SEC finalizes pay-versus-performance disclosure 

Crowe observation: In the final rules, business development companies (BDCs) are deemed the same as issuers other than registered investment companies; therefore, BDCs are subject to the new disclosure requirements.

• Principal executive officer (PEO) and named executive officer (NEO) compensation:
  • Total compensation, which is the same amounts as in the summary compensation table, of the PEO and the average total compensation of other NEOs
  • Compensation actually paid to the PEO and the average actual compensation paid to the other NEOs

• Financial performance measures:
  • Total shareholder return (TSR)
  • TSR of the entity’s peer group (not required for SRCs)

Crowe observation: The rules require a weighted peer group TSR based on market capitalization at the beginning of the TSR period. The peer group should be the same as depicted either in the entity’s performance graph disclosure (Item 201(e) of Regulation S-K) or in the entity’s CD&A benchmarking practices disclosure.

• Net income
• The entity-specific, company-selected financial performance measure (company-selected measure) that is most important to the link between compensation actually paid and company performance for the most recently completed fiscal year (not required for SRCs)

Crowe observation: The final rule specifies that registrants can elect to provide supplemental measures of compensation or financial performance (for example, in the tabular disclosure or in other disclosure) and other supplemental disclosures, assuming the additional measure or disclosure is “clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure.”

*Not required for SRCs
Source: SEC final rule, “Pay Versus Performance,” 2022, https://www.sec.gov/news/press-release/2022-149 

In addition to the tabular disclosure, an entity must provide:

• A clear description (graphic, narrative, or both) of the relationship between the executive compensation actually paid to the PEO and NEOs and the tabular financial performance metrics for the five most recently completed fiscal years (three years for SRCs).
• A description of the relationship between the entity’s cumulative TSR and cumulative peer group TSR (not required for SRCs).
• A list of up to seven most important financial performance measures used to link compensation to performance (not required for SRCs). A registrant also may elect to include nonfinancial measures in the list.

Crowe observations: The list of important financial performance measures does not need to be ranked in order of importance. No minimum number of measures exists (for example, if the entity uses fewer than three measures, it is required to disclose only those that are used); however, seven measures is the maximum. In addition, the company-selected measure or the list might include non-GAAP measures. Non-GAAP measures included in the pay-versus-performance disclosure are not subject to the additional requirements of Regulation G or Item 10(e) of Regulation S-K; however, the entity must disclose how the measure is calculated from the audited financial statements.

Crowe observation: A newly public company need not provide disclosure for any year it was not a reporting company under Section 13(a) or Section 15(d) of the Exchange Act.

Near-term consideration for management

• Timing. How will the entity ensure it will be ready to provide pay-versus-performance disclosures in its proxy and information statements filed in calendar year 2023?
• Content. How will management gather the appropriate data to prepare pay-versus-performance disclosures?
• Controls and procedures. What disclosure controls and procedures are needed to comply with the new disclosure rules?
• Governance. Has management considered providing draft disclosures in advance to the appropriate board members? How will review and feedback timelines change given the additional disclosures?