3.7 Executive Compensation and Other Proxy Disclosures

Proxy disclosure, particularly executive compensation, has been a topic of focus in SEC staff comments to registrants, including those issued to SRCs. Many of the staff’s comments are related to (1) disclosures in Compensation Discussion and Analysis (CD&A), including disclosures about how performance is assessed and the use of performance targets; (2) executive compensation table disclosures; and (3) requests to include employment agreements as exhibits to certain filings.

The SEC continues to evaluate executive compensation30 and other proxy disclosure requirements through its rulemaking. On August 5, 2015, the Commission issued a final rule that requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO (the “pay ratio rule”). In the seven years since the release of the final rule, stakeholders have raised concerns about its implementation. In response to those concerns and to clarify the final rule as well as revise some of the interpretations that the SEC issued on October 16, 2016, the SEC issued interpretive guidance on pay ratio disclosure, a revised set of C&DIs on the final rule, and staff guidance on the calculation of pay ratio disclosure on September 21, 2017. The pay ratio rule became effective for disclosures required for the first full fiscal year beginning on or after January 1, 2017.31 See Deloitte’s October 17, 2017, Heads Up for more information on the pay ratio rule.

In addition, on August 25, 2022, the SEC issued a final rule that requires certain registrants to provide disclosures about executive pay and company performance within any proxy statement or information statement for which executive compensation disclosures are required (the “pay-versus-performance rule”). The disclosure requirements are effective for registrants beginning with fiscal years ending on or after December 16, 2022, (e.g., calendar-year-end companies for 2022 proxy statements filed in 2023) and apply to all registrants other than EGCs, registered investment companies, and FPIs. SRCs are exempt from certain of the requirements. See Section 3.7.4 for further discussion of the pay-versus-performance rule.

3.7.1 Determining Compensation — Assessment of Performance

Examples of SEC Comments

We note that . . . you disclose your company-wide net income targets and named executive officer base salary target percentages associated with threshold, target and high-end levels for net income. However, . . . you cite net sales and return on average assets as additional formula-based factors used to determine payment amounts under the management incentive plan. In these cases, you have not disclosed any target or formula relating to these factors. You also have not disclosed the actual amount of net income, net sales or return on assets used to determine the amount of the payments. [I]n future filings, please disclose all of the company-wide targets and formulas that form the basis of incentive compensation payments, as well as the actual amount of each related measure of company performance, so that it is clear how the Compensation Committee determined the specific amounts of incentive compensation paid to each named executive officer. In your response, please show us what your disclosure would have looked like for [the fiscal year]. In addition to your narrative explanation, please consider providing an illustrative example.
[W]e note your disclosure . . . that the . . . award of performance units to Mr. [A] “represent[s] the right to receive a cash payment equal to $[X] multiplied by certain performance factors.” Please expand your disclosure to identify the performance factors upon which the award of performance units is to be based. We note the related disclosure you include in the Form 8-K that you filed . . . . Also discuss how difficult it will be for Mr. [A] or how likely it will be for the company to achieve the target levels or other factors.
In future filings, please revise your disclosure to provide additional information around how your compensation committee makes determinations regarding cash bonuses. In this regard, we note your disclosure [stating] that the committee determines bonus amounts based upon a “quantitative review of [Company A’s] performance against the board-approved operating plan and its qualitative review of individual performance and other factors deemed relevant.” Clarify whether the committee gives particular weight to the quantitative or qualitative factors and describe in more detail the precise factors taken into account for each named executive officer.

The SEC staff has historically asked registrants that use performance targets to disclose them and provide information about their use.32 Under Regulation S-K, Item 402(b), a registrant is required to discuss any compensation awarded to NEOs in its CD&A. The discussion should include (1) the objectives of the compensation program, (2) what the compensation program is designed to reward, (3) the elements of the compensation, (4) the registrant’s reasons for paying each element, (5) how each element is calculated (including any formula used), (6) how the program fits into the registrant’s objectives, and (7) how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation in determining compensation policies and decisions. The SEC staff has frequently commented on how certain performance factors affect compensation arrangements for NEOs as well as how nonequity incentive compensation granted to NEOs is calculated.

