627\ See Nilabhra Bhattacharya, Young Jun Cho & Jae B. Kim, 
Leveling the Playing Field Between Large and Small Institutions: 
Evidence from the SEC's XBRL Mandate, Acct. Rev., Sept. 2018, at 51.
    \628\ See, e.g., Y. Huang, Y.G. Shan & J.W Yang, Information 
Processing Costs and Stock Price Informativeness: Evidence from the 
XBRL Mandate, 46 Aus. J. Mgmt. 1 (2021) (finding XBRL adoption 
``leads to more informative stock price through two channels, the 
firm-specific information incorporation, and increased 
disclosures''); see also Y. Dong, O.Z. Li, Y. Lin & C. Ni, Does 
Information Processing Cost Affect Firm-Specific Information 
Acquisition? Evidence from XBRL Adoption, 51 J. Fin. Quant. Analys. 
2 (2016) (finding ``evidence consistent with the SEC's statement 
that XBRL adoption helps market participants translate more firm-
specific information into stock prices'').
---------------------------------------------------------------------------

    We considered not requiring some or all of the block tagging that 
the final rules will require, such as: the graphical or narrative 
disclosure that would follow the tabular disclosure; the disclosure of 
deductions and additions used to determine executive compensation 
actually paid; and the disclosure regarding vesting date valuation 
assumptions. While the nature and potential variation in format of 
these disclosures may make them less suitable for large-scale analysis 
than the numerical data in the main table, the incremental costs of 
tagging these disclosures as block-text should be low and such tagging 
could benefit investors interested in extracting these parts of the 
disclosure from a large number of filings We also considered, as 
proposed, not requiring 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 will require incremental compliance costs, it may benefit 
investors interested in using this data, such as for constructing 
alternate pay measures.
    We also considered requiring registrants to provide the data an 
XML-based data language specific to the pay-versus-performance 
disclosures (``custom XML'') rather than Inline XBRL.\629\ As discussed 
in the Proposing Release, a custom XML requirement could increase the 
ease of implementation of the structured formatting requirement for the 
main table, and could thus reduce costs of structuring, particularly 
for smaller registrants. However, the Commission's custom XML data 
languages are generally unsuitable for tagging large blocks of 
information or implementing detail tags within such blocks, and are 
therefore not as appropriate for implementing the requirements of the 
final rules.
---------------------------------------------------------------------------

    \629\ This would be consistent with the approach used for other 
XML-based structured data languages created by the Commission for 
certain forms, including the data languages used for reports on each 
of Form 13F, Form D and the Section 16 beneficial ownership reports 
(Forms 3, 4 and 5).
---------------------------------------------------------------------------

iii. Compensation Measures
    We have considered several alternative approaches to the 
compensation measures to be included in the disclosure, particularly 
with respect to the definition of executive compensation actually paid. 
The final rules define this compensation measure generally in line with 
the approach described as ``incremental compensation earned'' in the 
discussion of implementation alternatives in the Proposing Release. We 
also considered adopting definitions that would treat equity awards and 
pensions differently, such as in the proposed definition, or that would 
include different elements of compensation.
    With respect to equity awards, the proposed approach would have 
required registrants to include the fair value of stock and option 
awards in executive compensation actually paid at the time of vesting. 
As discussed in more detail above,\630\ some commenters agreed with 
arguments in the Proposing Release that certain features of this 
approach, such as the fact that it would reflect the change in value of 
equity awards based on performance outcomes after they are granted, 
would be beneficial for this purpose. However, many commenters raised 
concerns that the proposed definition would generate a mismatch between 
the period in which pay was reported and the period of the associated 
performance,\631\ and that this would significantly reduce the 
potential usefulness of the disclosure.\632\
---------------------------------------------------------------------------

    \630\ See Section IV.C.2 above.
    \631\ See, e.g., letters from Allison; CAP; CCMC 2015; CEC 2015; 
Celanese; Coalition; Cook; Davis Polk 2022; Farient; Faulkner; FSR; 
Georgiev; Hodak; Huddart; Hyster-Yale; Infinite; NACCO; NACD 2015; 
NAM 2015; NAM 2022; PG 2015; PG 2022; Pearl; Ross; SBA-FL; SVA; TCA 
2015; TCA 2022; Teamsters; TIAA; and WorldatWork.
    \632\ See, e.g., letters from CEC 2015; Celanese; Cook; NACCO; 
NAM 2022; Pearl; PG 2015; Ross; TIAA; TCA 2022; and WorldatWork.
---------------------------------------------------------------------------

    Specifically, as discussed in the Proposing Release, under the 
proposed definition of executive compensation actually paid, the 
measure may be subject to volatility based not on performance but on 
the vesting pattern of equity awards, because it 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. A number of 
commenters highlighted concerns of this nature.\633\ Similar issues 
that commenters noted include an exacerbation of the misalignment when 
the size of an award is intended to recognize performance in the year 
of grant (or prior); \634\ when awards formally vest in a different 
year than the end of the performance period,\635\ or when the vesting 
date of an award is distant from the end of the year.\636\ Commenters 
also noted that the timing mismatch would not apply equally to 
different types of compensation or across different vesting patterns, 
leading to difficulties in comparisons across registrants or 
executives.\637\ Consider, for example, a fiscal year in which one PEO 
receives a $1 million cash bonus and another instead receives a $1 
million restricted stock award that vests after one year. Under the 
definition that was proposed, executive compensation actually paid 
would have been $1 million and zero, respectively, for the two PEOs in 
that fiscal year.\638\
---------------------------------------------------------------------------

    \633\ See, e.g., letters from CEC 2015; Celanese; Cook; 
Faulkner; Hodak; Hyster-Yale; Infinite; NACCO; SVA; and TCA 2022.
    \634\ See, e.g., CCMC 2015; McGuireWoods; and NAM 2022.
    \635\ See, e.g., letters from Hall; PG 2015; PG 2022; and 
Towers.
    \636\ See, e.g., letters from Celanese; Hyster-Yale; and NACCO.
    \637\ See, e.g., letters from Hodak; Honeywell; Hyster-Yale; and 
NACCO.
    \638\ The Proposing Release also provides an example of 
comparability issues in the case of executives with asynchronous 
vesting dates.
---------------------------------------------------------------------------

    As discussed above,\639\ the treatment of equity awards in the 
adopted measure of executive compensation actually paid is expected to 
preserve the benefits noted by commenters of the proposed approach 
while substantially reducing the risk of a timing mismatch.\640\ Under 
the adopted approach, the total value reflected in executive 
compensation actually paid for a given award, when summed across years, 
will be equivalent by the time of vesting to that which

[[Page 55184]]

would have been included at vesting under the proposed approach. 
However, by attributing the change in an equity award's fair value in a 
given year--which would reflect performance in that same year--to that 
individual year, rather than ascribing the full value to the vesting 
date, the revised measure should better align pay with the associated 
performance.
---------------------------------------------------------------------------

    \639\ See Section IV.C.2 above.
    \640\ Some timing mismatches may remain, even under the adopted 
approach. For example, in the case of compensation contingent on a 
performance condition (e.g., based on achieving a particular level 
of net income), that is later recovered (i.e., clawed back) because 
of a restatement, the market stock price correction associated with 
the restatement may happen in a more recent period, while the 
historical accounting performance and compensation measure would be 
corrected retroactively. In this case, even after recovery of the 
erroneously awarded compensation, the effect on executive 
compensation actually paid is not likely to appear in the same 
period as the associated market reaction in TSR.
---------------------------------------------------------------------------

    This improved alignment will limit the volatility associated with 
vesting patterns, by distributing pay over the full vesting period, as 
it is earned. It will also reduce the sensitivity to small differences 
in formal vesting dates, by associating amounts of pay with particular 
years based on the changes in value attributable to those years rather 
than solely based on where the vesting date happens to fall. 
Attributing some of the value of equity awards to the grant year 
addresses the possibility that the size of awards may be designed to 
reward grant year performance.\641\ The revised approach also improves 
comparability; for example, the two PEOs discussed above, who receive a 
$1 million cash bonus and a $1 million restricted stock award, will 
both be considered to receive $1 million of compensation actually paid 
in that year, while any change in the value of the second executive's 
stock until vesting would also be reflected in future years. Overall, 
the enhanced alignment resulting from the revised definition is 
expected to make it easier for investors to understand the relationship 
between pay and performance,\642\ though this comes at the cost of 
increased compliance costs for registrants.
---------------------------------------------------------------------------

    \641\ To the extent that registrants may use infrequent awards 
or so-called mega-grants in some years to award performance over 
multiple years (see, e.g., letters from Cook and PG 2015), the 
revised definition of executive compensation may increase sharply in 
grant years regardless of performance. The inclusion of Summary 
Compensation Table total compensation (which reports the aggregate 
grant date fair value of all equity awards granted to the NEO during 
the fiscal year, and would therefore also reflect any differences in 
annual grant sizes) alongside executive compensation actually paid 
in the tabular disclosure may assist investors in filtering these 
effects out from the patterns in pay that are more likely to be 
driven by performance after the grant date.
    \642\ The revised definition 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. See, e.g., letter from Pearl.
---------------------------------------------------------------------------

    In valuing option awards in executive compensation actually paid, a 
number of commenters recommended that we use intrinsic values (i.e., 
the ``in-the-moneyness,'' or the amount that would be gained upon 
immediate exercise) instead of fair values. Those commenters indicated 
that intrinsic values would be easier and less burdensome to calculate 
\643\ or would more appropriately reflect compensation rather than the 
effect of an executive's investment decisions.\644\ We acknowledge that 
fair values are more burdensome to compute than intrinsic values. 
However, intrinsic values can severely understate the values of 
options.\645\ The fair value of an option provides a more accurate 
picture of the total value of the asset being transferred, which 
includes both the current intrinsic value and the ongoing time value of 
the option: the ability to potentially capture additional upside while 
not taking the commensurate downside risk. By granting an option with 
significant remaining time to maturity after vesting, boards are 
consciously awarding executives with value beyond the vesting-date 
intrinsic value. As such, this transfer of value may reasonably be 
considered to be compensation. While an executive might not wait until 
maturity to exercise an option, the fair value calculation should 
generally incorporate an assumption regarding typical exercise 
behavior. Whether the executive chooses to exercise earlier or later 
than is typical (and therefore expected by the board) can reasonably be 
considered an investment decision.
---------------------------------------------------------------------------

