[Federal Register Volume 80, Number 88 (Thursday, May 7, 2015)]
[Proposed Rules]
[Pages 26329-26364]
[FR Doc No: 2015-10429]

Vol. 80

Thursday,

No. 88

May 7, 2015

Part II

Securities and Exchange Commission

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17 CFR Parts 229 and 240

Pay Versus Performance; Proposed Rule

Federal Register / Vol. 80 , No. 88 / Thursday, May 7, 2015 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229 and 240

[Release No. 34-74835; File No. S7-07-15]
RIN 3235-AL00

Pay Versus Performance

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to Item 402 of Regulation S-K to
implement Section 14(i) of the Securities Exchange Act of 1934 (the
``Exchange Act''), as added by Section 953(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the ``Dodd-Frank Act'').
Section 14(i) directs the Commission to adopt rules requiring
registrants to disclose in a clear manner the relationship between
executive compensation actually paid and the financial performance of
the registrant. The proposed disclosure would be required in proxy or
information statements in which executive compensation disclosure
pursuant to Item 402 of Regulation S-K is required. The proposed
disclosure requirements would not apply to emerging growth companies or
foreign private issuers.

DATES: Comments should be received on or before July 6, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an Email to<EMAIL_ADDRESS>Please include
File Number S7-07-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.

All submissions should refer to File Number S7-07-15. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's Web
site (http://www.sec.gov/rules/proposed.shtml). Comments are also
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. All comments
received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the SEC's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Eduardo A. Aleman, Special Counsel, in
the Office of Rulemaking, Division of Corporation Finance, at (202)
551-3430, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing to add new paragraph (v) to
Item 402 of Regulation S-K.\1\
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    \1\ 17 CFR 229.402.
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Table of Contents

I. Introduction
II. Proposed Amendment
    A. Introduction
    B. New Item 402(v) of Regulation S-K
    C. Executives Covered
    D. Determination of ``Executive Compensation Actually Paid''
    E. Measure of Performance
    F. Time Period Covered
    G. Clear Description
    H. Smaller Reporting Companies
III. General Request for Comments
IV. Economic Analysis
    A. Background
    B. Baseline
    C. Discussion of Economic Effects
    1. Benefits
    2. Costs
    3. Implementation Alternatives
    D. Request for Comment
V. Paperwork Reduction Act
    A. Background
    B. Summary of Collection of Information Requirements
    C. Paperwork Reduction Act Burden Estimates
    D. Solicitation of Comments
VI. Initial Regulatory Flexibility Act Analysis
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority and Text of Proposed Amendments

I. Introduction

    We are proposing amendments today as required by Section 953(a) of
the Dodd-Frank Act.\2\ Section 953(a) added Section 14(i) \3\ to the
Exchange Act,\4\ which directs the Commission to adopt rules requiring
registrants \5\ to disclose in any proxy or consent solicitation
material for an annual meeting of shareholders a clear description of
any compensation required to be disclosed by the issuer under Item 402
of Regulation S-K \6\ (or any successor thereto), including information
that shows the relationship between executive compensation actually
paid and the financial performance of the registrant, taking into
account any change in the value of the shares of stock and dividends of
the registrant and any distributions. A report by the Senate Committee
on Banking, Housing and Urban Affairs indicated that the rules mandated
by Section 953(a) of the Dodd-Frank Act were not intended to be overly-
prescriptive and that Congress recognized that there could be many ways
to disclose the relationship between executive compensation and
financial performance of the registrant.\7\
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ 15 U.S.C. 78n(i).
    \4\ 15 U.S.C. 78a et seq.
    \5\ Section 102(a)(2) of the Jumpstart Our Business Startups Act
(``JOBS Act'') amended Exchange Act Section 14(i) to exclude
registrants that are ``emerging growth companies'' from the pay-
versus-performance disclosure requirements. Public Law 112-106, 126
Stat. 306 (2012). Section 3(a) of the Exchange Act [15 U.S.C.
78c(a)] defines an ``emerging growth company'' as an issuer with
total annual gross revenues of less than $1 billion during its most
recently completed fiscal year.
    \6\ 17 CFR 229.402.
    \7\ See Report of the Senate Committee on Banking, Housing and
Urban Affairs to accompany S. 3217, S. Rep. No. 111-176, at 135
(2010) (the ``Senate Report'') which stated with respect to Section
953(a): ``This disclosure about the relationship between executive
compensation and the financial performance of the issuer may include
a clear graphic comparison of the amount of executive compensation
and the financial performance of the issuer or return to investors
and may take many forms.''
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    Section 953(a) was enacted contemporaneously with other executive
compensation-related provisions in the Dodd-Frank Act that are
``designed to address shareholder rights and executive compensation
practices.'' \8\ Section 951 of the Dodd-Frank Act enacted new Exchange
Act Section 14A \9\ which requires that not less than every three years
a proxy or consent or authorization for an annual or other meeting of
the shareholders for which the proxy solicitation rules of the
Commission require compensation disclosure shall include a separate
resolution subject to a non-binding shareholder vote to approve the

