Reporting Pay Versus Performance Executive Compensation Plans

What Are Pay Versus Performance Disclosure Rules?

Public companies are required under U.S. Securities and Exchange Commission (SEC) rules to periodically provide transparent disclosures to investors and the public regarding executive compensation, partcularly when compensation is tied to equity awards such as stock and stock options. These requirements are collectively referred to as equity plan disclosure rules.

Equity plan disclosures include:

• Grant policies
• Pay versus performance policies
• Clawback policies
• Insider trading and ownership disclosures

SEC Requirements for Pay Versus Performance Disclosures

The SEC provides highly specific instructions governing how pay versus performance information must be presented. Public companies are required to include detailed tables that compare executive compensation against company performance metrics.

These tables must clearly disclose:

• The compensation of the Chief Executive Officer (CEO);
• The average compensation of other Named Executive Officers (NEOs); and
• The company’s financial performance, often tied to equity-based awards.

The purpose of these disclosures is to allow investors to evaluate whether executive compensation aligns with company performance.

Mandatory and Company-Selected Performance Measures

Under SEC rules adopted in 2022 pursuant to the Dodd-Frank Act, public companies must disclose specific performance measures in their proxy statements to illustrate the relationship between executive pay and performance.

Mandatory measures include:

• Total Shareholder Return (TSR); and
• Net income.

In addition, companies must identify and disclose Company-Selected Measures (CSMs)—the financial performance measures the company believes are most important in linking executive compensation to performance.

Common CSMs include:

• Earnings before interest, taxes, depreciation, and amortization (EBITDA);
• Earnings per share (EPS); and
• Revenue or sales.

TSR measures the return generated for shareholders through stock price appreciation and dividends over a specified period and must be compared to a selected peer group. Net income reflects the company’s profitability after all expenses and taxes.

Uniform Formatting and Disclosure Obligations

The SEC requires pay versus performance disclosures to be presented in a uniform and standardized format to ensure comparability across public companies. Failure to comply with the prescribed format constitutes a violation of SEC reporting requirements. Ignorance of the rules is not a defense.

The SEC’s detailed disclosure instructions include the following requirements:

1. Footnotes to the table. Registrants must disclose specified information in footnotes, including the name of each Principal Executive Officer (PEO) and each non-PEO NEO included in the average compensation amounts, as well as amounts deducted or added to calculate executive compensation actually paid.
2. Relationship disclosure. Item 402(v) requires registrants to describe the relationships between each financial performance measure and the executive compensation actually paid to the PEO and, on average, to other NEOs over the five most recently completed fiscal years (or three years for Smaller Reporting Companies). Registrants other than SRCs must also describe the relationship between company TSR and peer group TSR. These disclosures may be presented in narrative, graphical, or combined formats.
3. Tabular List. Registrants other than SRCs must provide a list of three to seven financial performance measures they determine are the most important measures used to link executive compensation to performance. Non-financial measures may be included if they are among the company’s most important metrics.
4. Inline XBRL. All registrants are required to use Inline XBRL to tag pay versus performance disclosures in proxy or information statements. Each value in the pay versus performance table must be separately tagged, with block-text tagging required for footnotes, relationship disclosures, and the Tabular List where applicable.

Why This Matters for Public Companies

Pay versus performance disclosures are a frequent focus of SEC review and investor scrutiny. Errors, omissions, or deviations from the required format can result in regulatory comments, amended filings, enforcement actions, and reputational harm.

Careful coordination between legal, finance, compensation, and reporting teams is essential to ensure compliance and minimize regulatory risk.

Need Legal Guidance on Pay Versus Performance Compliance?

The securities attorneys at Corporate Securities Legal LLP advise public companies on executive compensation disclosures, proxy statement compliance, equity plan reporting, and SEC regulatory strategy.

Our team can help ensure your Pay Versus Performance Executive Compensation disclosures fully comply with SEC requirements—so you can avoid regulatory exposure and the uncertainty of how the SEC may respond.