Background
In August of 2022, the Securities and Exchange Commission (SEC) adopted amendments to its rules that require registrants to disclose information reflecting the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance. The revisions represent enhancements to the existing legislation and are a requirement mandated by the Dodd-Frank Act. The pay versus performance disclosure amendments were initially proposed in 2015 and the SEC reopened the comment period on the proposal in January of 2022.
Application
The amended disclosure requirements apply to US registrants that file proxy and information statements mandating executive compensation disclosure under Item 402 of Regulation S-K ("Item 402"), for fiscal years ending on or after December 16th, 2022. Amended disclosure requirements will apply to companies with calendar year ends who file proxy and information statements in 2023.
Emerging Growth Companies (revenues under $1.07 billion and/or within five years of their initial IPO), issuers filing under the multi-jurisdictional disclosure system, and foreign private issuers are exempt from the amended disclosure rules. Any Canadian company with shares listed on a US exchange who has chosen to follow SEC disclosure rules to satisfy Canadian compensation disclosure obligations will be required to comply with the amended SEC reporting requirements.
Reporting Requirements
The amended disclosure rules require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. Smaller Reporting Companies (SRCs) have a scaled-down reporting requirement (look back of three years versus five years).
Three new core requirements were introduced for reporting purposes:
1. Production of a new Pay for Performance Table that includes five years of data on "actually paid" compensation to the CEO and the average of the other NEOs, as well as key financial measures that reflect corporate performance (defined below),
2. A descriptive narrative explaining the relationship between compensation "actually paid" and the performance measures disclosed in the Pay for Performance Table, and,
3. Identification of at least three and up to seven financial performance measures used by the registrant to link to compensation "actually paid" to NEOs for the last fiscal year.
The financial measures linked to NEO compensation must include total shareholder return (TSR), the TSR of companies in the registrant's executive compensation peer group, its net income, and a financial performance measure chosen by the registrant. Registrants will be expected to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group, using the information presented in the Pay for Performance Table.
Implications for our Canadian Clients
Initially, the SEC disclosure requirements changes should only affect a minority of Bedford’s publicly listed Canadian clients. However, it is reasonable to expect pressure from shareholder rights groups like the ISS and Glass Lewis for the new US disclosure rules to be applied by issuers on Canadian exchanges, particularly the TSX. Over the past two years, a number of our Canadian clients have included the development of performance scorecards as part of our compensation mandates. Linking pay to performance is a core competency for our firm.
“SEC Adopts Pay versus Performance Rules”, White & Case, September 6th, 2022.
Defined by the SEC as having a public float of less than $250 million, or with less than $100 million in revenue and either no public float or a public float of less than $700 million
“SEC Adopts Pay versus Performance Rules”, White & Case, September 6th, 2022.