A Center On Executive Compensation webinar explored the SEC’s new pay for performance regulations and implications with Takis Makridis, President & CEO of Equity Methods.
The discussion focused on the three pillars of the rule: a pay versus performance table, a tabular list of metrics, and a description of relationships, while also examining the issues that Compensation Committees must consider as they prepare for compliance.
- Pillar 1: Pay versus performance table (PVP): This is a prescribed table in form and content with a unique calculation for “compensation actually paid.”
- Key questions:
- Should you select the TSR peer group used in the “performance graph” located in the Annual Report—which can be an industry index or company identified peer group—or use the peer group disclosed in the CD&A for compensation benchmarking purposes?
- For the company-selected metric, should you choose a metric from the annual or long-term incentive plan?
- Should you put the disclosure in the CD&A or after the CD&A?
- Pillar 2: Tabular list of metrics: This includes a list of 3 to 7 of the “most important” metrics for determining pay in the previous fiscal year. Determining what metrics to include may depend on what is already disclosed in the proxy. The Compensation Committees will look to strike a balance in effectively “telling the story” versus disclosing too many metrics and causing confusion.
- Key question: Should you provide only three minimum required metrics or include all metrics in the annual and long-term plans?
- Pillar 3: Description of relationships: This includes an explanation of the relationships defined in the PVP table. Misalignment in this area will be a major focus for the Compensation Committee and companies will need to assess whether additional context will be required to explain conflicts between this disclosure and existing CD&A disclosure.
- Key Question: Should you disclose the relationships in a single graph with all components, multiple graphs, narrative only, or a combination?
Panelists highlighted unclear areas of the rule where additional guidance from the SEC is necessary, particularly whether existing pay for performance disclosures will now all be considered “supplementary.”
Mr. Makridis discussed the “moving parts” associated with calculating equity values for various award types which will go into the compensation actually paid definition. He advised that year one will be the most complex because it will require decisions on the methodology and involve the greatest number of valuation calculations. Ensuring correct and thorough data in this first year is critical and employers should maintain a rigorous review process to avoid errors.
Companies with fiscal years ending on or after December 16 should consider creating mockups now of the new disclosures to form a position on key decision points, with a cross-functional project team and timeline for reporting to the Committee.
Center members received a Compliance Guide detailing options for each of these decision points and slide deck with additional resources.
