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9 February 20249 minute read

SEC issues new pay-versus-performance C&DIs

The US Securities and Exchange Commission (SEC) has issued new Compliance and Disclosure Interpretations (C&DIs) regarding the pay-versus-performance (PVP) disclosure requirements for publicly traded companies. The new C&DIs supplement the C&DIs previously published by the SEC and address issues regarding the PVP disclosure requirements as calendar-year registrants enter a second year of PVP disclosure this proxy season.


Item 402(v) of Regulation S-K requires that registrants include in their executive compensation disclosure a table disclosing specified executive compensation for the company’s named executive officers and financial performance measures for the company’s five most recently completed fiscal years. The initial disclosure requires reporting for only three years, and additional years will be added each reporting year thereafter.

The reported financial performance measures in the table should include the company’s and its peer group’s total shareholder return (TSR), the company’s net income, and an additional financial performance measure chosen by the company that, in the company’s assessment, represents the most important financial measure used by the company to link compensation actually paid to its named executive officers to company performance.

Item 402(v) also requires companies to clearly describe, in narrative or graphical form, the relationship between compensation actually paid by the company to its named executive officers and the organization’s TSR, net income, and company-selected measure disclosed in the table, as well as provide a comparison of the company’s TSR to the TSR of the company’s peer group.

Finally, companies must disclose in tabular format a list of three to seven financial performance measures that the company determines are its most important measures linking executive compensation to company performance. Scaled disclosure requirements apply to smaller reporting companies, and emerging growth companies are exempt from the disclosure requirements.

The existing and new C&DIs on PVP disclosure requirements are incorporated into the general set of C&DIs for Regulation S-K.

Along with the new C&DIs, the SEC revised Question 118.08, which addresses non-GAAP financial measures for purposes other than disclosure of target levels. The SEC additionally revised Question 128D.07, which clarifies the presentation of the peer group TSR in 2024 proxy statements and in later years if the composition of the peer group changes.

The C&DIs generally cover items relating to valuation, selection of peer groups, companies transitioning from emerging growth company or smaller reporting company status, and other technical points.

New C&DI Questions 128D.14 to D.30 address the following:

  • C&DI 128D.14: Awards granted in fiscal years prior to an equity restructuring, such as spinoffs, that are modified in a restructuring or retained by the holder following the restructuring, and remain outstanding during a covered fiscal year, should be included in the PVP table for that fiscal year.

  • C&DI 128D.15: For outstanding stock-based awards granted prior to the date of the registrant’s initial public offering, the required calculations for purposes of Item 402(v) disclosure should be determined based on the change in fair value from the end of the prior fiscal year rather than on other dates, such as the date of the registrant’s initial public offering.

  • C&DI 128D.16: Addresses market conditions appliable to stock-based awards. Under GAAP, a market condition is a condition related to the price of the registrant’s shares that affects the exercise price, exercisability, or other pertinent factor used in determining the fair value of an award. Market conditions are not considered vesting conditions under GAAP. The effect of a market condition should be reflected in the FASB ASC Topic 718 fair value of a stock-based award. For purposes of the PVP table, a market condition should also be considered in determining whether the vesting conditions of stock-based awards have been met, and, until the market condition is met, the registrant must include in the calculation of compensation actually paid set forth in the PVP table any change in fair value of any awards subject to the market condition. Similarly, the registrant must deduct from the amount of compensation actually paid the fair value of the award at the end of the prior fiscal year for any award that fails to meet the market condition during the covered fiscal year, if it results in forfeiture of the award.

  • C&DI 128D.17: Outstanding stock-based awards with certain market or performance conditions not met during an eligible year, but that could be met in future years, are not considered awards that have failed to vest for purposes of PVP disclosures and calculating executive compensation actually paid.

  • C&DI 128D.18: Outstanding stock-based awards with retirement eligibility as the sole vesting condition are considered vested for purposes of PVP disclosures and calculating executive compensation actually paid in the year of retirement eligibility (unless there are other vesting conditions, such as performance-based vesting).

