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New SEC Disclosure Rules in Effect Soon

New SEC Disclosure Rules in Effect Soon

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the U.S. Congress in 2010 as a response to behaviors that Congress believed led to 2008’s recession. In short, the legislation was written to make the United States financial system safer for both consumers and taxpayers after years of practices that led to a multitude of problems. 

One section of this lengthy legislation directed the U.S. Securities and Exchange Commission (SEC) to write and implement regulations that would require all companies that are publicly traded to disclose measures of executive pay versus performance. In other words, they must publicly disclose detailed information about what metrics companies use to measure the performance of executives and their compensation. 

These new rules make the scope of disclosure far wider than many public companies are used to. Many companies already disclose pay-for-performance information regarding their CEOs. However, these final rules from the SEC extend those disclosures to all named executive officers, not just CEOs. 

The Pay vs. Performance Table

Part of the SEC’s requirements for company disclosure includes companies completing a Pay vs. Performance Table. This table includes compensation data and measures used for financial performance for the five most recent fiscal years. 

According to the SEC, this table must include the following information:

  • The summary compensation table
  • The adjusted “executive compensation actually paid” which is adjusted for pension benefits and equity awards
  • The company’s shareholder return
  • The weighted total shareholder return (TSR) for the company’s peer group
  • The company’s net income
  • A financial performance measure that the company chooses based on what they feel best represents their most important financial performance measure that the company uses to link compensation 

Companies are also required to provide a list of several financial performance measures that the company feels are its most important measures. These measures are permitted to be non-financial if they feel they are among the most important measures they’ve identified. 

What Should Your Next Steps Be?

These new rules are going to affect your 2023 proxy statements greatly. With 2022 rapidly running down, here are things you should consider tackling now to make the process less taxing:

1. Start Preparing Right Away

Begin coordinating with HR and your legal team to determine how your current pay-for-performance disclosures align with the forthcoming rules. This will assist you in creating a game plan around what additional disclosures will need to be made on your future proxy statements. 

 

2. Determine Your Measures

As stated above, the new rules allow companies to self-identify a measure that they feel is most relevant to how they compensate executives. Additionally, companies can also identify 3-7 additional measures including non-financial ones if appropriate. Working with all stakeholders, begin the decision-making process of determining which measures your company will use to show this relevance. 

 

3. Build a Data Plan

There will be a lot of data needed to accurately complete the Pay vs. Performance Table that is required. Create plans and policies now that will guide all stakeholders such as accountants and HR through the process of collecting all relevant data that will be needed for disclosures.

4. Begin Building Your Narratives

Once the data is collected, another time-consuming process will be creating narratives that show the relationship between the compensation that is actually paid to executives and the financial performance of the company. Justification will be necessary, so careful drafting and revision are vital. 

Stay up-to-date with all laws and regulations that govern your company with the help of Complete Payroll. Our blog features hundreds of articles that provide current and actionable information to ensure your company is always compliant. Check us out today!

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