    \643\ See, e.g., letters from CAP; Corning; Davis Polk 2015; 
Honeywell; Pearl; and WorldatWork.
    \644\ See, e.g., letters from CEC 2015; CEC 2022; Honeywell; and 
Pearl.
    \645\ See, e.g., Zvi Bodie, Robert S. Kaplan & Robert C. Merton, 
For the Last Time, Stock Options are an Expense, Harv. Bus. Rev. 
(Mar. 2003), available at https://hbr.org/2003/03/for-the-last-time-stock-options-are-an-expense.
---------------------------------------------------------------------------

    Some commenters also suggested that we consider valuing equity 
awards as of alternate dates, such as the grant date \646\ or, for 
options, the exercise date.\647\ Valuations as of these alternative 
dates may be less burdensome to calculate, as grant date fair values 
are already included in the Summary Compensation Table and the amount 
realized on exercise of options is already included in the Stock Vested 
and Options Exercised Table. However, grant date valuations would not 
reflect the performance sensitivity of unvested equity awards. As 
discussed above, because 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. Exercise date 
valuations, in turn, reflect the effect of performance after the grant 
date, but also reflect the executive's decision of when to exercise 
awards, which may reasonably be considered an investment decision 
rather than a compensation decision. For example, as one commenter 
noted, ``executives who hold their options to the full term before 
exercise may be unjustifiably seen as being overpaid compared to 
executives who exercise their options quickly.'' \648\
---------------------------------------------------------------------------

    \646\ See, e.g., letters from CAP and NAM 2022.
    \647\ See, e.g., letters from CEC 2015; Corning; Coalition; and 
FSR.
    \648\ See letter from Honeywell.
---------------------------------------------------------------------------

    With respect to pensions, the final rules require that executive 
compensation actually paid include the pension service cost for the 
year as well as the prior service cost (or credit) due to any plan 
amendments or initiations in the year, rather than just the pension 
service cost, as proposed. Some commenters alternatively suggested that 
we include the present value of pension benefits that were earned in 
the last fiscal year, or, similarly, the change in present value of 
accumulated pension benefits while holding the beginning and ending 
valuation assumptions constant.\649\ All of these approaches--including 
what is being adopted, what was proposed, and the commenters' 
suggestions--should reduce the volatility in reported pay caused solely 
by changes in assumptions relative to the pension component of the 
Summary Compensation Table, because the latter includes the change in 
value of all previously accumulated benefits with changes in interest 
rates and other actuarial assumptions. Thus, any of these approaches 
should make it easier for investors to evaluate the relationship of pay 
with performance. We considered, as an alternative to the adopted 
approach, including only pension service cost (as proposed) or the 
present value of pension benefits that were earned in the last fiscal 
year (as suggested by, or similar to what was suggested by, various 
commenters).
---------------------------------------------------------------------------

    \649\ See letters from AON; Barnard; Exxon; Mercer; Towers; and 
WorldatWork.
---------------------------------------------------------------------------

    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. They are also a function of the terms of the plan. 
Service costs are based on estimates of future benefits that assume 
plan terms remain fixed and that may already incorporate projections 
about future compensation levels. Service costs are also smoothed over 
time relative to how the future benefits are actually earned or change 
over time. As a result, the effect of plan amendments and actual 
changes in current compensation levels on the value included for 
pensions under the proposed approach may be dampened.

[[Page 55185]]

For example, if a plan were amended, current and future service costs 
would be adjusted upwards, but there would be no corresponding 
adjustment for service costs reported for previous years. The adopted 
approach would more fully reflect the effect of any plan amendments by 
including a catch-up adjustment for the impact on service costs 
reported in previous years.
    The adopted approach does not fully account for changes in actual 
compensation levels from the estimated compensation levels used to 
estimate service cost. 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 of including the present value of 
pension benefits earned in a given year may be more useful in 
evaluating the relationship between pay and performance. This 
alternative approach would fully reflect plan amendments as well as 
unexpected increases in pay,\650\ whose impact on pension benefits may 
reflect an important source of increased compensation.\651\ Under this 
alternative, registrants may be able to make the required computations 
based on the information already available to them, rather than through 
their actuarial services provider, which could marginally reduce 
compliance costs. Such an approach may also further increase the 
comparability between compensation provided through defined benefit and 
defined contribution plans, because 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, the amount included with respect to pensions under this 
alternative would not have as direct of a relationship with the values 
included in the audited GAAP financial statements as the service cost 
(and prior service cost or credit) included under the adopted approach.
---------------------------------------------------------------------------

    \650\ See, e.g., letter from Mercer.
    \651\ See, e.g., Irina Stefanescu, Yupeng Wang, Kangzhen Xie & 
Jun Yang, Pay Me Now (and Later): Pension Benefit Manipulation 
Before Plan Freezes and Executive Retirement, 127 J. Fin. Econ. 152 
(2018).
---------------------------------------------------------------------------

    Some commenters suggested excluding components of pay that may be 
considered unrelated to performance--such as perquisites and values 
related to retirement benefits--from the definition of executive 
compensation actually paid.\652\ As discussed in the Proposing Release, 
restricting the definition of executive compensation actually paid in 
such a way would not provide investors with a complete picture 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, the other 
components of compensation may still 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.\653\ 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 would be excluded from the prescribed measure versus 
those that rely more heavily on compensation types that would be 
included.
---------------------------------------------------------------------------

    \652\ See, e.g., letters from AON; CEC 2015; Coalition; Corning; 
Honeywell; and PG 2015.
    \653\ See, e.g., Lucian Bebchuk & Jesse Fried, Stealth 
Compensation via Retirement Benefits, 1 Berkeley Bus. L. J., 291 
(2004).
---------------------------------------------------------------------------

    We also considered adjusting the definition of executive 
compensation actually paid to account for executives' continued 
exposure to registrant performance after an equity award vests, due to 
restrictions on the transfer or monetization of such equity,\654\ by 
continuing to reflect such awards in executive compensation actually 
paid until these other restrictions lapse. In some cases, the 
relationship of executives' wealth accumulation to registrant 
performance may be driven by their vested holdings of equity. When such 
holdings are mandated, the resulting exposure to registrant performance 
after vesting may reflect a compensation decision rather than an active 
investment decision by the executives, and could be helpful to consider 
in order to better understand the total required sensitivity of an 
executive's income and financial assets to the registrant's 
performance.
---------------------------------------------------------------------------

    \654\ Such restrictions include delayed option exercisability as 
well as equity anti-hedging, holding, and mandatory deferral 
requirements. See, e.g., letters from CEC 2015; CEC 2022; Davis Polk 
2015; Hyster-Yale; and NACCO (describing awards to their executives 
consisting of ``immediately vested and taxable restricted stock'' 
that is ``non-transferrable and generally may not be hedged, pledged 
or transferred for a period of 10 years'').
---------------------------------------------------------------------------

    However, different sets of restrictions on the transfer or 
monetization of equity can have different effects on the degree of 
continued required exposure. For example, some non-transferable 
holdings could be monetized by executives through contractual 
agreements with a broker-dealer, if the registrant's hedging policies 
permit such transactions. There is therefore uncertainty as to how best 
to reflect such restrictions for the purpose of the new disclosure. 
While the adopted definition of executive compensation actually paid 
does not include adjustments for restrictions on the transfer or 
monetization of equity awards, registrants can choose to provide 
supplemental measures of pay if they believe that those measures better 
demonstrate the effects of these features.
    The final rules 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. We considered excluding this measure. Some 
commenters indicated that it would be extraneous or confusing in the 
pay-versus-performance disclosure.\655\ However, as discussed above, 
some current pay-for-performance analyses used by investors use grant-
date measures of pay, similar to total compensation from the Summary 
Compensation Table.\656\ To the extent that some investors 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 in the tabular disclosure. Further, as discussed 
above, this existing total compensation measure may be a useful 
benchmark for understanding executive compensation actually paid, such 
as in the case where infrequent grants designed to provide multi-year 
incentives may cause sharp increases in the latter measure in the years 
when such grants are made.\657\
---------------------------------------------------------------------------

    \655\ See, e.g., letters from CEC 2015; Exxon; Hall; 
McGuireWoods; Meridian; PG 2015; TCA 2015; and TCA 2022.
    \656\ See Section IV.B.2 above.
    \657\ See supra note 641.
---------------------------------------------------------------------------

    We considered also requiring the disclosure of a measure of 
realizable pay, a type of measure that a number of commenters indicated 
may be useful in this context.\658\ The adopted measure of executive 
compensation actually paid is quite similar conceptually to realizable 
pay measures, with a few key differences. For example, realizable pay 
is typically computed based on equity awards granted over a fixed 
period. This approach may make it easier to evaluate the compensation 
decisions made by a board over such fixed period. However, equity 
awards can have long vesting periods and typically have overlapping 
performance periods, so considering all

[[Page 55186]]

unvested awards, regardless of when they were granted, may provide a 
more complete picture of pay for the purpose of evaluating its 
alignment with performance. Realizable pay is also typically computed 
over a multi-year period, with outstanding equity awards valued as of 
the end of the period (or sometimes at vesting or exercise, if 
earlier). As discussed above, such aggregated, multi-year pay measures 
can smooth certain outliers but can also obscure the year-to-year 
relationship of pay and performance. Registrants may voluntarily 
include measures of realized or realizable pay in the disclosure if 
they deem them to be helpful to explaining the relationship of their 
pay with performance.
---------------------------------------------------------------------------

    \658\ See supra note 520.
---------------------------------------------------------------------------

    Lastly, we considered also requiring the disclosure of peer group 
compensation. While TSR for a peer group is required to be included 
under the final rules, also incorporating pay information for a peer 
group in order to produce relative pay-versus-performance disclosures 
may be useful to investors as it would provide further context in which 
to evaluate the pay-versus-performance alignment of a registrant.\659\ 
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 disclosures 
would most likely impose higher compliance costs. Under the final 
rules, investors can 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) of Regulation S-K or in the 
CD&A, if such peers have filed their disclosures as of the time of 
comparison.
---------------------------------------------------------------------------

