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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with over 400 companies annually, are a team of nearly 70 professionals in the U.S. with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Featured Viewpoints

PVP Q&A: Our Interpretations of the SEC's New PVP Rules


The Securities and Exchange Commission (SEC) released its final rules regarding the mandated “Pay Versus Performance” (PVP) disclosure on August 25, 2022. The new rules are the culmination of various proposals by the SEC dating back to 2015 when the agency first issued proposed PVP disclosure rules required by the Dodd-Frank legislation. Pay Governance LLC summarized the new rules in a recent Viewpoint (see SEC Releases Final Rules Regarding Pay-Versus-Performance (PVP) Disclosures, dated August 31, 2022).

After further analysis of the new rules and the opportunity to discuss them with clients and colleagues, we have prepared this follow-up Viewpoint to share additional insights in the form of Questions and Answers (Q&As) which we believe will help enhance clients’ understanding of the rules and their implementation. We plan on providing additional Viewpoints including an executive summary, sample graphics, and the narrative disclosures that can be used to illustrate the PVP relationship in the near future.

Questions and Answers

Company Selected Measure(s)

1. Is the inclusion of a company selected measure (CSM) optional?

In general, all companies must include a CSM in the PVP table. There are exceptions, however, for smaller reporting companies (SRPs), companies that only use measures that are already included in the table, or companies that do not use financial measures to determine compensation (for example, pre-commercial biotech companies).

2. Do CSMs need to be financial performance measures?

CSMs need to be “financial performance measures” as defined by the rule, which includes measures that are determined and presented in the financial statements and any measures that are derived wholly or in part from such measures. Additionally, the rules specify that both stock price and total shareholder return (TSR) are considered financial performance measures.

3. Do CSMs need to be reported in accordance with Generally Accepted Accounting Principles (GAAP)?

No. The SEC acknowledges that CSMs may not necessarily comply with GAAP and requires companies using non-GAAP measures to include a reconciliation of the measure either in the proxy or earnings release.

4. Can a company use more than one CSM?

Yes. Additional CSMs may be included in the PVP table. Note that the company will be required to disclose how the CEO and the average of the other NEOs compensation actually paid (CAP) relates to all CSM measures.

5. Is there any limit on the number of CSMs that can be added to the table?

The SEC rules would appear to allow up to seven CSMs. However, with the emphasis of the table being the “most important” measures, coupled with the additional narrative disclosure requirements associated with multiple CSMs, we expect companies will seek to limit the number of CSMs.

The presumed seven CSM maximum is based on the SEC requirement that no less than three and no more than seven performance measures be reported in a Tabular List of the company’s “most important” performance measures, and the CSM must be listed in the secondary table.

Relative TSR

6. Is it allowable to report three-year rTSR in the PVP table for each of the required years of data in the table?

Possibly. The SEC did not mandate the methodology used to calculate the CSM, providing companies significant discretion to determine how the CSM is presented in the table. If permissible, using three-year rTSR as the CSM would facilitate a direct comparison of the level of relative stock price performance and the corresponding payout factor with the CAP value reported for that year (and all future PVP tables in which that fiscal year is included).

7. If rTSR is selected as the CSM, can it be included in the PVP table as a percentile rank (e.g., 63rd percentile) or an absolute return value (e.g., 44%)?

Yes. We believe both representations would be acceptable. The rules require that the CSM is numerically quantifiable but do not otherwise mandate how the information is presented.

8. If rTSR is the company’s CSM, do the returns need to be market-cap weighted?

No. As noted above, the CSM should be based on how the company determines performance. The market cap weighted return is only required if the company wants to include the peer group in the mandated TSR column.

9. Is it allowable to report three-year rTSR in the PVP table for each of the required years of data in the table?

Possibly. The SEC did not mandate the methodology used to calculate the CSM, providing companies significant discretion to determine how the CSM is presented in the table. If permissible, using rTSR as the CSM would facilitate a comparison of the level of relative stock price performance with the CAP value for that year in the current year PVP table and all future PVP tables in which that fiscal year is included.

10. Does the rTSR peer group need to be disclosed in the proxy or under Item 201(e) if it is used as a CSM?

No. The requirement to disclose the peer group only applies to the companies used to determine the mandated peer group TSR disclosure; however, for transparency purposes, a rTSR peer group or index should be disclosed in the CD&A.