compensation of executives. Pursuant to the mandate in Section 14A, we
adopted rules requiring a shareholder advisory vote to approve the
compensation of the named executive officers (``NEOs''), as disclosed
pursuant to Item 402 of Regulation S-K, at an annual or other meeting
of shareholders at which directors will be elected and for which such
executive compensation disclosure is required.\10\
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    \8\ Dodd-Frank Act, H.R. Rep. 111-517, at 872 (2010).
    \9\ 15 U.S.C. 78n-1.
    \10\ See Shareholder Approval of Executive Compensation and
Golden Parachute Compensation, Release No. 33-9178 (Jan. 25, 2011)
[76 FR 6010] (Feb. 2, 2011).
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    We believe that the pay-versus-performance disclosure mandated by
Section 953(a), and the disclosure of the ratio of the median annual
total compensation of employees to the annual total compensation of the
chief executive officer mandated by Section 953(b),\11\ are intended to
provide shareholders with information that will help them assess a
registrant's executive compensation when they are exercising their
rights to cast advisory votes on executive compensation under Exchange
Act Section 14A. The Senate Report accompanying the statute references
shareholder interest in the relationship between executive pay and
performance as well as the general benefits of transparency of
executive pay practices.\12\
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    \11\ We proposed rules to implement Section 953(b), see Pay
Ratio Disclosure, Release No. 33-9452 (Sept. 18, 2013) [78 FR 60560]
(Oct. 1, 2013).
    \12\ The Senate Report includes the following with respect to
Section 953 of the Dodd-Frank Act: ``It has become apparent that a
significant concern of shareholders is the relationship between
executive pay and the company's financial performance . . . The
Committee believes that these disclosures will add to corporate
responsibility as firms will have to more clearly disclose and
explain executive pay.'' See Senate Report, supra note 7.
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    In that regard, the disclosure mandated by Section 14(i) of the
Exchange Act will give shareholders a new metric for assessing a
registrant's executive compensation relative to its financial
performance. Currently, Item 402 of Regulation S-K specifies the
information that must be included when the applicable form or schedule
requires executive compensation disclosure. Information on financial
performance is required by other items throughout Regulation S-K,
including in Item 201(e),\13\ Item 301,\14\ Item 302 \15\ and Item
303.\16\ There is currently no requirement to disclose specific
information showing the relationship between executive compensation
actually paid and the financial performance of the registrant. Instead,
Item 402 of Regulation S-K contains detailed requirements for the
disclosure of executive compensation and more principles-based
disclosure requirements regarding the relationship between pay and
performance. The Compensation Discussion and Analysis (``CD&A'')
required by Item 402(b) of Regulation S-K requires registrants to
provide an explanation of ``all material elements of the registrant's
compensation of the named executive officers.'' \17\ With respect to
performance, Item 402(b)(2) includes non-exclusive examples of
information that may be material, including (i) specific items of
corporate performance taken into account in setting compensation
policies and making compensation decisions; (ii) how specific forms of
compensation are structured and implemented to reflect these items of
the registrant's performance; and (iii) how specific forms of
compensation are structured and implemented to reflect the NEO's
individual performance and/or individual contribution to these items of
the registrant's performance.\18\
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    \13\ 17 CFR 229.201(e), Performance Graph.