    \659\ See, e.g., letter from Cook.
---------------------------------------------------------------------------

iv. Performance Measures
    We have considered several reasonable alternatives with respect to 
the performance measures to be included in the disclosures. For 
example, commenters raised, and we have considered, many different 
approaches to computing and presenting TSR. As discussed above, common 
suggestions included, among others, presenting a rolling average of TSR 
(i.e., for each year, registrants would report the cumulative TSR for 
the previous five years) or an annualized TSR (i.e., for each year, 
registrants would report TSR for that single year).\660\ While a 
rolling average could present a broader view of performance to those 
taking a longer-term perspective, it could also obscure the performance 
specific to a given year. A five-year rolling average TSR could change 
from year to year because of performance in the current year being 
newly included in the rolling average or because of the performance six 
years ago being newly excluded from the rolling average. An annualized 
TSR would provide greater clarity and align with the revised definition 
of executive compensation actually paid, which will reflect, in a given 
year, changes in the value of outstanding equity awards over that 
specific year. Also, according to one commenter, ``most investors and 
proxy advisors generally look to an annualized approach when they 
assess a company's TSR.'' \661\
---------------------------------------------------------------------------

    \660\ See supra notes 254 to 257 and accompanying text.
    \661\ See letter from Towers.
---------------------------------------------------------------------------

    However, the adopted approach of computing cumulative TSR, and 
presenting it as the changing value of an initial fixed dollar 
investment, will be familiar to both investors and registrants because 
it aligns with the Item 201(e) of Regulation S-K performance graph 
requirement. We also expect this approach will make the trend in 
performance easier to understand for less sophisticated investors, 
given concerns about financial literacy among investors \662\ and, 
particularly, a common difficulty in appropriately combining percentage 
changes \663\ (e.g., recognizing that a negative 50 percent return 
followed by a positive 50 percent return represents a negative 25 
percent return on a cumulative basis). A cumulative return, scaled to a 
fixed investment, will still make the return attributable to a given 
year apparent, and sophisticated investors can easily use this return 
to compute other variations of TSR that they may prefer.
---------------------------------------------------------------------------

    \662\ See, e.g., SEC Staff Study Regarding Financial Literacy 
Among Investors, as required by Section 917 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (August 2012), available 
at https://www.sec.gov/files/917-financial-literacy-study-part1.pdf; 
and Annamaria Lusardi & Olivia Mitchell, The Economic Importance of 
Financial Literacy: Theory and Evidence, 52 J. Econ. Lit., No. 1, 5 
(2014).
    \663\ See, e.g., Haipeng Chen & Akshay Rao, When Two Plus Two is 
Not Equal to Four: Errors in Processing Multiple Percentage Changes, 
34 J. Consumer Rsch. 327 (Oct. 2007).
---------------------------------------------------------------------------

    We also considered not requiring any registrants, including non-
SRCs, to include peer group TSR in the disclosure. As discussed above, 
a number of commenters had concerns about the peer group TSR 
requirement,\664\ including that it would be costly and yet the 
benefits could be limited because variation in peer group selection, 
and in the degree of relevance of peer group performance, could reduce 
comparability and mislead investors. We acknowledge that peer group TSR 
will not provide an equally relevant benchmark across all registrants. 
However, it may nonetheless provide helpful context for assessing 
registrant TSR by providing some indication of broader market or 
industry conditions, and may help to address the concerns of commenters 
that registrant TSR could reflect a number of factors outside of the 
control of the executives of the registrant.\665\ We continue to expect 
the costs of including peer group TSR to be limited, even if a 
registrant does not use the same peer group as in the Item 201(e) of 
Regulation S-K peer group TSR disclosure, because the required data is 
readily available and the required computations are relatively 
straightforward.
---------------------------------------------------------------------------

    \664\ See supra notes 261 to 269 and accompanying text.
    \665\ See supra note 526.
---------------------------------------------------------------------------

    Another alternative to the final rules would be, as in the proposed 
rules, to not require any other prescriptive performance measures, 
beyond TSR and peer group TSR, to be included in the disclosure. As 
some commenters noted, it is not clear that any single measure other 
than TSR would be relevant across most registrants.\666\ Declining to 
prescribe additional measures would reduce costs and limit the risk 
that registrants would have to include and discuss a measure that could 
be misleading or which investors may not find to be useful. This 
approach could thereby increase the likelihood that investors could 
process the disclosures quickly, while not decreasing the total amount 
of underlying information available from public disclosures. At the 
same time, if the addition of another performance measure would better 
explain the pattern in executive compensation actually paid, 
registrants would be able to voluntarily provide such measures, and 
would likely be motivated to do so.\667\
---------------------------------------------------------------------------

    \666\ See, e.g., letters from AB; BlackRock; Davis Polk 2022; 
and TIAA.
    \667\ See, e.g., letters from CFA; CII 2015; Davis Polk 2022; 
and SCG.

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

[[Page 55187]]

    However, as discussed in the Benefits section above, the inclusion 
of net income as an additional measure may provide investors with 
useful context for interpreting the disclosure. Even if required to 
include a Company-Selected Measure, registrants might not always 
provide a measure of profitability, in which case net income may help 
to provide a more complete picture of registrant performance. Further, 
as discussed above, measures of profitability are commonly used as 
performance metrics in executive compensation contracts.\668\ Yet, if 
registrants provide measures of profitability in the disclosure, they 
may be non-GAAP or adjusted measures, and investors may benefit from 
having net income beside these measures as a benchmark to better 
understand the effects of such adjustments. Finally, limiting the 
additional prescribed measures to a single, readily available measure 
should help to contain the costs and risks of expanding the required 
measures that are noted above.
---------------------------------------------------------------------------

    \668\ See Section IV.B.3 above.
---------------------------------------------------------------------------

    We also considered other financial measures as alternatives to net 
income. As discussed in the Baseline section above, the measures 
presented by third parties as part of pay-for-performance analyses in 
recent years--which may reflect investor interest in or demand for the 
measures--include operating cash flow growth, earnings per share 
growth, EBITDA growth, return on equity, return on invested capital, 
return on assets, and various ratios and growth rates using ``economic 
value added.'' \669\ Measures that commenters suggested we consider 
include EBITDA,\670\ free cash flow,\671\ revenue or profit 
growth,\672\ return on investment,\673\ shareholder value added,\674\ 
or the ratio of enterprise value to either EBITDA or earnings before 
interest and taxes (``EBIT'').\675\ Overall, these suggestions and the 
measures presented in third party analyses differ from net income in 
that many involve some form of scaling--that is, some are ratios, which 
can help to account for the capital or assets used to generate profits, 
while others are growth rates--and many include adjustments to focus on 
operating items or cash flows. It is possible that investors may 
benefit more from a prescribed measure with these characteristics, 
rather than net income. However, it is not obvious that there is a 
single preferred measure, and net income has the benefit of being a 
clearly-defined, widely-understood measure. Registrants may supplement 
the disclosure with other measures if they feel they would be useful or 
if their investors demand them.
---------------------------------------------------------------------------

    \669\ See supra note 453.
    \670\ See letter from Dimensional.
    \671\ See letters from Dimensional and Quirin.
    \672\ See letter from Grier.
    \673\ See letter from Quirin.
    \674\ See letter from Quirin.
    \675\ See letter from PDI.
---------------------------------------------------------------------------

    Another alternative to the final rules would be, as in the proposed 
rules, to give registrants the option to include additional performance 
measures but not to require a Company-Selected Measure of any 
registrant. As discussed above, if the addition of another performance 
measure would better explain the pattern in executive compensation 
actually paid, registrants would likely be motivated to include such a 
measure on a voluntary basis. Not requiring a Company-Selected Measure 
would also eliminate any costs or difficulties associated with 
isolating a single most important measure and give registrants more 
flexibility to include only the measures that they expect may be most 
useful to investors. For example, investors may benefit if registrants 
are able to present a different measure than the Company-Selected 
Measure in cases where the measure that drove compensation in the last 
fiscal year may not be the most important for explaining the pattern in 
executive compensation actually paid over the full five-year horizon of 
the disclosure. On the other hand, requiring a Company-Selected Measure 
may elicit additional helpful context in cases where registrants would 
not otherwise supplement the required performance measures.
    As an alternative to the Tabular List, we also considered other 
approaches to providing context about the measures that were critical 
in linking pay to performance at a given registrant. For example, we 
could have required registrants to disclose all of the measures 
actually used to link pay to performance, with or without quantitative 
disclosure of the outcomes of the quantifiable measures, any applicable 
thresholds and targets, and the associated payouts. Such disclosure may 
provide a more complete view of how pay is linked to performance at a 
given registrant, and the potential quantitative element may allow 
investors to more readily assess the sensitivity of pay to particular 
measures and the rigor of performance goals. Some investors commented 
that they would benefit from this information being more readily 
available.\676\ However, depending on the specific requirements, such 
disclosure could be more costly to produce than the Tabular List and 
may take more time for investors to review, rather than providing 
simple context and framing for an investor's review of the main table 
and associated descriptions. There may also be implications of 
increased transparency of quantitative targets and thresholds, such as 
pressuring registrants to limit discretion in their pay programs, which 
may or may not be beneficial. Finally, we note that several commenters 
mentioned that some registrants are already providing such 
disclosures,\677\ with one indicating that the market does not seem to 
have coalesced around a consistent format for such disclosures.\678\ We 
expect that market practices in this area may continue to develop.
---------------------------------------------------------------------------

    \676\ See, e.g., letters from AFL-CIO 2015; AFL-CIO 2022; 
CalPERS 2022; CII 2015; CII 2022; and SBA-FL.
    \677\ See, e.g., letters from PG 2022 and SBA-FL.
    \678\ See letter from PG 2022.
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

A. Background

    Certain provisions of our regulations and schedules that would be 
affected by the final rules contain a ``collection of information'' 
within the meaning of the PRA. The Commission is submitting the final 
rules to the Office of Management and Budget (``OMB'') for review in 
accordance with the PRA.\679\ The Commission published a notice 
requesting comment on changes to these collection of information 
requirements in the Proposing Release and submitted these requirements 
to the OMB for review in accordance with the PRA.\680\ The hours and 
costs associated with preparing, filing, and distributing the schedules 
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 comply with, a collection of information unless it displays 
a currently valid OMB control number. Compliance with the final rules 
is mandatory. Responses to the information collections will not be kept 
confidential and there is no mandatory retention period for the 
information disclosed.
---------------------------------------------------------------------------

    \679\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \680\ Id.
---------------------------------------------------------------------------

    The titles for the collections of information are:
    ``Regulation 14A and Schedule 14A'' (OMB Control No. 3235-0059); 
and
    ``Regulation 14C and Schedule 14C'' (OMB Control No. 3235-0065).
    We adopted the above-referenced regulations and schedules pursuant 
to the Securities Act or the Exchange Act. The regulations and 
schedules set forth

[[Page 55188]]

the disclosure requirements for proxy and information statements filed 
by registrants to help investors make informed investment and voting 
decisions. The final rules are intended to satisfy the requirements of 
Section 14(i).
    A description of the final amendments, including the need for the 
information and its use, as well as a description of the likely 
respondents, can be found in Section II above, and a discussion of the 
expected economic effects of the final amendments can be found in 
Section V above.