Equity Valuation Used in Determining CAP

11. How are equity awards valued when determining CAP?

Equity awards are valued based on their fair value, as determined in accordance with ASC 718 and estimates of the value of the award as of a specific point in time. CAP includes changes in awards fair values over time, from its initial grant through vesting.

12. How is the fair value of a stock option or stock appreciation rights (SAR) determined?

The fair value of a stock option, or SAR, granted during the year is determined using the Black-Scholes, binomial, or other appropriate model based on the year-end stock price as well as updated assumptions for interest rates, dividend yield, expected term, etc.

The same methodology is used to determine the change in fair value of prior year awards ; except in the case of awards that vested during the year, the vest date fair value is compared to the prior year-end fair value.

13. How is the fair value of time-vested restricted stock or time-vested restricted stock units determined?

The fair value of restricted stock and RSUs granted during the year is determined using the year-end stock price. The calculation also includes the value of dividends which are paid, accrued, or converted into additional restricted shares/units during the year.

The same methodology is used to determine the change in fair value of prior year awards ; except in the case of awards that vested during the year, the vest date fair value is compared to the prior year-end fair value.

14. How is the fair value of performance shares or performance stock units determined?

The fair value of performance shares or performance stock units (PSUs) granted during the year is determined at year-end, including the value associated with dividends during the year. The precise methodology for measuring fair value depends on the performance measure and how it impacts the value of an award.

  • In the case of an award granted with a “market measure” such as rTSR, the fair value is established using a Monte Carlo or similar valuation model based on the year-end stock price and other updated assumptions.
  • In the case of an award granted with a financial or operational measure (e.g., earnings per share [EPS] growth), the fair value is established using the year-end stock price and an updated assumption as to the number of shares/units expected to be earned based on the probable outcome of the performance condition(s).
  • In the case of awards that contain both types of performance conditions (e.g., EPS growth combined with an rTSR modifier), it will be necessary to consider both (i) the company’s determination as to the probable outcome of any performance condition and (ii) the estimated effect of the rTSR modifier as determined using a Monte Carlo or similar valuation model.

The same methodology is used to determine the change in fair value of prior year awards ; except in the case of awards that vested during the year, the vest date fair value is compared to the end of the prior year’s fair value.

15. How are retirement eligible executives’ awards determined?

In the case of executives who become retirement eligible during the fiscal year or are retirement eligible at the beginning of the year, the vest date may be accelerated, in which case the fair value of outstanding awards must be determined on the date the executive becomes eligible to retire.

While it is unlikely the SEC intended this outcome, in the case of retirement vesting provisions that involve pro-rata vesting, a literal interpretation of the rules might require daily or monthly fair value calculations of equity awards as they vest based on the pro-ration formula.

16. How much effort is required to calculate the fair value/change in fair value of equity for the CEO and other NEOs for inclusion in CAP?

The number of detailed calculations will vary depending on the types of equity awards and the form and length of the vesting period (e.g., ratable vs. cliff vesting), but expect the effort to be extensive. Calendar-year companies will need to collect and value equity awards outstanding at the end of 2019, 2020, 2021, and 2022. In addition, awards that vested in 2020, 2021, and 2022 will also need to be valued on the vest date.

Assuming a company has 50% PSUs that vest based on a single metric and cliff vest on the third anniversary of the grant as well as 50% time-vested RSUs that vest ratably over 3 years, a conservative estimate is ~12 valuation dates per year (RSUs and PSUs granted in the current year=2, RSU tranches vesting during the year=3, PSU tranche vesting during the year=1, RSUs and PSU awards outstanding at year-end=3+3=6). With the initial PVP disclosure covering 3 years for most companies, that translates into ~36 valuation events . Once valuations have been determined for each key date, it will be necessary to calculate changes in fair value for the CEO and other NEOs — likely resulting in more than 180 individual calculations (36 valuation events x 5 NEOs). The complexity of these calculations will increase if additional valuations are required for (i) new hire, retirements, or other terminations; (ii) additional award vehicles or special awards; (iii) multiple PSU metrics; or (iv) more frequent vesting dates (e.g., quarterly vesting).

