Thought Leadership  •  April 12, 2023

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SEC Ruling on Pay Versus Performance

In August 2022, the Securities and Exchange Commission (SEC) announced new rules regarding the pay versus performance clause that is part of the Dodd-Frank Act. Explore the new change, who is affected and updated SEC pay versus performance reporting requirements.

What Is Pay vs. Performance?

First things first, what does pay versus performance mean? The new SEC ruling on pay versus performance created a sub-item to the regulations that specifically addresses executive compensation. The change requires publicly traded companies to follow new SEC pay for performance disclosure rules. The change furthermore specifies the manner in which data must be reported — see more on these reporting requirements below.


Any company that is registered in the US and files proxy and information statements with the SEC is affected.

Companies that are deemed emerging growth are exempt; so are companies known as foreign private issuers or FPIs. Companies that mature out of the emerging growth phases, however, are required to comply with these new rules.

Significance of Ruling

Last year's update was the biggest change since 2006 to SEC rules regarding executive compensation. As a reminder, in 2006, the Compensation Discussion & Analysis (or CD&A) disclosure rules and compensation tables were developed.

The new rules continue in a similar direction, requiring public companies to be transparent with compensation information. The rules are quite prescriptive in their approach, laying out a precise formula and display method companies must follow when reporting the required information.

The new rules change the methodology to be used to determine executive pay. They outline a minimum of three and a maximum of seven metrics that fall under the executive compensation heading. This will require companies to recalculate the amounts when reporting.

Companies must also provide a so-called clear description of the relationship between executive compensation and measures such as net income.

Pay vs. Performance Reporting Requirements

As mentioned, the new rules are very prescriptive when it comes to the reporting of pay versus performance. They mandate companies insert a pay versus performance table that discusses compensation-related disclosures and performance-related disclosures. They require a narrative explanation of the numbers. They also mandate a specific markup language known as inline XBRL (or IXBRL) tagging be used to format information for SEC transmission.

Companies must look back over the five preceding fiscal years when reporting this information. Newly formed companies can look back over the three preceding fiscal years.

Compensation-Related Columns

The table should include:

  • Column A: CEO total compensation for the previous five fiscal years
  • Column B: "Actual pay" to be determined by the new formula
  • Column C: Average total compensation for all other named executive officers, or NEOs
  • Column D: Average "actual pay" of NEOs, to be determined by the new formula

The precise formula for reporting actual pay is found on the SEC's website. In brief, the formula requires adding other awards, including pension and equity, and assessing the fair value of unvested equity given in preceding years.

The SEC requires companies to use footnotes to expand on information provided in the table. For example, footnotes can list the names of NEOs.

Performance-Related Disclosures

The following four columns describe performance-related disclosures for the five-year period. Younger companies can use the three-year period as discussed.

  • Column E: Total shareholder return for the company
  • Column F: Total shareholder return for peer companies
  • Column G: Net income for the fiscal year
  • Column H: "Company-selected measure," a financial measure chosen by the company that it believes is the most important in linking company performance to actual NEO compensation

In either a narrative or visual form, such as a graph, the company must also outline:

  • The relationship between financial performance and executive pay
  • The company's total shareholder return compared with that of its peer group

Tabular List

As mentioned, companies that are not considered "smaller reporting companies" must list three to seven financial performance measures that reflect the pay versus performance question. These must be reported in a tabular list as follows:

  • Non-financial measures can be included if they are pivotal; however, a company must report at least three financial measures as well.
  • Measures can be reported in any order; they do not need to be ranked most to least important.
  • Measures can be lumped into a single list or reported separately.

Last, this data must be reported in a specific format: IXBRL, or Inline eXtensible Business Reporting Language. For ease of preparing data, companies should look for SEC filing software that supports IXBRL markup.

The SEC also mandates the way companies attribute or tag items using IXBRL. For example, companies need to tag values within the tables separately. They need to tag footnotes and supportive disclosures.

Effective Date & Phase-In Periods

This is a lot of new information for companies to adapt to. You may be wondering about the timeline for implementing the SEC pay versus performance final rules. The SEC officially adopted these requirements on October 11, 2022. Companies must use the new reporting requirements for any fiscal year that ends after December 16, 2022.

To start, companies can provide information for the previous three years. Thus, a company reporting on a fiscal year ending December 31, 2022, must report on fiscal year 2022, fiscal year 2021 and fiscal year 2020.

Moving forward, the company must add an additional year until five years are reported. Thus, when reporting for 2023, it must report on fiscal year 2023, fiscal year 2022, fiscal year 2021 and fiscal year 2020. In 2024, it will officially reach the five-year threshold. From that point on, it can drop the oldest year and maintain the five-year period that is required.

Understanding and complying with complex new regulations, including the pay versus performance change, takes time. It's recommended that companies leave themselves plenty of time to familiarize themselves with the complexities of the reporting, run the numbers using the new formulas and format everything in the required way. DFIN offers SEC filing software that supports IXBRL and streamlines financial reporting. DFIN's ActiveDisclosure software keeps up to date with the latest SEC changes so companies never miss a beat.


John Truzzolino

Director, Corporate Governance Services, DFIN