    \14\ 17 CFR 229.301, Selected Financial Data.
    \15\ 17 CFR 229.302, Supplementary Financial Information.
    \16\ 17 CFR 229.303, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
    \17\ 17 CFR 229.402(b)(1).
    \18\ 17 CFR 229.402(b)(2)(v)-(vii).
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    The disclosure required by Exchange Act Section 14(i) can
supplement the discussion in the CD&A as part of the shareholder's
evaluation of the registrant's executive compensation practices and
policies, including for purposes of the shareholder advisory vote on
executive compensation. The proposed amendment provides a factual
description of how the executive compensation actually paid related to
the financial performance of the registrant.\19\ This disclosure may
provide a useful point of comparison for the analysis provided in the
CD&A about a compensation committee's approach to linking pay and
performance. We also believe that the proposed disclosure may provide
relevant information to shareholders when voting in an election of
directors. By helping to inform a shareholder's assessment of a
registrant's executive compensation, the new disclosure may help
shareholders evaluate the directors' oversight of this important area.
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    \19\ We recognize that financial performance of the registrant
is a broad term and can mean different things to different
registrants. Throughout this release, we use the term ``financial
performance'' to refer to the financial performance of the
registrant as required to be disclosed by new Section 14(i) of the
Exchange Act, which we propose to measure by cumulative total
shareholder return as defined in Item 201(e) of Regulation S-K. See
Section II.E below.
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    As with other Dodd-Frank Act rulemakings, we have sought comment
from the public prior to the issuance of a proposing release.\20\ We
have considered the pre-proposal comment letters received to date.
Commenters were divided on whether we should provide specific rules on
how the proposed disclosure must be prepared or whether we should allow
registrants flexibility in determining how to disclose the relationship
between pay and performance. Some commenters believed that we should
propose specific requirements to encourage consistency and
comparability across registrants.\21\ Other commenters were supportive
of an approach to pay-versus-performance disclosure in which our rules
would not provide specific requirements, but would allow registrants to
determine the substance of such disclosure and how such disclosure
should be presented.\22\
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    \20\ Comments related to the executive compensation provisions
of the Dodd-Frank Act are available at http://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.
    \21\ See letters from Pay Governance LLC (``Pay Governance''),
Farient Advisors (``Farient''), Compensia, Inc. (``Compensia''),
Meridian Compensation Partners (``Meridian''), MDU Resources, Inc.
(``MDU'') and Shareholder Value Advisors, Inc. (October 4, 2010)
(``SVA I'').
    \22\ See letters from the Center on Executive Compensation
(September 1, 2010) (``CEC I''), American Bar Association (``ABA''),
Protective Life Corporation (``Protective Life''), ClearBridge
Compensation Group (``ClearBridge'') and Davis Polk & Wardwell LLP
(``Davis Polk'').
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    As discussed in more detail below, our proposed amendments would
require registrants to provide disclosure that can be compared across
registrants, while also continuing to allow registrants to supplement
their disclosure about pay-versus-performance to reflect the specific
situation of the registrant and its industry. Throughout the release we
seek comment on this approach, and whether alternative approaches
should be considered to accomplish the objectives of Section 14(i) of
the Exchange Act.