B. Summary of Comment Letters and Revisions to PRA Estimates

    In the Proposing Release, the Commission requested comment on the 
PRA burden hour and cost estimates and the analysis used to derive such 
estimates. While several commenters provided comments on the potential 
costs of the proposed rules and of the potential requirements discussed 
and analyzed in the Reopening Release, only one commenter specifically 
addressed our PRA estimates, stating that the Commission's estimates of 
the man hour and cost burden of the rule on companies were ``grossly 
underestimated.'' \681\ As discussed, above, we have made some changes 
to the proposed amendments as a result of comments received in response 
to the Proposing Release and the Reopening Release. We have revised our 
estimates from the Proposing Release accordingly, taking into account 
the changes and the comments received.
---------------------------------------------------------------------------

    \681\ See letter from NAM 2015. Another commenter contended that 
the Reopening Release should have included an updated PRA analysis. 
See letter from Toomey/Shelby. That letter is discussed in footnote 
8, supra.
---------------------------------------------------------------------------

C. Summary of Collection of Information Requirements

    We are adding new Item 402(v) to Regulation S-K. This item requires 
registrants to provide a table containing the Summary Compensation 
Table measure of total compensation and the values of the prescribed 
measure of executive compensation actually paid for the PEO and as an 
average for the other NEOs, TSR both for the registrant and its peer 
group, the registrant's net income, and a Company-Selected Measure. 
Item 402(v) of Regulation S-K also requires a registrant to provide a 
clear description of (i) the relationships between executive 
compensation actually paid to its PEOs and, on average, to its other 
NEOs and the registrant's TSR, (ii) the relationship between executive 
compensation actually paid to the registrant's PEOs and, on average, 
its other NEOs, and the net income of the registrant, (iii) the 
relationships between executive compensation actually paid to the 
registrant's PEOs and, on average, its other NEOs and the registrant's 
Company-Selected Measure, and (iv) the relationship between the 
registrant's TSR and its peer group TSR, in each case over the 
registrant's five most recently completed fiscal years. A registrant 
will also be required to disclose an unranked Tabular List of its most 
important financial performance measures used by it to link executive 
compensation actually paid to its PEOs and other NEOs during the fiscal 
year to registrant performance. The final rules require registrants to 
separately tag the values disclosed in the table in Inline XBRL, block-
text tag the footnote and relationship disclosure and the Tabular List 
in Inline XBRL, and tag specific data points (such as quantitative 
amounts) within the footnote disclosures in Inline XBRL.
    The disclosure is 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. EGCs, 
registered investment companies, and foreign private issuers are not 
required to provide the disclosure. SRCs are subject to scaled 
disclosure requirements, under which they will not be required to 
provide a peer group TSR or a Company-Selected Measure (or any related 
relationship disclosures), nor will they be required to provide a 
Tabular List or disclose amounts related to pensions; and will only be 
required to provide three (two in the first applicable filing after the 
rules become effective) years of disclosure. SRCs must provide the 
Inline XBRL data beginning in the third filing in which they provide 
the required pay-versus-performance disclosure.
    Much of the information required to produce the pay-versus-
performance disclosure is based on items that are already required 
elsewhere in the executive compensation disclosure and financial 
statements provided by registrants. In particular, 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 final rules are not expected to 
require registrants to collect significant new data, relative to 
current disclosure requirements.\682\ All of the individual components 
needed to calculate executive compensation actually paid already must 
be reported under existing disclosure requirements, with the exception 
of the values to be included with respect to equity awards and the 
values to be included with respect to pension benefits for registrants 
other than SRCs, which are not required to include such pension amounts 
in their calculation of executive compensation actually paid. 
Information about net income for all registrants is already required to 
be disclosed in the registrant's financial statements. Further, 
information about TSR and peer group TSR is already required to be 
disclosed in a registrant's annual report to shareholders under Item 
201(e) of Regulation S-K, and the measures that make up the Tabular 
List and the Company-Selected Measure are already considered by 
registrants when making executive compensation determinations, and may 
already be discussed, in a different form, in the CD&A. SRCs are not 
required to provide disclosure under Item 201(e) of Regulation S-K or a 
CD&A, but also are not required under the final rules to provide 
disclosure of peer group TSR, the Tabular List, or the Company-Selected 
Measure. However, SRCs, which currently are not required to disclose 
their TSR in annual reports, will need to calculate this measure under 
the final rules.
---------------------------------------------------------------------------

    \682\ See supra Section V.C.
---------------------------------------------------------------------------

    We arrived at the estimates discussed below by reviewing our burden 
estimates for similar disclosure and considering our experience with 
other tagged data initiatives. In addition, the estimates discussed 
below reflect our belief that much of the information required to 
prepare the pay-versus-performance disclosure will be readily available 
to registrants because the information is required to be gathered, 
determined, or prepared in order to satisfy the other disclosure 
requirements of our rules, including Item 402 of Regulation S-K. We 
believe that the amendments regarding pay-versus-performance disclosure 
will enhance the already required compensation disclosure.
    The following PRA Table 1 summarizes the estimated effects of the 
final amendments on the paperwork burdens associated with the affected 
collections of information listed in Section VI.A.

[[Page 55189]]



                     PRA Table 1--Estimated Paperwork Burden Effects of the Final Amendments
----------------------------------------------------------------------------------------------------------------
                           Final amendments and effects                              Estimated burden effect *
----------------------------------------------------------------------------------------------------------------
Pay-versus-Performance Table:
     Registrants other than SRCs: Requiring a table containing the          28 hour increase in
     Summary Compensation Table measure of total compensation and the values of     compliance burden per
     the prescribed measure of executive compensation actually paid for the PEO     schedule for registrants
     and as an average for the other NEOs, TSR for both the registrant and its      other than SRCs
     peer group, the registrant's net income, and a Company-Selected Measure. The   17 hour increase in
     calculation of executive compensation actually paid includes adjustments       compliance burden per
     from the Summary Compensation Table amounts with respect to equity awards      schedule for SRCs.
     and pension benefits. Related footnote disclosure of the amounts that were
     deducted from, and added to, the Summary Compensation Table total and of
     valuation assumptions also required. Registrants required to separately tag
     the values disclosed in the table, block-text tag the footnote disclosure,
     and tag specific data points (such as quantitative amounts) within the
     footnote disclosures, all in Inline XBRL. Estimated burden increase: 20
     hours per schedule.
     SRCs: Requiring a table containing the Summary Compensation Table
     measure of total compensation and the values of the prescribed measures of
     executive compensation actually paid for the PEO and as an average for the
     other NEOs, TSR for the registrant, and the registrant's net income. The
     calculation of executive compensation actually paid includes adjustments
     from the Summary Compensation Table amounts with respect to equity awards.
     Related footnote disclosure of the amounts that were deducted from, and
     added to, the Summary Compensation Table total and of valuation assumptions
     also required. Registrants required to separately tag the values disclosed
     in the table, block-text tag the footnote disclosure, and tag specific data
     points (such as quantitative amounts) within the footnote disclosures, all
     in Inline XBRL. Estimated burden increase: 15 hours per schedule.
Relationship Disclosure:
     Registrants other than SRCs: Requiring a clear description of (i)
     the relationships between executive compensation actually paid to its PEOs
     and, on average, its other NEOs and the registrant's TSR, (ii) the
     relationships between executive compensation actually paid to the
     registrant's PEOs and, on average, its other NEOs and the net income of the
     registrant, (iii) the relationships between executive compensation actually
     paid to the registrant's PEOs and, on average, its other NEOs and the
     registrant's Company-Selected Measure, and (iv) the relationships between
     the registrant's TSR and its peer group TSR, in each case over the
     registrant's five most recently completed fiscal years. Registrants required
     to block-text tag the relationship disclosure in Inline XBRL. Estimated
     burden increase: 4 hours per schedule.
     SRCs: Requiring a clear description of (i) the relationships between
     executive compensation actually paid to its PEOs and, on average, its other
     NEOs and the registrant's TSR and (ii) the relationships between executive
     compensation actually paid to the registrant's PEOs and, on average, its
     other NEOs and the net income of the registrant, in each case over the
     registrant's three most recently completed fiscal years. Registrants
     required to block-text tag the relationship disclosure in Inline XBRL.
     Estimated burden increase: 2 hours per schedule.
Tabular List:
     Requiring a registrant that is not an SRC to disclose an unranked
     Tabular List of the most important financial performance measures used by it
     to link executive compensation actually paid to its PEOs and NEOs during the
     fiscal year to company performance. Registrants required to block-text tag
     the Tabular List in Inline XBRL. Estimated burden increase: 4 hours per
     schedule.
----------------------------------------------------------------------------------------------------------------
* Estimated effect expressed as an increase of burden hours on average and derived from Commission staff review
  of samples of relevant sections of the affected forms and schedules.

