SEC Finalizes Pay-for-Performance Disclosure Rules

Structure of the New Disclosure The new disclosure will be a standalone section of the proxy statement, which can be located inside or outside the CD&A. In its simplest form, the disclosure might consist of essentially two tables, one or more graphs, and many footnotes: * The PVP Table * A table of three to seven financial measures (the Tabular List) that the company considers most important in linking compensation actually paid to its executive officers to company performance, one of which must be listed in the PVP Table (referred to as the CompanySelected Measure (CSM)) * A graph or graphs plotting a number of data points from the PVP Table used to satisfy the requirement that a "clear description" be provided of the relationship between the new pay calculation and the financial metrics in the PVP Table Inline XBRL must be used to tag all the data in the PVP Table and much of the other information provided pursuant to the regulation. The CSM is defined as the financial performance measure1: which in the registrant's assessment represents the most important financial performance measure (that is not otherwise required to be disclosed in the table) used by the registrant to link compensation actually paid to the registrant's named executive officers for the most recently completed fiscal year, to company performance. Since columns (f), (g), and (h) contain information regarding the company's TSR, the TSR of its peer group, and net income, the CSM must be another financial measure.2 How difficult will it be to determine the CSM? Column (g)-the Value of $100 Using Peer Group TSR The 10-K rules require a company to prepare a performance graph comparing its stock price return to (a) a broad equity market index, and (b) one of two alternatives: (1) a published industry or line-ofbusiness index; or (2) peer issuers "selected in good faith. "3 The PVP rule allows a company to choose to use the same industry or line-of-business index it is using in the performance graph. Because the performance graph uses the same methodology (growth of a $100 investment), it will be easy to fill out column (g) if the company chooses to use the same index.