Additional Disclosure Requirements

17. What disclosure is required in addition to the PVP and the tabular list of the ‘most important’ performance measures?

The SEC requires the disclosure of the relationship of CAP for the CEO and other NEOs to TSR, net income, and the CSM. In addition, the company must describe the relationship of its TSR to the peer groups or index’s TSR.

18. Are there any limitations on how a company describes these relationships?

The SEC has provided significant flexibility for describing the relationships, including narrative, graphical, or a combination of the two. The only limitations are such disclosures may not be more prominent than the required disclosure or be misleading.

19. Does the SEC require that companies provide a description of how SCT and CAP compare/relate to each other?

There is no requirement to discuss the relationship of SCT and CAP. The SEC believes investors will compare the two values of compensation and find such comparisons useful. The SEC also believes that the requirement to include a footnote reconciling the SCT and CAP amounts will clarify the differences in how each is determined.

Because the SCT amount and CAP represent entirely different perspectives of compensation, companies may want to provide significant details of those differences in the footnote to the PVP table.

It may also be useful to compare the rate of change in SCT compensation and CAP for the CEO and other NEOs. In most cases, the rate of change in CAP will vary considerably from the change in SCT due to the leverage built into equity incentives in general and the multiple years of outstanding equity (i.e., far more shares are included in the CAP calculation than the SCT amount).

20. What types of graphical comparisons are likely to resonate with investors?

In many cases, a simple line chart that compares the change in CAP to changes in TSR, net income, and the CSM supplemented with a brief narrative may be the most effective in illustrating the correlation of compensation to performance. In other cases, it may be necessary to also include supplemental analyses, such as a realizable pay for performance analysis to more fully explain how the company’s pay and performance compared to peers. As noted previously, we plan on providing illustrative graphics of these relationships in the near future.

21. Can modifications be made to the PVP Table?

Yes. Companies can add columns to supplement the required disclosure provided such additional columns are clearly identified as supplemental.


As noted in our previous Viewpoint, there are several activities that companies should undertake now to get a head start on this extensive new disclosure requirement. The guidance included in this and future Viewpoints will remain focused on providing our clients with the insights and information needed to comply with the new rules and to assist in framing their PVP story.


This Viewpoint is intended to inform compensation committees, executives, and compensation professionals about developments that may affect their companies; it should not be relied on as specific company advice or as a substitute for legal, accounting, or other professional advice.
General questions about this Viewpoint can be directed to John Ellerman (, Ira Kay (, Mike Kesner (, or Ben Stradley (

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Featured Viewpoint

SEC Reopens Comment Period Prospective Clawback Rules

Introduction and Background

The U.S. Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. One of Dodd-Frank’s key executive compensation provisions requires that all listed companies adopt and disclose a policy for the recoupment of incentive compensation, from its current and former executive officers, in the event a company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities law (colloquially referred to as a “clawback” policy). The amount subject to clawback is “equal to any incentive compensation received during the three-year period preceding the restatement in excess of what would have been paid the executive officers under the accounting restatement.”

In July 2015, the Securities and Exchange Commission (SEC) issued proposed rules requiring that listed companies adopt and disclose a clawback policy as required under Dodd-Frank. The proposed rules lay dormant, however, until October 2021, when the SEC reopened the comment period for the original rules along with 10 new policy questions — the most significant of which was the extension of clawbacks to corrections of errors in prior financial statements that are not material enough to require the reissuance of those statements.

On June 9, 2022, the SEC reopened a new 30-day comment period along with a memorandum prepared by the SEC’s Department of Economic and Risk Analysis (DERA). DERA’s memorandum provided detailed information on (1) the increase in voluntary adoption of compensation recovery policies by companies and (2) estimates of the number of additional restatements that would be subject to the clawback rules if the proposed rules were to include restatements due to material noncompliance (“Big R” restatements) and corrections of errors (“little r” restatements). The memorandum opines that many existing clawback policies do not comply with the Dodd-Frank requirements and most “little r” restatements do not affect net income; therefore, they are unlikely to result in a sharp increase in clawback activity. The memorandum also states that extending clawbacks to “little r” restatements will help improve the accuracy of financial reporting, especially among smaller issuers.

The SEC released an updated regulatory agenda on June 22, 2022, and it expects to issue final clawback regulations by October 2022, which makes it highly likely the rules will be effective in 2023.