To help financial statement users understand the registrant’s compensation policies and decisions, the SEC staff has asked registrants to:

Quantify and disclose the performance target, and identify and explain the purpose of performance factors.
Disclose actual performance results, and detail the specific elements of individual performance and contributions that affected the compensation received.
Discuss the correlation between achievement of performance targets and the compensation ultimately awarded.
Disclose the estimated payouts under the annual incentive plan when the performance threshold is achieved.
Discuss whether and, if so, how share repurchases affect the achievement of performance targets.
Indicate whether the compensation committee or others had discretion or additional qualitative input when determining the final amount of compensation awarded, and disclose the factors that affected the determination.

3.7.2 Executive Compensation Tables

Examples of SEC Comments

You disclose that you did not increase base salaries in [the fiscal year] due to the Company’s financial performance, but your Summary Compensation Table shows salary increases for all named executive officers. Please tell us the reason for this discrepancy, and in future filings, please explain any changes in your base salaries.
It appears that the amounts which you have disclosed in the “Bonus” column of this [summary compensation] table should have been disclosed under the “Non-Equity Incentive Compensation Plan” column because the amounts reflect the performance of your executives under your non-equity incentive plan, as defined in Item 402(a)(6)(iii) of Regulation S-K. If, in the exercise of discretion, an amount is paid over and above the amounts earned by meeting the performance measure in the non-equity incentive plan, that amount should be reported in the “Bonus” column. It appears that Mr. [B]’s discretionary bonus increase in the amount of $[X] should have been disclosed in the Bonus column. Please explain to us why the payments under the annual incentive bonus awards are being disclosed in the “Bonus” column. For guidance refer to Question 119.02 of Regulation S-K Compliance and Disclosure Interpretations. Please ensure that in future filings you disclose payments under your annual incentive bonus as earned under a non-equity incentive plan and provide appropriate disclosure in your Grant of Plan-Based Awards Table.
In [a footnote] to your summary compensation table . . . , you state that the amounts for [the CEO] for [year 1] and [year 2] reflect “the aggregate grant date fair value for certain performance units granted in December [year 1] and [year 2] that are valued based on a performance factor that is tied to certain operational performance metrics.“ Given that the non-equity plan compensation represented [A]% and [B]% of [the CEO]’s [year 1] and [year 2] total compensation, respectively, please expand [the footnote] to quantify the grant date fair values for both [year 1] and [year 2].
Please update your executive compensation table for . . . your most recently completed fiscal year. We note that your executive compensation table still references it is dated as of [the end of that fiscal year’s third quarter].

The SEC staff has focused on executive compensation tables because they give investors important information about a registrant’s compensation policies and decisions. Frequently, the staff has asked registrants to (1) explain why the amounts disclosed in the financial statements or other filings are inconsistent with the amounts disclosed in the summary compensation table for NEOs and (2) provide more recent information in the executive compensation table.

Regulation S-K, Item 402(c), requires that for each NEO, registrants include tabular disclosures specifying (1) the NEO’s name and principal position, (2) the fiscal year covered, (3) the base salary earned, (4) the bonus earned, (5) the stock/option awards, (6) nonequity incentive plan compensation, (7) the change in pension value and nonqualified deferred compensation earnings, (8) all other compensation, and (9) the total amount of compensation. Both the cash portion and the noncash portion of salary and bonus must be included.

Accordingly, the SEC staff has commented when registrants disclose amounts in incorrect columns of, or exclude types of compensation from, the table. For example, the staff has asked why bonuses paid to NEOs (on the basis of achieved performance targets) are disclosed in the bonus column instead of in the nonequity incentive plan compensation column.

