Commentary on the Latest Compliance & Disclosure Interpretations (“C&DIs”) from November 2023

Written By: Matt Eppehimer, Jackson Swindells

For Thanksgiving this year, the SEC served up 10 new Compliance & Disclosure Interpretations (“C&DIs”) related to the Pay Versus Performance rules on November 21st.  The 10 new C&DIs consist of revisions to 2 prior interpretations (revising 128D.7 and 128.D.18), along with 8 new Questions (128D.23 – 128D.30).

Most of the new C&DIs focus on TSR Disclosures (5 of the 10 questions), with a single question on Dividends, Smaller Reporting Companies, Emerging Growth Companies, Principal Financial Officers, and Retirement Eligibility.

Below is a summary of these interpretations along with commentary from Infinite Equity:

(Revised) Question 128D.7 | Peer TSR

In each of 2020 and 2021, a registrant provided the same list of companies as a peer group in its Compensation Discussion & Analysis (“CD&A”) under Item 402(b) but provided a different list of companies in its CD&A for 2022. With respect to a registrant providing initial Pay versus Performance disclosure in its 2023 proxy statement for three years (as permitted by Instruction 1 to Item 402(v) of Regulation S-K), may the registrant present the peer group total shareholder return for each of the three years using the 2022 peer group?

Infinite Equity Commentary: This guidance clarifies the prior language that the Peer TSR for each year
disclosed in the table should be based on the most recently disclosed peer group. In the event that changes in the peer group occur from year to year, companies should apply the guidance in Question 128D.27 and disclose the TSR for both the prior and new group of Peers. This guidance mirrors the rules for companies that change their custom industry peer group for their 10-k performance graph.

(Revised) Question 128D.18 | Retirement Eligibility

Some stock and option awards allow for accelerated vesting if the holder of such awards becomes retirement eligible. If retirement eligibility was the sole vesting condition, would this condition be considered satisfied for purposes of the Item 402(v) of Regulation S-K disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible?

Answer: Yes. However, if retirement eligibility is not the sole vesting condition, other substantive conditions must also be considered in determining when an award has vested. Such conditions would include, but not be limited to, a market condition as described in Question 128D.16 or a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period.  [November 21, 2023]

Infinite Equity Commentary: The use of the phrase “actual retirement” in the answer lends practitioners to believe the intent of the ambiguous language is that retirement eligibility can now be ignored when determining the last measurement date for non-vested equity. Practically speaking, this is a wonderful gift from the SEC, and we can all be thankful for this interpretation over the holidays as it will greatly simplify the determination of Compensation Actually Paid.

Arguably however, the new C&DI guidance now conflicts with the initial rules of when an “unconditional right” is earned, and the foundational theory that the values are consistent with the ASC718 expense recognition in their financial statements. 

If companies have already prepared disclosures based on prior guidance regarding retirement eligibility, there is a greater dilemma now of if they should transition to the new guidance and how. Our recommendation is to not revise prior year disclosures. Instead, re-value the “retirement eligible” awards with the new updated valuation in the current year’s disclosure. Therefore, any new incremental change will appear as a cumulative catchup in the current period. This could potentially lead to a disconnect between Compensation Actually Paid against the single year TSR. However, we believe this approach would bring the easiest resolution and alignment to the new guidance.

Question 128D.23 | Dividends and Dividend Equivalents

Some stock awards entitle the holder to receive dividends or dividend equivalents paid on the underlying shares prior to the vesting date. If the dollar value of dividends or dividend equivalents paid are not reflected in the fair value of such awards, should they be included in the calculation of executive compensation actually paid?

Infinite Equity Commentary: Yes. This is confirmation of previous guidance.  

Question 128D.24 | Peer TSR – Changes in the Industry Index

When identifying a total shareholder return peer group under Regulation S-K Item 402(v)(2)(iv), the registrant must use either the same index or issuers used by it to comply with Item 201(e)(1)(ii) or the companies it uses as a peer group under Regulation S-K Item 402(b). If a registrant uses more than one “published industry or line-of-business” index for purposes of Item 201(e)(1)(ii), may a registrant choose which index it uses for purposes of its pay versus performance disclosure?

Infinite Equity Commentary: This C&DI confirms prior guidance from both 201(e) along with 402(v).  Many comment letters from the SEC addressed the use of a broad Index for Peer TSR. However, the rules require the Industry Index from Item 201(e). If the Industry Index changes from one year to the next, then it must be footnoted for the reason for change and disclose the TSR of both.