Recap of the Rules

The key provisions of the original and updated proposed clawback rules include the following:

  • The rules are applicable to both current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date of the accounting restatement;
  • The recovery of incentive compensation must be made on the basis of “no-fault” on the part of an executive officer regardless of their responsibility or lack of responsibility;
  • The amount of the recovered incentive compensation, calculated on a pre-tax basis, is the amount that exceeds what the executive officer would have received based on the financial restatement;
  • Incentive-based compensation is defined as any compensation that is granted, earned, or vested based upon the attainment of a financial reporting measure, including stock price and total shareholder return (TSR); and
  • The proposed rules do not apply to time-vested stock options; time-vested restricted stock; or restricted stock units (RSUs), discretionary bonuses, or base salaries.

The clawback policy must be disclosed as an exhibit to a company’s annual report, proxy statement, or other annual disclosure. The October 21 release strongly suggests companies will be required to disclose the detailed calculations used in determining the amount of the clawback. This could be especially troubling for companies with a stock price hurdle or relative TSR metric, where such calculations are not nearly as clear as quantifying the effect of a restated revenue or profit amount.

It also remains to be seen if the SEC includes “little r” restatements in a final rule, which could significantly increase the number of companies that will have to determine and disclose a clawback event.

SEC Clawback Rules-Implications and Considerations

The SEC’s October 2022 target to finalize the rules is not binding and, like many past regulatory agenda dates, may turn out to be aspirational. However, the June 9, 2022 reopening of the clawback rules for public comment and the inclusion of the DERA memorandum suggests the SEC is determined to push through the rule-making process this year. While an effective date has not been proposed, it is likely to take effect for fiscal years beginning after December 31, 2022. Once finalized, companies subject to the new policy requirement will need to review their existing clawback policies and/or adopt a new policy that complies with the rules.

Some example changes to existing policies might include:

  • The inclusion of all active and former executive officers — not just the executive officer(s) whose misconduct led to the restatement.
  • The removal of Compensation Committee or Board discretion to pursue a clawback (unless the “impractical to do so” exemption applies) or determine the amount of clawback.
  • Assuming “little r” restatements are included in the final rule, policies will need to cover both “big R” and “little r” restatements.

Some commentators have suggested that the finalization of the clawback rules and inclusion of “little r” restatements could have an impact on the selection of future long-term incentive vehicles (time-vested stock options and RSUs are exempt from the rules). In addition, given the difficulty in quantifying the impact of a restatement on stock price and the potential requirement to disclose the calculation, finalization could reduce the use of stock price metrics, such as relative TSR or specific stock price hurdles, for fear of future litigation over such calculations.

Pay Governance will continue to monitor the SEC rule-making process for this item and will provide an update when the new rules are finalized.

General questions about this Viewpoint can be directed to Mike Kesner ( or John Ellerman (

Featured Viewpoint

SEC Releases Final Rules Regarding Pay-Versus-Performance (PVP) Disclosures

Executive Summary

The Securities and Exchange Commission (SEC) released its final version of the rules mandated by Dodd-Frank regarding the disclosure of pay versus performance (PVP) on August 25, 2022. Initial rules were proposed in 2015, and follow-up proposals and invitations for comment were extended in late 2021 and early 2022 by the SEC. The SEC PVP disclosure is intended to provide investors with a clear analysis of the alignment of the top executives’ compensation actually paid (CAP) with the company’s financial and stock price performance. This analysis, while complex, may be viewed by investors as a window into the governance and workings of the company’s pay for performance model.

Pay Governance LLC has prepared this Viewpoint with the intent of providing our clients and interested parties with a comprehensive yet clear picture of this new SEC disclosure requirement. This Executive Summary provides a snapshot of the new rules. The sections that follow the Executive Summary provide our interpretation of the SEC rules along with some commentary on the implications of the new disclosure. We want our readers to know, however, that we will be providing additional analysis and recommendations regarding the rules in the weeks ahead as we have time to study the SEC’s recommended rules more carefully.

We also encourage SEC-filing companies to begin gathering the data and developing the PVP discussion needed to comply with the new disclosure requirements. There is a great deal of disclosure detail that companies can begin to draft immediately; please refer to the last section of this Viewpoint where we have recommended steps companies can take to initiate this process.