  • C&DI 128D.19: If certification that performance conditions have been achieved is an additional substantive vesting condition and certification occurs after year end, then the stock-based award is not considered vested at year end for purposes of calculating the value of equity awards in determining compensation actually paid. However, a certification requirement provision should be analyzed to determine whether it creates an additional substantive vesting condition, such as an employee does not vest in the award unless and until they remain employed through the date such certification occurs.

  • C&DI 128D.20: For purposes of calculating executive compensation actually paid, a registrant may compute the fair value of stock-based awards using a valuation technique that differs from the one used to determine the grant date fair value of option or other equity-based awards that are classified as equity in the financial statements, if the valuation technique would be permitted under FASB ASC Topic 718, including that it meets the criteria for a valuation technique and the fair-value measurement objective.

  • C&DI 128D.21: It is not acceptable to value stock-based awards as of the end of a covered fiscal year based on a methodology or assumptions that are not consistent with FASB ASC Topic 718.

  • C&DI 128D.22: A registrant is not required to disclose target levels with respect to specific quantitative or qualitative performance conditions considered by the board or compensation committee for its awards under Item 402(v)(4) to the extent such conditions involve confidential trade secrets or confidential commercial or financial information, and to the extent that the disclosure would result in competitive harm for the registrant. However, the registrant must provide as much information as possible responsive to Item 402(v)(4) without disclosing the confidential information. The registrant should also discuss how any material differences in valuation assumptions from those disclosed as of the grant date of stock-based awards affect how difficult it will be for the executive, or how likely it will be for the registrant, to achieve the undisclosed target levels of other factors.

  • C&DI 128D.23: The calculation of compensation actually paid must include dividends and dividend equivalents paid that are not already reflected in the fair value of stock awards or included in another component of compensation.

  • C&DI 128D.24: If a registrant uses more than one “published industry or line-of-business” index for purposes of disclosing cumulative total return in its stock performance graph, the registrant may choose which index it uses for purposes of disclosing peer group data in its PVP disclosure, but should include a footnote disclosing the index chosen. Additionally, if the registrant changes the index chosen for a year in comparison to the immediately preceding year, it must explain in a footnote the reasons for the change and compare the registrant’s TSR with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year.

  • C&DI 128D.25: A registrant may not use a broad-based equity index used for other compensation purposes and which is disclosed in the compensation discussion and analysis as its peer group in its PVP disclosure.

  • C&DI 128D.26: If a registrant uses a compensation peer group disclosed in its compensation discussion and analysis (CD&A), rather than a published industry or line-of-business index, as its peer group for purposes of its PVP disclosure, it must identify the companies composing the peer group in a footnote. The returns of each component company of the peer group must also be weighted according to the company’s stock market capitalization at the beginning of the period for which a return is indicated.

  • C&DI 128D.27: If a registrant uses a compensation peer group disclosed in its compensation discussion and analysis for purposes of its PVP disclosure and adds or removes any companies from the peer group, it must footnote the changes and compare its TSR with that of both the updated peer group and the peer group used in the immediately preceding year, subject to certain exceptions.

  • C&DIs 128D.28 and 128D.29: These C&DIs provide guidance regarding PVP disclosure for registrants that lose smaller reporting company or emerging growth company status.

  • C&DI 128D.30: If a registrant has two or more individuals serving as the principal financial officer (PFO) during a single covered fiscal year, the registrant may not treat the PFOs as the equivalent of one PFO for purposes of calculating average compensation for NEOs other than the principal executive officer. Each PFO must be included individually in the calculation, but additional disclosure regarding the impact of the inclusion of multiple PFOs on the calculation should be considered.

To read more about pay versus performance disclosure requirements, see our previous client alert: Linking executive compensation to D&I metrics in the wake of SFFA: Action steps for public companies to consider

For more information, please contact any of the members of our Employee Benefits and Executive Compensation group.