II. Proposed Amendment

A. Introduction

    We are proposing new Item 402(v) of Regulation S-K that would
require a registrant to provide a clear description of (1) the
relationship between executive compensation actually paid to the
registrant's NEOs and the cumulative total shareholder return (TSR) of
the registrant, and (2) the relationship between the registrant's TSR
and the TSR of a peer group chosen by the registrant, over each of the

registrant's five most recently completed fiscal years.
    The proposed amendments would:
     Require that the executive compensation used in
calculating the executive compensation actually paid be total
compensation as disclosed in the Summary Compensation Table,\23\
modified to exclude changes in actuarial present value of benefits
under defined benefit and actuarial pension plans that are not
attributable to the applicable year of service, and to include the
value of equity awards at vesting rather than when granted, which
adjustments are intended to capture the Section 953(a) required measure
of ``executive compensation actually paid''; \24\
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    \23\ Item 402(c) of Regulation S-K [17 CFR 229.402(c)].
    \24\ The terms ``stock,'' ``option,'' ``stock appreciation
right,'' ``equity,'' ``plan'' and ``incentive plan'' used in this
release are generally as defined in Item 402(a)(6) of Regulation S-K
[17 CFR 229.402(a)(6)]. Similarly, while we do not define the term
``defined benefit and actuarial pension plans,'' the term has the
same meaning as in Item 402 of Regulation S-K.
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     Require registrants to measure financial performance using
TSR, as defined in Item 201(e) of Regulation S-K, and TSR of a
registrant peer group;
     Require registrants to provide the executive compensation
actually paid, total compensation as disclosed in the Summary
Compensation Table, TSR, and peer group TSR in a prescribed table;
     Require the executive compensation disclosure to be
presented separately for the principal executive officer, and as an
average for the remaining NEOs identified in the Summary Compensation
Table;
     Require the disclosure of the relationship between (1)
executive compensation actually paid and registrant TSR (for the same
executives identified in the registrant's Summary Compensation Table),
and (2) registrant TSR and peer group TSR, in each case over the
registrant's five most recently completed fiscal years;
     For smaller reporting companies, require the disclosure of
the relationship between executive compensation actually paid and TSR
over the registrant's three most recently completed fiscal years,
without requiring these companies to provide disclosure of peer group
TSR;
     Require that the disclosure be provided in tagged data
format using eXtensible Business Reporting Language (XBRL); and
     Provide a phase-in of the requirement.
    We discuss each of these aspects of our proposal in detail below.
    Foreign private issuers, as defined in Exchange Act Rule 3b-4 [17
CFR 240.3b-4], would not be subject to the proposed amendment. Because
securities registered by a foreign private issuer are not subject to
the proxy statement requirements of Exchange Act Section 14,\25\
foreign private issuers would not be required to provide Item 402(v)
disclosure. As proposed, registered investment companies would not be
required to provide Item 402(v) disclosure. We believe that the
management structure of, and the regulatory regime governing,
registered investment companies differentiate them from issuers that
are operating companies. Registered investment companies, unlike other
issuers, are generally externally managed and often have few, if any,
employees that are compensated by the registered investment company.
Rather, such employees are generally compensated by the registered
investment company's investment adviser. Furthermore, registered
investment companies do not have named executive officers within the
meaning of Item 402, and, therefore, are not required to conduct the
shareholder advisory votes required by Exchange Act Section 14A.\26\
Business development companies are a category of closed-end investment
company that are not registered under the Investment Company Act [15
U.S.C. 80a-2(a)(48) and 80a-53-64]. As proposed, business development
companies would be treated in the same manner as issuers other than
registered investment companies and, therefore, would be subject to the
disclosure requirement of Item 402(v).
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    \25\ Exchange Act Rule 3a12-3(b) [17 CFR 240.3a12-3(b)]
specifically exempts securities registered by a foreign private
issuer from Exchange Act Sections 14(a) and 14(c).
    \26\ As noted earlier, we believe that the pay-versus-
performance disclosure mandated by Section 953(a), together with the
disclosure of the ratio of the median annual total compensation of
employees to the annual total compensation of the chief executive
officer mandated by Section 953(b), are intended to provide
shareholders with information that will help them assess a
registrant's executive compensation when they are exercising their
rights to cast advisory votes on executive compensation under
Exchange Act Section 14A. Further, as noted earlier, the Senate
Report indicated that ``a significant concern of shareholders is the
relationship between executive pay and a company's financial
performance,'' and that the pay-versus-performance disclosure would
``add to corporate responsibility as firms will have to more clearly
disclose and explain executive pay.'' See Senate Report, supra note
7.
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B. New Item 402(v) of Regulation S-K

1. Application and Operation of Proposed Item 402(v)
    Section 14(i) of the Exchange Act requires disclosure of the
relationship of executive compensation actually paid and the financial
performance of the registrant. Section 14(i) explicitly refers to Item
402 of Regulation S-K as the reference point for the executive
compensation to be addressed by the new disclosure relating
compensation to performance. Because the disclosure mandated by Section
14(i) relates specifically to executive compensation, we are proposing
to require this new disclosure in a new Item 402(v) of Regulation S-K.
    We are also proposing that the disclosure called for under new Item
402(v) of Regulation S-K be included in any proxy or information
statement for which disclosure under Item 402 of Regulation S-K is
required. Currently, Item 8 of Schedule 14A \27\ and Item 1 of Schedule
14C \28\ require registrants to furnish Item 402 information if action
is to be taken with regard to: The election of directors; any bonus,
profit sharing or other contract or arrangement in which any director,
nominee or executive officer of the registrant will participate; any
pension or retirement plan in which they will participate; or the
granting or extension to them of options, warrants or rights to
purchase securities on a pro rata basis.\29\ By including the
requirement in Item 402 and requiring this disclosure in proxy
statements on Schedule 14A and in information statements on Schedule
14C,\30\ shareholders would have available the pay-versus-performance
disclosure,