The new rules will become effective for companies with fiscal year disclosures ending on or after December 16, 2022. This means that companies on a calendar year will need to include their PVP disclosures in their 2023 proxies. In the table below, we have provided an overview of the key disclosure requirements and have included the required tabular disclosure mandated by the new rules.

Tabular PVP disclosure required by the final rules:

Tabular List of the company's "most important" performance measures:


The SEC’s 234-page release of the final rules appears to have carefully considered the often-conflicting comments received from investors, companies, consultants, and other interested parties in 2015 when the rules were first proposed. The final rules also reflect comments made in late 2021 as well as in 2022 when the rules were re-released by the SEC with several questions for comment.[1] The SEC acknowledges that the final rules will be more burdensome to comply with than the original proposal; however, the SEC believes that the additional effort will result in an improved level of accuracy in depicting PVP.

Required Disclosures in Tabular Format

The tabular disclosure required by the final rules is shown in the Executive Summary above. The primary tabular disclosure requires the reporting of the company’s compensation, company and peer total shareholder return and company financial performance for the 5 most recently completed fiscal years. The other tabular disclosure is composed of a list of no less than three and not more than seven of the most important performance measures used to determine compensation for the current fiscal year. This list must include at least three financial metrics and may include non-financial metrics.


Companies will be required to include total compensation reported in the SCT for the CEO and the average total compensation of the other NEOs, with each amount juxtaposed against the CAP for each of the past 5 years. Importantly, the SCT and CAP amounts are not directly comparable, as the SCT includes 1 year of equity compensation whereas CAP includes the fair value of the current year equity awards and the change in value during the current year of unvested prior year equity awards and awards that vested during the year. Thus, no inference should be drawn between the amount reported in SCT and CAP each year, and it is notable the SEC does not require a comparison of these two columns in the PVP discussion.

Performance Measures

Companies will be required to include four mandated financial performance measures: (1) company cumulative TSR, (2) the peer group’s cumulative TSR (market cap-weighted), (3) net income (as reported on a GAAP basis), and (4) a company-selected metric (CSM). The CSM, according to the SEC, should be the metric the company believes is the most important financial metric for determining CAP in the current fiscal year. The company’s CSM cannot be TSR or net income, as those metrics are already included in the table, and it must be included in the top three to seven tabular list of most important metrics. The SEC will also allow companies to include additional columns in the table for other financial CSMs they believe are important metrics for evaluating PVP.

The SEC acknowledges that in many cases the CSM may be a non-GAAP metric, and such metrics will require disclosure of a reconciliation to GAAP. The reconciliation disclosure is not likely to be burdensome for most companies because such disclosures are already required for companies using non-GAAP metrics in their earnings releases or incentive plans.

While the SEC requires the inclusion of both the company and peer group TSR in the PVP table (which presumably is intended to provide context on how a company is performing), the PVP table does not include peer company comparisons for net income, CSM, or peer group compensation data, which may leave out important context for fully evaluating PVP.

“Three to Seven” Tabular Disclosure

The SEC disclosure rules require companies to report no less than three financial measures and no more than seven measures, which are the most important metrics used by the company to determine CAP for the current fiscal year. The SEC allows non-financial measures to be included in the list, unlike the primary tabular disclosure, which is limited to financial measures, provided the three financial measure minimum is met. The three to seven list may include TSR or net income (if applicable) in addition to the other metrics. Initially, the SEC wanted the metrics to be presented in ranked order of importance; however, that requirement has been dropped.

Calculating CAP

The disclosure of CAP was mandated by the Dodd-Frank legislation, but Congress left the SEC with significant discretion on how to define it for PVP comparisons. In the chart and discussion below, we have summarized the key components of CAP.

Fair Value of Equity Included in CAP

The amount of equity to be included in the calculation of CAP, according to the SEC, is intended to closely follow the concept of realizable pay.

The final rule requires that equity granted during the year be valued at year-end. In addition, year-over-year changes in the value of unvested equity granted in previous years are to be included in the calculation of CAP based on the year-end fair value or vesting date value if such vesting occurs during the year. Forfeitures of awards are included in the fair value calculation. This fair value requirement allows companies to report the value of equity at year-end, which corresponds to the stock price used in calculating TSR and is generally aligned with the current year financial measures.