In addition, for stock awards included in the summary compensation table for NEOs, the SEC staff has asked for the aggregate grant-date fair value of the awards as computed in accordance with ASC 718 and for disclosure of all assumptions used in the valuation of share-based compensation, which the registrant can provide by including a reference to its footnotes to the financial statements or to the critical accounting policies section of its MD&A. Regulation S-K, Item 402(k)(2)(iii), requires disclosure of the aggregate grant-date fair value as computed in accordance with ASC 718 as well as disclosure of the aggregate number of stock awards outstanding as of the fiscal year-end for each director.

3.7.3 Executive Agreements

Examples of SEC Comments

We note your disclosure in this section that you amended and restated the letter agreements with each of your executive officers. Please file such amended and restated agreements as exhibits or tell us why you believe that you are not required to file such agreements pursuant to Item 601(b)(10) of Regulation S-K.
Please file the employment agreements for the individuals who will serve as the executive officers of [Company X].
To the extent any of your executive compensation plans or agreements are completed prior to the closing of your spin-off, please file them as exhibits pursuant to Item 601(b)(10) of Regulation S-K.
Please revise to describe the material terms of each letter separately as it appears the terms of the letters were not the same for each officer. For instance, we note that Dr. [A] received a stock bonus of [B]% of [Company X’s] ordinary shares in connection with his appointment letter.

The SEC staff has asked registrants to file new or updated employment agreements required under Regulation S-K, Item 601, as exhibits to certain filings when (1) there are new NEOs for an existing company or a newly formed company (e.g., for a spin-off) or (2) there are amended and restated compensation agreements for current NEOs. In addition, the staff frequently asks registrants to disclose the material terms of executive agreements.

3.7.4 Pay-Versus-Performance Disclosures

Examples of SEC Comments

Please provide a clear description of the relationship between compensation actually paid and net income, as required by Regulation S-K Item 402(v)(5)(ii). Please note that it is not sufficient to state that no relationship exists, even if a particular measure is not used in setting compensation.
Please identify the principal executive officer, as well as each named executive officer included in the calculation of average non-PEO NEO compensation, and the fiscal years in which such persons are included. You may provide this information in a footnote to the pay versus performance table. See Regulation S-K Item 402(v)(3).
We note that you have included Revenue as your Company-Selected Measure pursuant to Regulation S-K Item 402(v)(2)(vi). Please include your Company-Selected Measure in the Tabular List provided pursuant to Regulation S-K Item 402(v)(6).
We note that you have included Income (Loss) from Continuing Operations in column (h) of your pay versus performance table in lieu of net income (loss) as required by Regulation S-K Item 402(v)(2)(v). Please include net income (loss), as reported in your audited GAAP financial statements, in column (h) for all years covered by the table. Refer to Regulation S-K Compliance and Disclosure Interpretations Questions 128D.08 and 128D.09. Please note that you may voluntarily provide supplemental measures of compensation or financial performance, so long as any additional disclosure is clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure.
We note that you included Adjusted Earnings Per Share, a non-GAAP measure, as your Company-Selected Measure pursuant to Regulation S-K Item 402(v)(2)(vi). Please ensure that you provide disclosure showing how this number is calculated from your audited financial statements, as required by Regulation S-K Item 402(v)(2)(v).

As noted in Section 3.7, the SEC issued its pay-versus-performance rule on August 25, 2022. Under this final rule, both prescribed and free-form disclosures regarding the relationship between amounts actually paid and the performance of the registrant are required for the registrant’s PEO as well as other named executive officers (NEOs) besides the PEO. Performance of the registrant is presented in a tabular format containing disclosures that include net income, total shareholder return, and a company-selected measure. For more information about the pay-versus-performance rule, see Deloitte’s September 2, 2022, Heads Up.

Shortly after the pay-versus-performance rule was issued, the Division released various C&DIs on the final rule’s requirements. Further, in a manner similar to the SEC staff’s review of registrants’ compliance with other new disclosure rules, the staff has performed a targeted review of registrants’ disclosures under the pay-versus-performance rule and issued comments asking registrants to confirm that the concerns raised in those comments will be addressed in future filings.