along with all other executive compensation disclosures called for by
Item 402, in circumstances in which shareholder action is to be taken
with regard to an election of directors or executive compensation.
Because the proposed pay-versus-performance disclosure would be
provided pursuant to Item 402 of Regulation S-K, it would be subject to
the say-on-pay advisory vote under Exchange Act Rule 14a-21(a).\31\
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    \27\ 17 CFR 240.14a-101.
    \28\ Schedule 14C [17 CFR 240.14c-101] works in conjunction with
Schedule 14A to generally require the disclosure of information
called for by Schedule 14A to the extent that the item would be
applicable to any matter to be acted on at a meeting if proxies were
to be solicited. Schedule 14C implements Exchange Act Section 14(c)
[15 U.S.C. 78n(c)] which created disclosure obligations for
registrants that choose not to, or otherwise do not, solicit
proxies, consents, or other authorizations from some or all of their
security holders entitled to vote.
    \29\ The executive compensation disclosure called for under Item
402 of Regulation S-K is also required in certain registration
statements under the Securities Act and the Exchange Act, as well as
in annual reports on Form 10-K. Most registrants satisfy the Form
10-K disclosure requirement by incorporating by reference the
information contained in their annual proxy or information
statement.
    \30\ Even though Section 14(i) does not expressly include
information statements provided for under Section 14(c), we believe
that the purpose of information statements under Section 14(c),
which established disclosure obligations for registrants that do not
solicit proxies, does not support excluding the disclosure from
information statements. Although Section 14(c) and Schedule 14C
concern the provision of certain information when no solicitation is
involved, Section 14(c) provides an obligation relating to
information statements to transmit to holders ``such security
information substantially equivalent to the information which would
be required to be transmitted if a solicitation were made . . . .''
15 U.S.C. 78n(c).
    \31\ 17 CFR 240.14a-21.
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    We note that the language of Section 14(i) requires that the pay-
versus-performance disclosure be provided ``in any proxy or consent
solicitation material for an annual meeting of the shareholders.''
Shareholder annual meetings are typically the venue in which directors
are elected.\32\ This statutory language, if construed narrowly, would
require the pay-versus-performance disclosure in different instances
than our rules currently require for other executive compensation
disclosure.\33\ In particular, under our current rules if a registrant
solicits proxies \34\ with respect to the election of directors or
executive compensation matters, its proxy statement must include
specified information required by Item 402 of Regulation S-K, whether
the election takes place at an annual or special meeting.\35\ We
believe Item 402 disclosure, including the disclosure that would be
required under proposed Item 402(v), is equally useful to shareholders
without regard to the venue of the corporate action.
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    \32\ The Commission has previously recognized that directors
ordinarily are elected at annual meetings. See, e.g., Exchange Act
Rule 14a-6(a) [17 CFR 240.14a-6(a)] (acknowledging that registrants
soliciting proxies in the context of an election of directors at an
annual meeting may be eligible to rely on the exclusion from the
requirement to file a proxy statement in preliminary form). See
also, Exchange Act Rule 14a-3(b) [17 CFR 240.14a-3(b)] (requiring
proxy statements used in connection with the election of directors
at an annual meeting to be preceded or accompanied by an annual
report containing audited financial statements). The requirement for
registrants to hold an annual meeting at which directors are to be
elected, however, is imposed by a source of legal authority other
than the federal securities laws. In Delaware, for example, where
more than 50% of the publicly traded issuers are incorporated,
according to the State of Delaware's official Web site, Delaware
General Corporation Law (DGCL), Section 211(b) is viewed as
requiring an annual meeting for the election of directors. See R.
Franklin Balotti & Jesse A. Finkelstein, Delaware Law of
Corporations & Business Organizations, Sec.  7.1 (3d ed.), Edward P.
Welch, Andrew J. Turezyn, & Robert S. Saunders, Folk on the Delaware
General Corporate Law Sec.  211.2 (2013), and the text of DGCL
Section 211(b), which reads in relevant part, ``unless directors are
elected by written consent in lieu of an annual meeting as permitted
by this subsection, an annual meeting of stockholders shall be held
for the election of directors on a date and at a time designated by
or in the manner provided in the bylaws.'' See also Charles R.T.
O'Kelley & Robert B. Thompson, Corporations and Other Business
Associations 167 (7th ed.) (explaining that the ``paramount
shareholder function is the election of directors'' and that
``[m]ost corporation codes protect this right by specifying
immutably that directors shall be elected at an annually held
meeting of shareholders.''), California Corporations Code, Section
600(b), and 1969 Model Business Corporation Act (as amended through
1981), Section 7.01(a) (each requiring an annual meeting of
shareholders for the election of directors).
    \33\ The language of Section 14(i) calls for the disclosure to
