The SEC Pay versus Performance Rules:  Is the Value in an ESPP Included in Compensation Actually Paid?

Written By: Terry Adamson

The SEC announced the adoption of its new pay versus performance rules, or Item 402(v) on August 25, 2022.  A detailed summary of the new rules can be found within our Alert found here. However, the intent of this shorter brief is to highlight the treatment of Employee Stock Purchase Plans (ESPPs) within these disclosures. We believe this to be an area in which we have seen confusion by external issuers.

To start with, the value associated with ESPPs are generally not disclosed in the Summary Compensation Table. In Item 402 of Regulation S-K, the guidance references that the All Other Compensation column in the Summary Compensation Table should also include (among other things):

“For any security of the company or its subsidiaries purchased from the company or its subsidiaries (through deferral of salary or bonus) at a discount from the market price of such security at the date of purchase, unless that discount is available generally either to all security holders or to all salaried employees of the company, the compensation cost, if any, computed in accordance with FAS123R.

Since qualified ESPPs are available to all employees, then it is not required to include the compensatory value of an ESPP in the Summary Compensation Table. Similarly, we do not believe it should be included in the calculation of Compensation Actually Paid for the new Pay vs. Performance table under Item 402(v).

If your organization has questions about the disclosures in Item 402(v), please contact us.

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