The following table provides an illustration of how the equity fair values are calculated. While not required by the SEC, it could be useful to include such a table in the PVP footnotes to help explain how the equity component of CAP was determined (in the same way perquisites and benefits are disclosed as a footnote to the Other Compensation column of the SCT). The example assumes a company grants 50% performance shares (PSUs), 25% stock options (SOs), and 25%-time vested restricted stock units (RSUs). The PSUs cliff-vest on the third anniversary of the grant date, whereas the SOs and RSUs vest ratably over the 3 years following the grant date. Performance criteria for the PSUs include 50% weighting based on relative TSR and 50% weighting based on cumulative operating income over the 3-year measurement period.

In the year of grant, each award is valued at year-end based on the valuation principles set forth in ASC 718 (column a). Thus, the PSUs that are linked to relative TSR will need to be valued using a Monte Carlo simulation with updated valuation assumptions, including the year-end stock price. The PSUs tied to the cumulative operating income metric will be valued based on year-end stock price and an updated assumption regarding the probability of such awards vesting. The SOs will be valued based on an updated Black Scholes or binomial model calculation based upon updated valuation assumptions (including the use of year-end stock price). The RSUs will be updated for the year-end stock price. It is understood that accrued dividends on such awards will also be included in the fair value calculation.

In addition, awards granted in prior years that remain unvested at year-end will be re-valued, and the increase or decrease in the fair value will need to be accounted for if such awards will be included in the current year CAP amount (column b).

Finally, awards that have vested (or are forfeited) during the current fiscal year will be valued as of their vesting date, and any increase or decrease from the prior year value will be included in the current year CAP (column c).

The sum of these components represents the equity value included in the CAP amount (column d).

Dividends Paid on Unvested Shares

The SEC also requires that dividends paid on unvested shares or SOs also be included in the CAP amount. As previously noted, accrued dividends are already included in the CAP amount.

Pension Amount to be Included in CAP

The SEC requires (1) “the actuarially determined service cost for services rendered by the executive during the applicable year” (the “service cost”) and (2) that the entire cost of benefits granted in a plan amendment during the covered fiscal year be included in CAP for the CEO and other NEOs. According to the SEC, these amounts are calculated each year for financial statement purposes and will not require significant effort to obtain the required information for the PVP table.

Executives Included in the PVP Table

The new SEC disclosure rules require the company to report SCT total compensation and CAP values for both the CEO and the average of the other NEOs included in the SCT. For some companies, these executives may change frequently, and the SEC requires that the SCT and CAP amounts included in the PVP table reflect the executives listed for that year’s proxy.

In the case of two CEOs in a particular year, the SEC requires companies report each CEO’s SCT compensation and CAP separately by adding additional columns to the table for each CEO. This is not permitted in the case of two CFOs or terminated executives that are included in the SCT, as the amount reported for other NEOs is based on the average of the reported NEO executives.

Calculation of TSR Values

The SEC specifies in the new rules that companies should report cumulative TSR in the same manner as required in Item 201(e) of Regulation S-K. Item 201(e) requires companies to assume an initial $100 investment in a company’s stock at the beginning of the disclosure period and to report the value at the end of each year based on stock price and the reinvestment of dividends in the company’s stock.

In transitioning to the new rules during the first year, the SEC requires companies to report 3 years of cumulative TSR as follows:

  • 2022 cumulative TSR based on 2020-2022 results
  • 2021 cumulative TSR based on 2020-2021 results
  • 2020 cumulative TSR based on 2020 results

The 2023 and 2024 cumulative results will be added in subsequent years’ tables as follows:

  • 2023 cumulative TSR based on 2020-2023 results
  • 2024 cumulative TSR based on 2020-2024 results

Beginning in 2025 and every year thereafter, the cumulative TSR calculation will be reset each year, which may create comparability issues. For example, the cumulative TSR calculation for the 2025 fiscal year will assume that $100 was invested at the beginning of 2021 and will require that cumulative TSR be recalculated for 2021-2024 assuming 2021 is the base year (versus carrying over the cumulative TSR calculations for 2021-2024 from the prior year proxy statement). The changes in cumulative TSR will likely require additional explanation, as one year’s PVP table may show compensation that is fully aligned while a subsequent year may imply a lack of alignment because of the reset in the starting date for calculating cumulative TSR.