be provided in connection with annual meetings, the meeting at which
registrants generally provide for the election of directors.
Depending on the circumstances, this construction could be narrower
or broader than the scope of Item 8 of Schedule 14A, which requires
executive compensation disclosure in circumstances where action is
to be taken with regard to an election of directors or executive
compensation. For example, a registrant could solicit proxies to
approve a management contract or arrangement or other compensation
plan at a special meeting instead of an annual meeting and, in this
instance, Item 8 would require Item 402 executive compensation
disclosure. By contrast, although an annual meeting ordinarily
involves an election of directors, in the unlikely event that an
annual meeting did not include an election of directors or other
executive compensation actions, the proposed amendment would not
require any Item 402 executive compensation disclosure.
    \34\ Rule 14a-1(f) [17 CFR 240.14a-1(f)] defines the term
``proxy'' to include every proxy, consent or authorization within
the meaning of Section 14(a) of the Exchange Act. A solicitation of
consents therefore constitutes a solicitation of proxies subject to
Section 14(a) and Regulation 14A.
    \35\ See Item 8 of Schedule 14A.
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    Consistent with our approach to other Item 402 disclosures, we are
proposing to require pay-versus-performance disclosure in these
instances because we believe that the proposed disclosure would be most
useful to shareholders when they are deciding whether to approve the
compensation of the NEOs through the say-on-pay advisory vote, as well
as when making voting decisions on a compensation plan in which NEOs
participate, and making decisions pertaining to the election of
directors. The Senate Report accompanying the statute references
shareholder interest in the relationship between executive pay and
performance as well as the general benefits of transparency of
executive pay practices.\36\ Several commenters also noted that the
mandate may help inform shareholders.\37\ For example, one commenter
stated a belief that the requirements of Section 953(a), if implemented
appropriately, ``will help investors better understand the executive
pay decisions of the company, and make more informed `Say-on-Pay'
votes.'' \38\
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    \36\ The Senate Report includes the following with respect to
Section 953(a) of the Dodd-Frank Act: ``It has become apparent that
a significant concern of shareholders is the relationship between
executive pay and the company's financial performance . . . The
Committee believes that these disclosures will add to corporate
responsibility as firms will have to more clearly disclose and
explain executive pay.'' See Senate Report supra note 7.
    \37\ See letters from American Federation of Labor and Congress
of Industrial Organizations (Aug. 8, 2014) (``AFL-CIO''),
PublicCitizen, ClearBridge and Pay Governance.
    \38\ See letter from Pay Governance.
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    By proposing to require the disclosure as a new Item 402
requirement, however, the pay-versus-performance disclosure, unless
otherwise limited, also would be required in a registrant's Form 10-K
and in Securities Act registration statements that require Item 402
disclosure. The language of Section 14(i) calling for the disclosure to
be provided in solicitation material for an annual meeting of the
shareholders suggests that the disclosure was intended to be provided
in conjunction with a shareholder vote, and we believe that the
disclosure would be most useful in this context. Therefore, we are
proposing that Item 402(v) specify that the disclosure would only be
required in a registrant's proxy or information statement. In addition,
as proposed, the information will not be deemed to be incorporated by
reference into any filing under the Securities Act or the Exchange Act,
except to the extent that the registrant specifically incorporates it
by reference.\39\
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    \39\ See Instruction 6 to proposed Item 402(v) of Regulation S-
K. As proposed, the information would therefore not be subject to
forward incorporation by reference under Item 12(b) of Form S-3 [17
CFR 239.13].
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2. Format and Location of Proposed Disclosure
    Section 14(i) of the Exchange Act requires us to adopt rules
requiring disclosure of ``information'' that shows the relationship
between executive compensation actually paid and registrant financial
performance, but it does not specify the format or location of that
disclosure.
    We are not proposing a specific location within the proxy statement
or information statement for this new disclosure. We note that the
proposed disclosure item is related to the CD&A because it would show
the historical relationship between executive pay and registrant
financial performance, and may provide a useful point of comparison for
the analysis provided in the CD&A. However, including this disclosure
as part of CD&A might suggest that the registrant considered the pay-
versus-performance relationship, as disclosed, in its compensation
decisions, which may not be the case. Consequently, we believe it is
appropriate to provide flexibility for registrants in determining where
in the proxy or information statement to provide the disclosure
required by proposed Item 402(v), although we

