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. If a company uses relative TSR (rTSR) as an incentive plan measure, can they use it as their CSM?

Possibly. The rules require the company to include the financial measure the company believes is most impactful in determining the current year’s CAP. The rules clearly indicate TSR is considered a financial measure, but it is unclear whether relative TSR is also acceptable. Given the significance of rTSR in many companies’ incentive plans, and its close relation to TSR, we believe there is a reasonable basis to select rTSR as the CSM.

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 (john.ellerman@paygovernance.com), Ira Kay (ira.kay@paygovernance.com), Mike Kesner (mike.kesner@paygovernance.com), or Ben Stradley (bentham.stradley@paygovernance.com).
Click here to view a printable version of this Viewpoint.

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