The SEC staff’s comments on the pay-versus-performance rule have focused on ensuring that registrants comply with all elements of the rule and that the disclosures provided under the rule are clear to investors. For example, the rule requires compensation actually paid to be displayed in a tabular format along with net income. Net income from continuing operations or net income after an allocation of noncontrolling interests would not be appropriate for the purposes of the disclosures. Similarly, registrants must ensure that the executives included in the disclosures have been identified and that the relationship between the financial metrics and the compensation actually paid has been sufficiently described. Registrants may find it difficult to describe the relationship, particularly when compensation is not linked to a specific metric such as net income or total shareholder return, but the comments indicate that the SEC staff will not accept a statement that the metrics and compensation are not related.

Many registrants elected to use a non-GAAP financial measure for their company-selected measure. While the full disclosure requirements described in Section 3.4, including a reconciliation to the most comparable GAAP measure, does not apply to the pay-versus-performance disclosures, registrants must describe how this measure is calculated from its financial statements. The SEC staff issued comments to several registrants when this disclosure was not provided.

3.7.5 Corporate Governance

Examples of SEC Comments

Please expand your discussion of the reasons you believe that your leadership structure is appropriate, addressing your specific characteristics or circumstances. In your discussion, please also address the circumstances under which you would consider having the Chair and CEO roles filled by a single individual, when shareholders would be notified of any such change, and whether you will seek prior input from shareholders. Please also discuss how the experience of your Lead Independent Director is brought to bear in connection with your board’s role in risk oversight.
Please expand upon the role that your Lead Independent Director plays in the leadership of the board. For example, please enhance your disclosure to address whether or not your Lead Independent Director may:
- represent the board in communications with shareholders and other stakeholders;
- require board consideration of, and/or override your CEO on, any risk matters; or
- provide input on the design of the board itself.
Please expand upon how your board administers its risk oversight function. For example, please disclose:
- why your board elected to retain direct oversight responsibility for the design and implementation of risk management and risks associated with leadership succession planning, rather than assign oversight to a board committee;
- the timeframe over which you evaluate risks (e.g., short-term, intermediate-term, or long-term) and how you apply different oversight standards based upon the immediacy of the risk assessed;
- whether you consult with outside advisors and experts to anticipate future threats and trends, and how often you re-assess your risk environment;
- whether you have a Chief Compliance Officer and to whom this position reports; and
- how your risk oversight process aligns with your disclosure controls and procedures

Recently, the SEC staff has focused on board risk oversight disclosures, including a targeted review of such disclosures. Under Regulation S-K, Item 407(h), a registrant is required to (1) describe the leadership structure of the board, including whether the same person serves as both PEO and chairman of the board; (2) indicate why the registrant has determined that its leadership structure is appropriate; and (3) disclose the extent of the board’s role in the risk oversight of the registrant, such as how the board administers its oversight function and the effect that this has on the board’s leadership structure. When the disclosures do not adequately address these requirements, registrants are asked to confirm that they will expand their disclosures to include such information in future filings.

Footnotes

SRCs and EGCs may refer to Regulation S-K, Item 402(m)–(r), for scaled executive compensation disclosure requirements applicable to such filers.

In a manner consistent with the treatment of other Regulation S-K, Item 402, information, the final rule treats the pay ratio disclosure as “filed” for purposes of the Securities Act and Exchange Act. Therefore, a registrant making the disclosure is subject to potential liability (e.g., for making misleading statements under Section 18 of the Exchange Act).

Registrants may exclude performance targets (and other confidential information) if disclosing such material would result in competitive harm. However, registrants must satisfy “confidential-treatment” criteria and demonstrate to the SEC staff, upon request, that they have done so. Even when omission of targets or other factors or criteria is appropriate, a registrant should disclose how difficult it will be for the executive, or how likely it will be for the registrant, to achieve the undisclosed target levels or other criteria.