    The estimated burden increase associated with the final rules for 
both SRCs and non-SRCs reflects an increase from the estimated average 
burden increase of 15 hours for all registrants that was included in 
the Proposing Release.\683\ The increase reflects adjustments made due 
to comments received and accounts for several modifications relative to 
the proposed rules, including with respect to the calculation of 
executive compensation actually paid, the addition of net income and 
the Company-Selected Measure as performance measures to be included in 
the table, and related relationship disclosures with respect to those 
performance measures, and the requirement to provide the Tabular List. 
Because these estimates are averages of the burdens for all such 
companies in each respective category, the burden could be more or less 
for any particular company, and may vary depending on a variety of 
factors, such as the complexity of companies' compensation plans or the 
degree to which companies use the services of outside professionals, or 
internal staff and resources, to tag the data in Inline XBRL. This 
burden, as discussed in more detail below, will be added to the current 
burdens for Schedule 14A and Schedule 14C.
---------------------------------------------------------------------------

    \683\ See Section V.C of the Proposing Release.
---------------------------------------------------------------------------

D. Incremental and Aggregate Burden and Cost Estimates for the Final 
Amendments

    We anticipate that new disclosure requirements will increase the 
burdens and costs for the affected registrants. 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, as well as the average 
hourly rate for outside professionals who assist with such preparation. 
The burden estimates were calculated by multiplying the estimated 
number of responses by the estimated average amount of time it would 
take a registrant to prepare and review disclosure required under the 
final amendments. For purposes of the PRA, the burden is to be 
allocated between internal burden hours and outside professional costs. 
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.\684\ The portion of

[[Page 55190]]

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.
---------------------------------------------------------------------------

    \684\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This estimate is 
based on consultations with several issuers, law firms, and other 
persons who regularly assist issuers in preparing and filing reports 
with the Commission.
---------------------------------------------------------------------------

    We estimate that about 1,275 EGCs are required to file proxy 
statements on Schedule 14A or information statements on Schedule 14C, 
in which executive compensation disclosure pursuant to Item 402 of 
Regulation S-K is required. We have adjusted the estimates to deduct 
the filings attributed to these companies from our estimate because 
EGCs are not subject to the final rules.\685\ The table below sets 
forth our estimates of the number of current filings on the schedules 
that will be affected by the final rules. We used this data to 
extrapolate the effect of these changes on the paperwork burden for the 
listed collections of information.
---------------------------------------------------------------------------

    \685\ See supra note 23. Although EGCs would not have been 
subject to the proposed amendments, the estimates included in the 
Proposing Release were not adjusted to deduct the number of EGCs 
because at the time the precise number of these filers was difficult 
to determine.

            PRA Table 2--Estimated Number of Affected Filings
------------------------------------------------------------------------
                                      Current annual    Estimated number
               Form                  responses in PRA     of affected
                                       inventory *         filings **
------------------------------------------------------------------------
Schedule 14A......................              6,369              4,968
Schedule 14C......................                569                444
------------------------------------------------------------------------
* 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.
** Based on the approximately 1,275 EGCs that we estimate are required
  to file proxy statements on Schedule 14A or information statements on
  Schedule 14C relative to the estimated total number of approximately
  4,530 registrants subject to the final rules, we estimate that
  approximately 22% of the registrants filing Schedules 14A or 14C are
  EGCs, which are not subject to the final rules. In estimating the
  hours and service costs, we have removed those filers from the Current
  Annual Responses totals for Schedule 14A and Schedule 14C. As a
  result, we expect the final rules to affect approximately 4,968
  Schedule 14A filings [6,369 x 0.22 = 1,401; 6,369-1,401 = 4,968] and
  approximately 444 Schedule 14C filings [569 x 0.22 = 125; 569-125 =
  444].

    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 (particularly in the first year of compliance 
with the final rules) and some registrants may experience less than the 
average costs. PRA Table 3 below illustrates the incremental change to 
the total annual compliance burden of affected collections of 
information, in hours and in costs, as a result of the final 
amendments.

             PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting from the Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            Increase in     Increase in
                                                             Estimated      Burden hour     Increase in     Increase in    professional    professional
                                                             number of     increase per    burden hours    company hours     hours for       costs for
    Collection of information           Filed by *           affected        affected       for current     for current       current         current
                                                             responses       response        affected        affected        affected        affected
                                                                                             responses       responses       responses       responses
                                                                     (A)             (B)     (C) = (A) x     (D) = (C) x     (E) = (C) x     (F) = (E) x
                                                                                                     (B)            0.75            0.25            $400
--------------------------------------------------------------------------------------------------------------------------------------------------------
Schedule 14A....................  Non-SRC...............           2,981              28          83,468  ..............  ..............  ..............
Schedule 14A....................  SRC...................           1,987              17          33,779  ..............  ..............  ..............
                                                         -----------------------------------------------------------------------------------------------
    Schedule 14A (Total)........  ......................           4,968  ..............         117,247          87,935          29,312     $11,724,800
Schedule 14C....................  Non-SRC...............             266              28           7,448  ..............  ..............  ..............
Schedule 14C....................  SRC...................             178              17           3,026  ..............  ..............  ..............
                                                         -----------------------------------------------------------------------------------------------
    Schedule 14C (Total)........  ......................             444  ..............          10,474           7,856           2,619      $1,047,600
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Based on 2021 filings, SRCs represent about 41 percent (1,860 out of 4,530) of the affected registrants. We assume for purposes of our PRA estimates
  that 60 percent of each affected collection of information was filed by non-SRCs and 40 percent by SRCs.

    The following PRA Table 4 summarizes the requested paperwork 
burden, including the estimated total reporting burdens and costs, 
under the final amendments.

[[Page 55191]]



                                                               PRA Table 4--Requested Paperwork Burden Under the Final Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Current burden                            Program change                            Revised burden
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Current                                  Number of    Increase in   Increase in
                     Collection of information                         annual        Current    Current cost    affected       company    professional     Annual     Burden hours   Cost burden
                                                                      responses   burden hours     burden       responses       hours         costs       responses
                                                                             (A)           (B)           (C)           (D)  (E) [dagger]  (F) [Dagger]     (G) = (A)   (H) = (B) +   (I) = (C) +
                                                                                                                                                                               (E)           (F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Schedule 14A......................................................         6,369       778,802  $103,805,312         4,968        87,935   $11,724,800         6,369       866,737  $115,530,112
Schedule 14C......................................................           569        56,356     7,514,944           444         7,856     1,047,600           569        64,212     8,562,544
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[dagger] From Column (D) in PRA Table 3.
[Dagger] From Column (F) in PRA Table 3.

VII. Final Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \686\ requires the 
Commission, in promulgating rules under Section 553 of the 
Administrative Procedure Act,\687\ to consider the impact of those 
rules on small entities. We have prepared this Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with Section 604 of the 
RFA.\688\ An Initial Regulatory Flexibility Analysis (``IRFA'') was 
prepared in accordance with the RFA and was included in the Proposing 
Release. This FRFA relates to the amendments to Item 402 of Regulation 
S-K, Item 405 of Regulation S-T, Schedule 14A, and Schedule 14C.
---------------------------------------------------------------------------

    \686\ 5 U.S.C. 601 et seq.
    \687\ 5 U.S.C. 553.
    \688\ 5 U.S.C. 604.
---------------------------------------------------------------------------

A. Need For, and Objectives of, the Final Rules

    The final rules are designed to implement the requirements of 
Section 14(i), which was added by Section 953(a) of the Dodd-Frank Act. 
Section 14(i) mandates that the Commission adopt rules addressing 
specified disclosure requirements. Specifically, as described in detail 
in Section II above, the final rules will require registrants (other 
than EGCs, registered investment 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 
registrant's PEO and, on average, its other NEOs and the financial 
performance of the registrant for the three most recently completed 
fiscal years in the case of a registrant that qualifies as an SRC (or 
the five most recently completed fiscal years in the case of a non-
SRC), taking into account any change in the value of the shares of 
stock and dividends of the registrant and any distributions.
    The final rules require registrants to present pay-versus-
performance disclosure that can be readily compared across registrants, 
while also providing investors with disclosure reflecting the specific 
situation of the registrant. We believe that the final rules will, 
among other things, allow investors to assess a registrant's executive 
compensation actually paid relative to its financial performance more 
easily and at a lower cost to investors. The need for, and objectives 
of, the final rules are described in greater detail in Sections I and 
II.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, we requested comment on all aspects of 
the IRFA, including the nature of any impact on small entities and 
empirical data to support the extent of the impact. In addition, the 
Reopening Release included a discussion of the potential impact on SRCs 
of requiring disclosure of the additional performance measures 
discussed in that release and also requested comment on a number of 
matters with respect to SRCs in relation to the proposed rules and the 
additional requirements considered in that release. We did not receive 
any comments specifically addressing the IRFA.\689\ However, we 
received a number of comments on the proposed rules generally,\690\ and 
have considered these comments in developing the FRFA. In addition, as 
discussed in detail above in Section II.G.2, we received a variety of 
comments on whether SRCs should be subject to the proposed rules.\691\ 
Some commenters supported fully exempting SRCs from the pay-versus-
performance disclosure requirements,\692\ while another suggested that 
the pay-versus-performance disclosure be voluntary for SRCs.\693\ Other 
commenters stated that we should not exempt SRCs from the disclosure 
requirements,\694\ some noting that a lack of transparency could have 
negative market effects for SRCs.\695\ Commenters also made a variety 
of suggestions with respect to the timing of the disclosure for SRCs, 
including that SRCs be subject to the full pay-versus-performance 
disclosure requirement but with a one year ``grace period,'' \696\ or 
that SRCs provide five years of data, but with a three year transition 
period.\697\ One commenter also suggested that the Commission exempt 
SRCs from the disclosure requirements for five years so that the 
Commission could first analyze the impact of the disclosure 
requirements on larger registrants.\698\
---------------------------------------------------------------------------

    \689\ As discussed in footnote 8, supra, one comment letter 
noted that the Commission did not update the RFA analysis in the 
Reopening Release, and ``urge[d]'' the Commission to ``re-propose'' 
with an updated RFA analysis. See letter from Toomey/Shelby.
    \690\ See supra Section II.
    \691\ See supra notes 399-406 and accompanying text.
    \692\ See letters from CCMC 2015; Mercer; Pearl; TCA 2015; and 
TCA 2022.
    \693\ See letter from ICGN.
    \694\ See letters from AB; Better Markets; CalPERS 2015; 
CalSTRS; CII 2015; Morrell; SBA-FL; and Troop.
    \695\ See letter from CalPERS 2015.
    \696\ See letter from AB.
    \697\ See letter from Hermes.
    \698\ See letters from NIRI 2015 and NIRI 2022.
---------------------------------------------------------------------------