Peer Group TSR Calculations

The SEC will allow companies to use the peer group reported in the Item 201(e) disclosure or a peer group disclosed in the CD&A that is used for “compensation benchmarking purposes.” Item 201(e) requires the use of a published industry or line of business index. In addition, Item 201(e) also allows companies to use a company-selected peer group.

Although not entirely clear, we believe the final rules allow a company that discloses a relative TSR peer group in the CD&A to use that peer group in the PVP table. However, the peers’ TSR must be market cap-weighted when included in the PVP table.

Additionally, the SEC also requires that if the peer group or industry/business index group used to determine TSR changes between years, the company must provide an explanation for the change and provide a side-by-side comparison of TSR for the two peer sets over the applicable measurement period.

Additional Reporting and Disclosure Items

Companies will be required to explain the relationship between the CAP for the CEO and the average CAP of the other NEOs with respect to each of the performance metrics included in the PVP table (i.e., TSR, Net Income, and the designated CSM). In addition, companies must explain the relationship of the company’s TSR to its peers. This disclosure may be reported in a narrative or graphical format or a combination of the two.

Footnotes to the PVP table are required that identify the adjustments (exclusions and additions) to the SCT compensation amounts used to calculate CAP and the names of the other NEOs for each fiscal year.

Placing the PVP Disclosure Section in the Proxy

The SEC allow companies to include the PVP disclosure anywhere in the proxy. The SEC received several comments recommending this disclosure be integrated into the CD&A but decided against it because such placement “may cause confusion by suggesting that the registrant considered pay-versus-performance relationships in compensation decisions, which may or may not be the case.” The PVP disclosure must be tagged in inline XBRL, which — according to the SEC — will make the information easy to locate for small and large investors alike.

Special Exemptions and Rules Applicable to Selected Companies

Special rules are applicable to Smaller Reporting Companies, Emerging Growth Companies, foreign private issuers, registered investment companies, and companies that have recently gone public. With respect to Smaller Reporting Companies, they will only be required to disclose 3 years of data (2 years in the initial filing year). Additionally, such companies will not be required to report peer group TSR data, a CSM or list the three to seven most important performance measures. Emerging Growth Companies, foreign private issuers, and registered investment companies are exempt from all PVP disclosure requirements. Companies that have gone public recently are only required to report information for those years in which they were public entities.

Pay Governance’s Recommended Next Steps

In order to get a head-start on this extensive new disclosure requirement, companies may wish to consider some of the following activities:

  1. Begin compiling the cumulative TSR and CAP data for 2020 and 2021, as these amounts can be calculated now and are not dependent on 2022 year-end stock prices or equity awards granted or vested in 2022;
  2. Estimate the 2022 cumulative TSR and CAP data and prepare a proforma PVP table;
  3. Start analyzing the three to seven performance metrics that are driving pay outcomes for 2022 and identify from the list which metric(s) would be appropriate for inclusion as the CSM(s);
  4. Determine which peer group to use for TSR comparisons in the PVP table and evaluate the correlation of the company’s TSR with alternative indices/peer groups; and
  5. Begin work with the pension actuary regarding the retirement amounts to be included in the PVP table CAP amounts for 2020 and 2021 from both qualified and non-qualified retirement plans.

In preparing initial drafts of the PVP table and the accompanying narrative it may become clear that the CAP calculations and PVP table do not adequately capture the company’s pay for performance story. In these instances, it may be useful to consider a supplemental discussion to the PVP disclosure that presents an analysis of realizable pay and reporting of 3-year and 5-year performance and TSR data relative to peers.

Over the course of the next several weeks, Pay Governance will devote more time to studying and analyzing the new SEC disclosure rules. We will communicate with you by providing additional Viewpoints sharing our findings, conclusions, and recommendations.

General questions about this Viewpoint can be directed to John Ellerman ( , Ira Kay (, or Mike Kesner (


[1] Pay Governance submitted comments in both 2015 and 2022, primarily about the definition of CAP and misalignment of the original timing of the CAP and performance periods. The SEC does reference our and other comment letters numerous times. The SEC acknowledges that the new definition of CAP was influenced by the comment letters.

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