The Securities and Exchange Commission Adopted Long-awaited Executive Compensation Regulations. What Now?

• Jurisdiction: United States,Federal
• Citation: Vol. 1 No. 3
• Publication year: 2023
• topic: Corporate / Commercial,Securities Law

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Michael J. Albano, Audry X. Casusol, and Laura Bagarella ^*

This article focuses on insights and considerations that have arisen since the passage by the Securities and Exchange Commission of the "pay versus performance" rules and the rules on mandatory clawback of incentive compensation. It also highlights some practical takeaways for boards and management teams to keep in mind.

Last year saw a flurry of activity to implement rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a statute passed in reaction to the financial crisis of 2008 but for which enacting guidance had long been absent.

Two significant rules adopted by the Securities and Exchange Commission (SEC) in 2022 in the area of executive compensation are the "pay versus performance" rules (PVP Rules) and rules on mandatory clawback of incentive compensation (the Clawback Rules). This article focuses on insights and considerations that have arisen since the passage of the rules and highlights some practical takeaways for boards and management teams as we collectively work through compliance with rules that, in many cases, have created significant unanswered questions.

PVP Rules

As a refresher, the PVP Rules apply to U.S. public companies subject to SEC reporting (other than foreign private issuers (FPIs), most registered investment companies, and emerging growth companies) and generally will require disclosure in proxy or information statements in which disclosure under Item 402 of Regulation

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S-K is required with respect to any fiscal year ending on or after December 16, 2022.

PVP Key Takeaways and Questions

■ Even if this work will be done internally, setting up a process early that can be applied consistently will be helpful in complying with the rules. Because the PVP Rules require disclosure of valuation assumptions at later stages of the vesting cycle for equity-based awards, and these assumptions may differ from those used in determining grant-date fair value, companies may face a tension between complying with the rules and disclosing confidential or sensitive information (i.e., internal projections not otherwise required to be disclosed may be relevant for valuation assumptions but premature or competitively harmful).
■ The PVP Rules will require focus on peer group evaluation and selection and discipline, given that changing groups year-over-year will likely increase the disclosure burden under the rules.
■ The selection of a "Company-Selected Measure" on which compensation is based will imply its importance to the company's strategic objectives and compensation philosophy. Care must be taken to ensure conformity with selecting this measure and non-compensation-related disclosure of how this metric fits within the company's operational goals.
■ Compensation committees will need to decide the form and content of the PVP disclosures and ensure consistency between those disclosures and discussion of performance both within the compensation discussion and analysis (CD&A) in the proxy and elsewhere in the company's public filings. In terms of practicalities, we believe most issuers will opt for graphic disclosure (as it will be the easiest way to present the information in a clear and concise manner), will choose to present this new disclosure outside of the CD&A, and will resist the temptation to add supplemental disclosure in excess of what is plainly required by the PVP Rules, unless, of course, there is a significant disconnect in PVP caused by external factors not readily discernible from the minimum required disclosures.

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■ While we expect companies will take time to digest the initial response from proxy advisory firms and institutional shareholders to PVP disclosures to better understand the impact

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