C. Small Entities Subject to the Final Amendments

    The final rules will affect some companies that are small entities. 
For purposes of the RFA, under our rules, an issuer, other than an 
investment company,\699\ is a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year.\700\ The final rules will affect 
issuers that have a class of securities that are registered under 
Section 12 of the Exchange Act but are not foreign private issuers, 
registered investment companies, or EGCs. We estimate that there are 
approximately 450 issuers that may be considered small entities and are 
potentially subject to the final amendments. An investment company,

[[Page 55192]]

including a BDC, 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.\701\ We believe that the final 
rules will affect some small entities that are BDCs that have a class 
of securities registered under Section 12 of the Exchange Act. We 
estimate that one affected BDC may be considered a small entity.\702\
---------------------------------------------------------------------------

    \699\ 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].
    \700\ See Exchange Act Rule 0-10(a) [17 CFR 240.0-10(a)].
    \701\ 17 CFR 270.0-10(a).
    \702\ Of the seven BDCs that will be subject to the final 
amendments, one may be considered a small entity for purposes of the 
RFA.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    We expect the final rules to have an incremental effect on existing 
reporting, recordkeeping and other compliance burdens for all issuers, 
including small entities. Under the final rules, SRCs are permitted to 
provide disclosure in accordance with Item 402(v) of Regulation S-K 
that is scaled for small companies, consistent with SRCs' existing 
scaled executive compensation disclosure requirements. Specifically, 
SRCs are not required to provide a peer group TSR, a Company-Selected 
Measure, a Tabular List, or to disclose amounts related to pensions. 
Because SRCs are not required to provide a peer group TSR or Company-
Selected Measure, they are similarly not required to provide 
relationship disclosure with respect to those performance measures. In 
addition, because the existing scaled definition of NEO in Item 402 of 
Regulation S-K applicable to SRCs applies for purposes of the new Item 
402(v) disclosure, SRCs are required to provide disclosure about fewer 
NEOs than non-SRC registrants. SRCs also will only be required to 
provide three years of disclosure (two in the first applicable filing 
after the rules become effective). Both SRCs and non-SRC registrants 
are required to separately tag the values disclosed in the table in 
Inline XBRL, block-text tag the footnote and relationship disclosure 
and the Tabular List in Inline XBRL, and tag specific data points (such 
as quantitative amounts) within the footnote disclosures in Inline 
XBRL, but SRCs are required to provide the required Inline XBRL data 
beginning in the third filing in which they provide pay-versus-
performance disclosure.
    Much of the information required in the pay-versus-performance 
disclosure is based on items that are already required elsewhere in the 
executive compensation disclosure and financial statements provided by 
registrants, and the final rules are not expected to require 
registrants to collect significant new data, relative to current 
disclosure requirements.\703\ Compliance with certain provisions 
affected by the amendments will require the use of professional skills, 
including accounting, legal, and technical skills. The final amendments 
are discussed in detail in Sections I and II above. We discuss the 
economic impact, including the estimated compliance costs and burdens 
of the final rules on all registrants, including small entities, in 
Sections V and VI above.
---------------------------------------------------------------------------

    \703\ See supra Section V.C.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs us to consider alternatives that would accomplish 
our stated objectives, while minimizing any significant adverse impact 
on small entities. In connection with the final rules, 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;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the final 
rules.
    As noted above, the final rules will 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 for SRCs to calculate 
executive compensation actually paid already must be reported by SRCs 
under current disclosure rules, with the exception of the values to be 
included with respect to equity awards. In addition, net income is 
required under existing financial disclosure. As discussed above, we do 
not believe that it is necessary to exempt small entities from the 
final rules entirely, as we believe the benefit to investors of small 
entities providing pay-versus-performance disclosure outweighs the 
costs to them of preparing the scaled disclosure.\704\ We have provided 
some different and simplified compliance requirements for small 
entities, taking into account their resources. In particular, we have 
scaled the disclosure requirements for SRCs in an attempt to limit the 
compliance burden to which such companies will be subject. Accordingly, 
registrants that are SRCs will be subject to the final rules, but will 
be permitted to provide only three years of disclosure, instead of five 
years as required for all other registrants. Also, the final rules will 
require SRCs to disclose their company TSR and their net income, but 
they will not be required to disclose peer group TSR, a Company-
Selected Measure, or a Tabular List. In addition, because the scaled 
compensation disclosure that applies to SRCs under existing Item 402 of 
Regulation S-K does not include pension plans, the pension plan 
adjustment otherwise required under the final rules will not apply to 
SRCs. 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 SRCs 
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. Under the 
final rules, a small entity, therefore, will likely be subject to the 
scaled disclosure requirements described above that will apply to 
SRCs.\705\ We believe this will minimize any adverse impact on small 
entities of providing new disclosures which they generally do not 
currently provide.
---------------------------------------------------------------------------

    \704\ The alternative of exempting SRCs in their entirety from 
the final rules is discussed above in Section V.C.4.i.
    \705\ See supra Section II.G.3.
---------------------------------------------------------------------------

    With respect to compliance timetables, the final rules also provide 
SRCs with transitional relief under which they may provide two years of 
disclosure, instead of three, in the first applicable filing after the 
rules become effective, and three years of disclosure in subsequent 
proxy and information statement filings. The final rules also provide 
SRCs with a phase-in of the requirement to provide the disclosure in 
Inline XBRL, under which SRCs need not comply with the Inline XBRL 
requirement until the third filing in which they provide pay-versus-
performance disclosure.
    Although the final rules will require disclosure of prescribed 
measures of executive compensation actually paid and registrant 
financial performance, they will permit issuers significant flexibility 
in presenting the relationship between these measures. For example, 
issuers, including small entities, can describe the relationships in 
narrative form or by means of a graph or chart, or a combination of 
both forms. In this respect, the final rules make use of both design 
and performance standards as a means of balancing the investors' need 
for uniform disclosure across registrants while also providing 
registrants,

[[Page 55193]]

including small entities, with flexibility to describe their pay-
versus-performance relationship in a format that is best suited to 
their particular circumstances.

Statutory Authority and Text of Amendments

    The final amendments contained in this release are being adopted 
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, 232, and 240

    Reporting and Recordkeeping requirements; Securities.

    For the reasons set out in the preamble, we are amending title 17, 
chapter II, of the Code of Federal Regulations 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 authority citation for part 229 continues to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77n, 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, and 7201 et seq.; 18 
U.S.C. 1350; sec. 953(a), Pub. L. 111-203, 124 Stat. 1904 (2010); 
sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).


0
2. Amend Sec.  229.402 by adding paragraph (v) to read as follows:


Sec.  229.402  (Item 402) Executive compensation.

* * * * *
    (v) Pay versus performance. In connection with any proxy or 
information statement for which the rules of the Commission require 
executive compensation disclosure pursuant to this section (excluding 
any proxy or information statement of an ``emerging growth company,'' 
as defined in Sec.  230.405 of this chapter or Sec.  240.12b-2 of this 
chapter):
    (1) Provide the information specified in paragraph (v)(2) of this 
section for each of the registrant's last five completed fiscal years 
in the following tabular format:

                                                                 Pay Versus Performance
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Average                   Value of initial fixed
                                                                             summary       Average      $100 investment based
                                                 Summary                  compensation  compensation             on:
                                              compensation  Compensation   table total    actually   --------------------------               [Company-
                    Year                       table total    actually     for non-PEO  paid to non-                Peer group   Net income    selected
                                                 for PEO     paid to PEO      named       PEO named      Total        total                    measure]
                                                                            executive     executive   shareholder  shareholder
                                                                            officers      officers       return       return
(a)                                                    (b)           (c)           (d)           (e)          (f)          (g)          (h)          (i)
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (2) The table required by paragraph (v)(1) of this section must 
include:
    (i) The fiscal year covered (column (a)).
    (ii) The PEO's (as defined in paragraph (a)(3) of this section) 
total compensation for the covered fiscal year as reported in the 
Summary Compensation Table pursuant to paragraph (c)(2)(x) of this 
section, or paragraph (n)(2)(x) of this section for smaller reporting 
companies (column (b)), and the average total compensation reported for 
the remaining named executive officers collectively reported pursuant 
to such applicable paragraph (column (d)). If more than one person 
served as the registrant's PEO during the covered fiscal year, provide 
the total compensation, as reported in accordance with the immediately 
preceding sentence, for each person who served as the PEO during that 
period separately in an additional column (b) for each such person.
    (iii) The executive compensation actually paid to the PEO (column 
(c)) and the average executive compensation actually paid to the 
remaining named executive officers collectively (column (e)). If more 
than one person served as the registrant's PEO during the covered 
fiscal year, provide the compensation actually paid to each person who 
served as PEO during that period separately in an additional column (c) 
for each such person. For purposes of columns (c) and (e) of the table 
required by paragraph (v)(1) of this section, executive compensation 
actually paid must be the total compensation for the covered fiscal 
year for each named executive officer as provided in paragraph 
(c)(2)(x) of this section, or paragraph (n)(2)(x) of this section 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 accordance with paragraph (c)(2)(viii)(A) of this 
section;
    (B)(1) Add, for all defined benefit and actuarial pension plans 
reported in the Summary Compensation Table in accordance with paragraph 
(c)(2)(viii)(A) of this section, the aggregate of:
    (i) Service cost, 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; and
    (ii) Prior service cost, calculated as the entire cost of benefits 
granted (or credit for benefits reduced) in a plan amendment (or 
initiation) during the covered fiscal year that are attributed by the 
benefit formula to services rendered in periods prior to the amendment.
    (2) ``Service cost'' and ``prior service cost'' must be calculated 
using the same methodology as used for the registrant's financial 
statements under generally accepted accounting principles.
    (C)(1) Deduct the amounts reported in the Summary Compensation 
Table pursuant to paragraphs (c)(2)(v) and (vi) of this section and 
then include an amount calculated as follows for all stock awards, and 
all option awards, with or without tandem SARs (as defined in paragraph 
(a)(6)(i) of this section) (including awards that subsequently have 
been transferred):
    (i) Add the fair value as of the end of the covered fiscal year of 
all awards granted during the covered fiscal year that are outstanding 
and unvested as of the end of the covered fiscal year;
    (ii) Add the amount equal to the change as of the end of the 
covered fiscal year (from the end of the prior fiscal year) in fair 
value (whether positive or negative) of any awards

