It’s been twelve years in the making, but last week the Securities and Exchange Commission finally adopted a rule mandated by the Dodd-Frank Act of 2010 that will require companies to disclose the relationship between executive pay and the financial performance of the company.
The SEC first proposed amendments to Item 402 of Regulation S-K in April 2015 to implement the pay versus performance disclosure requirement. In January 2022, the comment period was reopened.
New Item 402(v) of Regulation S-K will require registered companies to “provide a table disclosing specified executive compensation and financial performance measures for the company’s five most recently completed fiscal years,” an SEC fact sheet stated.
The financial performance measures to be included in the table are the registrant’s total shareholder return (TSR); TSR for the registrant’s peer group; the registrant’s net income; and a financial performance measure chosen by the registrant that represents the “most important” financial performance measure used by the registrant to link compensation actually paid to the registrant’s named executive officers (NEOs) to company performance for the most recently completed fiscal year.
Companies are permitted, but not required, to include non-financial measures in the list if they consider such measures to be among their three to seven “most important” measures.
Connecting Pay to Performance
Additionally, Item 402(v) will require registrants to provide “a clear description of the relationships between each of the financial performance measures included in the table and the executive compensation actually paid to its [principal executive officer] and, on average, to its other NEOs over the registrant’s five most recently completed fiscal years,” the SEC fact sheet stated.
The rules will apply to all reporting companies, except foreign private issuers, registered investment companies, and emerging growth companies. Smaller reporting companies will be allowed to provide scaled disclosures.
SEC Chair Gary Gensler stated in a press release that the final rule “makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies” and “provides for new, more flexible disclosures that allow companies to describe the performance measures it deems most important when determining what it pays executives.”
Registrants will be required to use Inline XBRL to tag their pay versus performance disclosure and must start complying with the new disclosure requirements in proxy and information statements for fiscal years ending on or after Dec. 16, 2022. 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.