Question 128D.25 | Peer TSR – Companies with LTI contingent on Relative TSR

For purposes of determining the total shareholder return of a registrant’s peer group under Regulation S-K Item 402(v)(2)(iv), the registrant must use the same index or issuers used by it for purposes of Item 201(e)(1)(ii) or the companies it uses as a peer group for purposes of its disclosures under Item 402(b). If registrant discloses in its Compensation Discussion & Analysis that it determines the vesting of performance-based equity awards based on relative TSR compared to a broad-based equity index, can the registrant use that broad-based index as its peer group for purposes of Item 402(v)(2)(iv)?

Infinite Equity Commentary: No, companies cannot use a broad Index in the Pay vs. Performance tables even if their performance equity is based on a broad Index. These tables must either use an Industry Index, or alternatively the executive compensation peer group.

Question 128D.26 | Peer TSR – Market Cap Weighting

Pursuant to Regulation S-K Item 402(v)(2)(iv), if the registrant’s peer group is not a published industry or line-of-business index, the identity of the issuers composing the group must be disclosed in a footnote. The returns of each component issuer of the group must be weighted according to the respective issuers’ stock market capitalization at the beginning of each period for which a return is indicated. In what circumstances is such market capitalization-based weighting required?

Infinite Equity Commentary:  If you do not disclose an Industry Index, and your peer TSR is based on company specific peers, then you must market cap weight the calculations. There is flexibility in the frequency of re-balancing the market cap weights from Annually, to Quarterly, to Monthly.  Read more about how to market cap weight TSR calculations here.

Question 128D.27 | Peer TSR – Changes in Members

If a registrant that uses a peer group other than a published industry or line-of-business index as its peer group under Regulation S-K Item 402(v)(2)(iv) adds or removes any of the companies in the peer group, is it required to footnote the change(s) and compare its cumulative total shareholder return with that of both the updated peer group and the peer group used in the immediately preceding fiscal year?

Infinite Equity Commentary:  Yes. If you use a custom peer group of peers, you must disclose both the updated peer group and the peer group from the prior year.  However, there is an exception if the entity is omitted because it is no longer in the business or industry, or alternatively if the change in peer group is due to pre-established objective criteria. Generally, it is likely easier to disclose the TSR of both the prior and current group.

Question 128D.28 | Smaller Reporting Company

A smaller reporting company (SRC) with a December 31 fiscal year end provided scaled pay versus performance disclosure covering fiscal years 2021 and 2022 in its proxy statement filed in April 2023. It subsequently loses its SRC status based on its public float as of June 30, 2023. The registrant proposes to rely on General Instruction G(3) of Form 10-K to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into its 2023 Form 10-K from its definitive proxy or information statement to be filed not later than 120 days after its 2023 fiscal year end. What pay versus performance information is the registrant required to include in such proxy or information statement?

Infinite Equity Commentary:  A SRC was only required to disclose 2 years upon transition (generally 2021 and 2022). This guidance will allow for the SRC to continue limited disclosures of 3 years for 2023 (generally 2021, 2022, and 2023). However, in subsequent years it will require the full disclosure of 5 years. 

Question 128D.29 | Emerging Growth Company

A registrant that previously qualified as an emerging growth company loses that status as of December 31, 2024. Is it required to provide pay versus performance disclosure in its proxy statement filed in 2025? How many years are required in the table?

Infinite Equity Commentary:  Emerging Growth Companies (EGC) are not required to disclose the Pay vs. Performance Tables. Upon losing status as an EGC, however, they must comply with the full rules.   However, an EGC can apply for Transitional Relief, which would allow the company to only report their most recent three fiscal years of Pay versus Performance during their first year of required disclosure.   

Question 128D.30 | Multiple Principal Financial Officers

Two (or more) individuals served as a registrant’s principal financial officer (PFO) during a single covered fiscal year included the pay versus performance table and related disclosure under Regulation S-K Item 402(v). Each such individual is included in the Summary Compensation table as a named executive officer (NEO) pursuant to Item 402(a)(3)(ii). For purposes of the calculation of average compensation amounts for the NEOs other than the principal executive officer reported pursuant to Items 402(v)(2)(ii) and (iii), may the registrant treat the PFOs as the equivalent of one NEO?

Infinite Equity Commentary:  No, you must treat each PFO as NEOs and be consistent with the Summary Compensation Table.

Bottom Line

With the exception of the revised language in 128D.18 (Retirement Eligibility), the new C&DIs were confirmations of prior guidance and will have very little impact.  It appears that most of the new guidance is consistent with many of the SEC Comment Letters published to a handful of Issuing companies. Infinite Equity continues to monitor all guidance put forth by the SEC and are available to answer any questions that assist companies with producing compliant PVP disclosures.

For more information on the new PvP rules, heading into Year 2, or clarity on best practices, we encourage you to access our recent webinar here or feel free to contact us

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