[[Page 55194]]

granted in any prior fiscal year that are outstanding and unvested as 
of the end of the covered fiscal year;
    (iii) Add, for awards that are granted and vest in the same year, 
the fair value as of the vesting date;
    (iv) Add the amount equal to the change as of the vesting date 
(from the end of the prior fiscal year) in fair value (whether positive 
or negative) of any awards granted in any prior fiscal year for which 
all applicable vesting conditions were satisfied at the end of or 
during the covered fiscal year;
    (v) Subtract, for any awards granted in any prior fiscal year that 
fail to meet the applicable vesting conditions during the covered 
fiscal year, the amount equal to the fair value at the end of the prior 
fiscal year; and
    (vi) Add the dollar value of any dividends or other earnings paid 
on stock or option awards in the covered fiscal year prior to the 
vesting date that are not otherwise included in the total compensation 
for the covered fiscal year.
    (2) If at any time during the last completed fiscal year, the 
registrant has adjusted or amended the exercise price of 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 changes in fair value included 
pursuant to this paragraph (v)(2)(iii)(C) must take into account the 
excess fair value, if any, of any such modified award over the fair 
value of the original award as of the date of such modification.
    (3) Fair value amounts must be computed in a manner consistent with 
the fair value methodology used to account for share-based payments in 
the registrant's financial statements under generally accepted 
accounting principles. For any awards that are subject to performance 
conditions, calculate the change in fair value as of the end of the 
covered fiscal year based upon the probable outcome of such conditions 
as of the last day of the fiscal year.
    (iv) For purposes of columns (f) and (g) of the table required by 
paragraph (v)(1) of this section, for each fiscal year disclose the 
cumulative total shareholder return of the registrant (column (f)) and 
peer group cumulative total shareholder return (column (g)) calculated, 
except as set forth below, in the same manner as under Sec.  229.201(e) 
of this chapter (Item 201(e) of Regulation S-K). For purposes of 
calculating the cumulative total shareholder return of the registrant 
and peer group cumulative total shareholder return, the term 
``measurement period'' must 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 fiscal year for which cumulative 
total shareholder return of the registrant or peer group cumulative 
total shareholder return is being calculated. The closing price at the 
measurement point must be converted into a fixed investment of one 
hundred dollars, 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 must be the value of such fixed investment 
based on 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. For 
purposes of determining the total shareholder return of the 
registrant's peer group, the registrant must use the same index or 
issuers used by it for purposes of Sec.  229.201(e)(1)(ii) of this 
chapter or, if applicable, the companies it uses as a peer group for 
purposes of its disclosures under paragraph (b) of this section. If the 
peer group is not a published industry or line-of-business index, the 
identity of the issuers composing the group must be disclosed in a 
footnote. 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. If the registrant selects or otherwise uses a different peer 
group from the peer group used by it for the immediately preceding 
fiscal year, explain, in a footnote, the reason(s) for this change and 
compare the registrant's cumulative total return with that of both the 
newly selected peer group and the peer group used in the immediately 
preceding fiscal year.
    (v) The registrant's net income for each fiscal year (column (h)).
    (vi) An amount for each fiscal year attributable to an additional 
financial performance measure included in the Tabular List provided 
pursuant to paragraph (v)(6) of this section, designated as the 
Company-Selected Measure, which in the registrant's assessment 
represents the most important financial performance measure (that is 
not otherwise required to be disclosed in the table) used by the 
registrant to link compensation actually paid to the registrant's named 
executive officers, for the most recently completed fiscal year, to 
company performance (column (i)). For purposes of this paragraph (v) of 
this section, ``financial performance measures'' means measures that 
are determined and presented in accordance with the accounting 
principles used in preparing the issuer's financial statements, any 
measures that are derived wholly or in part from such measures, and 
stock price and total shareholder return. A financial performance 
measure need not be presented within the registrant's financial 
statements or otherwise included in a filing with the Commission to be 
a Company-Selected Measure. Disclosure of any Company-Selected Measure, 
or any additional measure that the registrant elects to provide, that 
is not a financial measure under generally accepted accounting 
principles will not be subject to Sec. Sec.  244.100 through 102 of 
this chapter (Regulation G) and Sec.  229.10(e) of this chapter (Item 
10(e)); however, disclosure must be provided as to how the number is 
calculated from the registrant's audited financial statements.
    (3) For each amount disclosed in columns (c) and (e) of the table 
required by paragraph (v)(1) of this section, disclose in footnotes to 
the table each of the amounts deducted and added pursuant to paragraph 
(v)(2)(iii) of this section, the name of each named executive officer 
included as a PEO or in the calculation of the average remaining named 
executive officer compensation, and the fiscal years in which such 
persons are included. 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) of this section, disclose in a footnote to the table 
required by paragraph (v)(1) of this section any assumption made in the 
valuation that differs materially from those disclosed as of the grant 
date of such equity awards.
    (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) of this section to provide a clear 
description (graphically, narratively, or a combination of the two) of 
the relationships:
    (i) Between:
    (A) 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)) included in the Summary Compensation Table; and

[[Page 55195]]

    (B) The cumulative total shareholder return of the registrant 
(column (f)), across the registrant's last five completed fiscal years;
    (ii) Between:
    (A) 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)) included in the Summary Compensation Table; and
    (B) Net income of the registrant (column (h)), across the 
registrant's last five completed fiscal years; and
    (iii) Between:
    (A) 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)) included in the Summary Compensation Table; and
    (B) The Company-Selected Measure (column (i)), across the 
registrant's last five completed fiscal years.
    (iv) The description provided in response to paragraph (v)(5)(i) of 
this section must 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. If a registrant elects to provide any additional measures 
in the table, each additional measure must be accompanied by a clear 
description of the relationship between:
    (A) 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)) included in the Summary Compensation Table; and
    (B) That additional measure, across the registrant's last five 
completed fiscal years. (6) Subject to paragraph (v)(6)(iii) of this 
section, provide a tabular list of at least three, and up to seven, 
financial performance measures, which in the registrant's assessment 
represent the most important financial performance measures used by the 
registrant to link compensation actually paid to the registrant's named 
executive officers, for the most recently completed fiscal year, to 
company performance (``Tabular List'').
    (i) The registrant may provide the Tabular List disclosure either 
as one tabular list, as two separate tabular lists (one for the PEO, 
and one for all named executive officers other than the PEO), or as 
separate tabular lists for the PEO and each named executive officer 
other than the PEO. If the registrant elects to provide multiple 
tabular lists in accordance with the immediately preceding sentence, 
each tabular list must include at least three, and up to seven, 
financial performance measures, which in the registrant's assessment 
represent the most important financial performance measures used by the 
registrant to link compensation actually paid to that, or those, 
particular named executive officer, or officers, for the most recently 
completed fiscal year, to company performance.
    (ii) If fewer than three financial performance measures were used 
by the registrant to link compensation actually paid to the 
registrant's named executive officers, for the most recently completed 
fiscal year, to company performance, the Tabular List must include all 
such measures that were used, if any.
    (iii) A registrant may include non-financial performance measures 
(i.e., performance measures other than those that fall within the 
definition of financial performance measures) used by the registrant to 
link compensation actually paid to the registrant's named executive 
officers, for the most recently completed fiscal year, to company 
performance in the Tabular List, if it determines that such measures 
are among its three to seven most important performance measures, and 
it has disclosed its most important three (or fewer, if the registrant 
only uses fewer) financial performance measures, in accordance with 
this paragraph (v)(6).
    (iv) The Tabular List may include a maximum of seven performance 
measures, regardless of whether the registrant elects to include non-
financial performance measures in the Tabular List.
    (7) The disclosure provided pursuant to this paragraph (v), 
including, but not limited to, any disclosure provided pursuant to 
paragraphs (v)(3) and (6) of this section, must appear with, and in the 
same format as, the rest of the disclosure required to be provided 
pursuant to this section and, in addition, must be provided in an 
Interactive Data File in accordance with Sec.  232.405 of this chapter 
and the EDGAR Filer Manual (referenced in Sec.  232.301 of this 
chapter).
    (8) A registrant that qualifies as a ``smaller reporting company,'' 
as defined by Sec.  229.10(f)(1) of this chapter, may provide the 
information required by this paragraph (v) for three years, instead of 
five years. A smaller reporting company may provide the disclosure 
required by this 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)(2)(iv) or (v)(5) of 
this section with respect to the total shareholder return of any peer 
group, or the Company-Selected Measure disclosure required by paragraph 
(v)(2)(vi) of this section, or the Tabular List provided pursuant to 
paragraph (v)(6) of this section. For purposes of paragraph (v)(2)(iii) 
of this section with respect to smaller reporting companies, executive 
compensation actually paid must be the total compensation for the 
covered fiscal year for each named executive officer as provided in 
paragraph (n)(2)(x) of this section, adjusted to deduct the amounts 
reported in the Summary Compensation Table pursuant to paragraphs 
(n)(2)(v) and (vi) of this section, and to add in their place the fair 
value of the amounts added in paragraph (v)(2)(iii)(C) of this section. 
Disclose in a footnote to the table required pursuant to paragraph 
(v)(1) of this section 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, the name 
of each named executive officer included as a PEO or in the calculation 
of the average remaining named executive officer compensation, and the 
fiscal years in which they are included. A smaller reporting company is 
required to comply with paragraph (v)(7) of this section in the third 
filing in which it provides the disclosure required by this paragraph 
(v).
    Instructions to paragraph (v).
    1. Transitional relief. A registrant may provide the disclosure 
required by this paragraph (v) for three years, instead of five years, 
in the first filing in which it provides this disclosure, and may 
provide disclosure for an additional year in each of the two subsequent 
annual filings in which this disclosure is required.
    2. 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.
    3. Incorporation by reference. The information required by 
paragraph (v) of this section 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 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
3. The general authority citation for part 232 continues to read as 
follows:


[[Page 55196]]


    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-10, 80b-11, 7201 et seq.; 
and 18 U.S.C. 1350, unless otherwise noted.
* * * * *

0
4. Amend Sec.  232.405 by:
0
a. Revising the introductory text and paragraphs (a)(2) and (4).
0
b. In paragraph (b)(1)(i), removing the word ``and'' from the end of 
the sentence;
0
c. In paragraph (b)(1)(ii), removing the period from the end of the 
sentence, and adding ``; and'' in its place;
0
d. Adding paragraph (b)(1)(iii);
0
e. In paragraph (b)(3)(i)(A), removing the word ``and'' from the end of 
the sentence;
0
f. In paragraph (b)(3)(i)(B), adding ``and'' at the end;
0
g. Adding paragraphs (b)(3)(i)(C) and (b)(4); and
0
h. Revising Note 1 to Sec.  232.405.
    The additions and revisions read as follows:


Sec.  232.405  Interactive Data File submissions.

    This section applies to electronic filers that submit Interactive 
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) 
of Regulation S-K), General Instruction F of Form 11-K (Sec.  249.311), 
paragraph (101) of Part II--Information Not Required to be Delivered to 
Offerees or Purchasers of Form F-10 (Sec.  239.40 of this chapter), 
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.  
249.220f of this chapter), paragraph B.(15) of the General Instructions 
to Form 40-F (Sec.  249.240f of this chapter), paragraph C.(6) of the 
General Instructions to Form 6-K (Sec.  249.306 of this chapter), Note 
D.5 of Rule 14a-101 under the Exchange Act (Sec.  240.14a-101 of this 
chapter), Item 1 of Rule 14c-101 under the Exchange Act (Sec.  240.14c-
101 of this chapter), General Instruction C.3.(g) of Form N-1A 
(Sec. Sec.  239.15A and 274.11A of this chapter), General Instruction I 
of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this chapter), General 
Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a and 274.11b of this 
chapter), General Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b 
and 274.11c of this chapter), General Instruction C.3.(h) of Form N-6 
(Sec. Sec.  239.17c and 274.11d of this chapter), and General 
Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 274.128 of this 
chapter) specify when electronic filers are required or permitted to 
submit an Interactive Data File (Sec.  232.11), as further described in 
note 1 to this section. This section imposes content, format and 
submission requirements for an Interactive Data File, but does not 
change the substantive content requirements for the financial and other 
disclosures in the Related Official Filing (Sec.  232.11).
    (a) * * *
    (2) Be submitted only by an electronic filer either required or 
permitted to submit an Interactive Data File as specified by Sec.  
229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K), 
General Instruction F of Form 11-K (Sec.  249.311), paragraph (101) of 
Part II--Information Not Required to be Delivered to Offerees or 
Purchasers of Form F-10 (Sec.  239.40 of this chapter), paragraph 101 
of the Instructions as to Exhibits of Form 20-F (Sec.  249.220f of this 
chapter), paragraph B.(15) of the General Instructions to Form 40-F 
(Sec.  249.240f of this chapter), paragraph C.(6) of the General 
Instructions to Form 6-K (Sec.  249.306 of this chapter), Note D.5 of 
Rule 14a-101 under the Exchange Act (Sec.  240.14a-101 of this 
chapter), Item 1 of Rule 14c-101 under the Exchange Act (Sec.  240.14c-
101 of this chapter), General Instruction C.3.(g) of Form N-1A 
(Sec. Sec.  239.15A and 274.11A of this chapter), General Instruction I 
of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this chapter), General 
Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a and 274.11b of this 
chapter), General Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b 
and 274.11c of this chapter), General Instruction C.3.(h) of Form N-6 
(Sec. Sec.  239.17c and 274.11d of this chapter), or General 
Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 274.128 of this 
chapter), as applicable;
* * * * *
    (4) Be submitted in accordance with the EDGAR Filer Manual and, as 
applicable, Item 601(b)(101) of Regulation S-K (Sec.  229.601(b)(101) 
of this chapter), General Instruction F of Form 11-K (Sec.  249.311 of 
this chapter), paragraph (101) of Part II--Information Not Required to 
be Delivered to Offerees or Purchasers of Form F-10 (Sec.  239.40 of 
this chapter), paragraph 101 of the Instructions as to Exhibits of Form 
20-F (Sec.  249.220f of this chapter), paragraph B.(15) of the General 
Instructions to Form 40-F (Sec.  249.240f of this chapter), paragraph 
C.(6) of the General Instructions to Form 6-K (Sec.  249.306 of this 
chapter), Note D.5 of Rule 14a-101 under the Exchange Act (Sec.  
240.14a-101 of this chapter), Item 1 of Rule 14c-101 under the Exchange 
Act (Sec.  240.14c-101 of this chapter), General Instruction C.3.(g) of 
Form N-1A (Sec. Sec.  239.15A and 274.11A of this chapter), General 
Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this 
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a 
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter), General Instruction 
C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d of this chapter); 
or General Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 
274.128 of this chapter).
    (b) * * *
    (1) * * *
    (iii) The disclosure set forth in paragraph (b)(4) of this section.
* * * * *
    (3) * * *
    (i) * * *
    (C) The disclosure set forth in paragraph (b)(4) of this section.
* * * * *
    (4) The disclosure provided under 17 CFR part 229 (Regulation S-K) 
and related provisions that is required to be tagged, including, as 
applicable:
    (i) The information provided pursuant to Sec.  229.402(v) of this 
chapter (Item 402(v) of Regulation S-K).
    (ii) [Reserved].
* * * * *
    Note 1 to Sec.  232.405: Section 229.601(b)(101) of this chapter 
(Item 601(b)(101) of Regulation S-K) specifies the circumstances under 
which an Interactive Data File must be submitted and the circumstances 
under which it is permitted to be submitted, with respect to Sec.  
239.11 of this chapter (Form S-1), Sec.  239.13 of this chapter (Form 
S-3), Sec.  239.25 of this chapter (Form S-4), Sec.  239.18 of this 
chapter (Form S-11), Sec.  239.31 of this chapter (Form F-1), Sec.  
239.33 of this chapter (Form F-3), Sec.  239.34 of this chapter (Form 
F-4), Sec.  249.310 of this chapter (Form 10-K), Sec.  249.308a of this 
chapter (Form 10-Q), and Sec.  249.308 of this chapter (Form 8-K). 
General Instruction F of Sec.  249.311 of this chapter (Form 11-K) 
specifies the circumstances under which an Interactive Data File must 
be submitted, and the circumstances under which it is permitted to be 
submitted, with respect to Form 11-K. Paragraph (101) of Part II--
Information not Required to be Delivered to Offerees or Purchasers of 
Sec.  239.40 of this chapter (Form F-10) specifies the circumstances 
under which an Interactive Data File must be submitted and the 
circumstances under which it is permitted to be submitted, with respect 
to Form F-10. Paragraph 101 of the Instructions as to Exhibits of Sec.  
249.220f of this chapter (Form 20-F) specifies the circumstances under 
which an Interactive Data File must be submitted and the circumstances 
under which it is permitted to be submitted, with respect to Form 20-F. 
Paragraph B.(15) of the General Instructions to Sec.  249.240f of this 
chapter (Form 40-F) and Paragraph C.(6) of the General Instructions to 
Sec.  249.306 of this chapter

[[Page 55197]]

(Form 6-K) specify the circumstances under which an Interactive Data 
File must be submitted and the circumstances under which it is 
permitted to be submitted, with respect to Sec.  249.240f of this 
chapter (Form 40-F) and Sec.  249.306 of this chapter (Form 6-K). Note 
D.5 of Sec.  240.14a-101 of this chapter (Schedule 14A) and Item 1 of 
Sec.  240.14c-101 of this chapter (Schedule 14C) specify the 
circumstances under which an Interactive Data File must be submitted 
with respect to Schedules 14A and 14C. Section 229.601(b)(101) (Item 
601(b)(101) of Regulation S-K), paragraph (101) of Part II--Information 
not Required to be Delivered to Offerees or Purchasers of Form F-10, 
paragraph 101 of the Instructions as to Exhibits of Form 20-F, 
paragraph B.(15) of the General Instructions to Form 40-F, and 
paragraph C.(6) of the General Instructions to Form 6-K all prohibit 
submission of an Interactive Data File by an issuer that prepares its 
financial statements in accordance with 17 CFR 210.6-01 through 210.6-
10 (Article 6 of Regulation S-X). For an issuer that is a management 
investment company or separate account registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a et seq.) or a business development 
company as defined in Section 2(a)(48) of the Investment Company Act of 
1940 (15 U.S.C. 80a-2(a)(48)), General Instruction C.3.(g) of Form N-1A 
(Sec. Sec.  239.15A and 274.11A of this chapter), General Instruction I 
of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this chapter), General 
Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a and 274.11b of this 
chapter), General Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b 
and 274.11c of this chapter), General Instruction C.3.(h) of Form N-6 
(Sec. Sec.  239.17c and 274.11d of this chapter), and General 
Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 and 274.128 of this 
chapter), as applicable, specifies the circumstances under which an 
Interactive Data File must be submitted.

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

0
5. The general authority citation for part 240 continues to read 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, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 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); and Pub. L. 
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise 
noted.
* * * * *

0
6. Amend Sec.  240.14a-101 by adding paragraph D.5 to the Notes to read 
as follows:


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

Schedule 14A Information
* * * * *

    Notes 

* * * * *

    D. * * * 
    5. Interactive Data File. An Interactive Data File must be 
included in accordance with Sec.  232.405 of this chapter and the 
EDGAR Filer Manual where applicable pursuant to Sec.  232.405(b) of 
this chapter.

* * * * *

0
7. Amend Sec.  240.14c-101 by revising Item 1 to read as follows:


Sec.  240.14c-101  Schedule 14C. Information required in information 
statement.

Schedule 14C Information
* * * * *
    Item 1. Information required by Items of Schedule 14A (17 CFR 
240.14a-101). Furnish the information called for by all of the items of 
Schedule 14A of Regulation 14A (17 CFR 240.14a-101) (other than Items 
1(c), 2, 4 and 5 thereof) which would be applicable to any matter to be 
acted upon at the meeting if proxies were to be solicited in connection 
with the meeting. Notes A, C, D, and E to Schedule 14A (including the 
requirement in Note D.5 to provide an Interactive Data File in 
accordance with Sec.  232.405 of this chapter and the EDGAR Filer 
Manual where applicable pursuant to Sec.  232.405(b) of this chapter) 
are also applicable to Schedule 14C.
* * * * *

    By the Commission.

    Dated: August 25, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-18771 Filed 9-7-22; 8:45 am]
BILLING CODE 8011-01-P

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