generally expect registrants would disclose it with the Item 402
executive compensation disclosure.
    As proposed, Item 402(v) would require registrants to provide a
table containing the values of the prescribed measures of executive
compensation actually paid, TSR for the registrant and TSR for the
selected peer group (see table below). For each amount disclosed as
executive compensation actually paid in columns (c) and (e) of the
prescribed table, proposed Item 402(v) would require footnote
disclosure for both principal executive officer compensation and
average NEO compensation of each amount deducted from, and added to the
total compensation amount as provided in the Summary Compensation
Table. As proposed, Item 402(v) also would require registrants to
include in the table the total PEO compensation reported in the Summary
Compensation Table (column (b), and, for NEOs, the average total
compensation reported in the Summary Compensation Table (column (d)).
Requiring disclosure of the Summary Compensation Table measure of total
compensation together with our proposed measure of executive
compensation actually paid would provide shareholders with disclosure
of two measures in one single table and, we believe, would facilitate
comparisons of the two measures of a registrant's executive
compensation to the registrant's performance. To the extent that some
shareholders may be interested in considering the relationship of
performance with a measure of pay that excludes changes in the value of
equity awards, they would be able to refer to the Summary Compensation
Table measure of total compensation required alongside executive
compensation actually paid in the tabular disclosure. Among other
things, the Summary Compensation Table measure of total compensation
reflects the grant date values of equity awards.
    We are proposing that the disclosure provided in each column of the
proposed table, including any footnote disclosure, be provided in
interactive data format using XBRL.\40\ The proposal would require
registrants to tag separately the values disclosed in the required
table, and to separately block-text tag the disclosure of the
relationship among the measures, the footnote disclosure of deductions
and additions used to determine executive compensation actually paid,
and the footnote disclosure regarding vesting date valuation
assumptions. The interactive data would have to be provided as an
exhibit to the definitive proxy or information statement filed with the
Commission, in addition to appearing with and in the same format as the
rest of the disclosure provided pursuant to proposed Item 402(v) of
Regulation S-K (e.g., in ASCII or HTML). Registrants would be required
to prepare their interactive data using the list of tags the Commission
specifies and submit them with any supporting files the EDGAR Filer
Manual prescribes.\41\ We believe requiring the data to be tagged would
lower the cost to investors of collecting this information, would
permit data to be analyzed more quickly by investors and other end-
users than if the data was provided in a non-machine readable format,
and would facilitate comparisons among public companies. In addition,
requiring the data to be tagged would facilitate analysis of how
information related to a single issuer changes over time.
---------------------------------------------------------------------------

    \40\ Data becomes interactive when it is labeled or ``tagged''
using a computer markup language such as XBRL that software can
process for analysis.
    \41\ The EDGAR Filer Manual is available at: http://www.sec.gov/info/edgar/edmanuals.htm.>

                                                                 Pay Versus Performance
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Average summary
                                                                   compensation table   Average compensation
        Year          Summary compensation      Compensation       total for  non-PEO      actually paid to     Total shareholder     Peer group total
                       table total for PEO  actually paid to PEO     named executive        non-PEO named            return          shareholder return
                                                                        officers         executive officers
(a)                                 (b)                   (c)                   (d)                   (e)                   (f)                   (g)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                      ....................  ....................  ....................  ....................  ....................  ....................
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Because the statute requires disclosure of the relationship between
executive compensation and registrant performance, we do not believe
that simply disclosing the amount of executive compensation actually
paid and the financial performance measure would satisfy this statutory
requirement. Thus, using the values presented in the table, proposed
Item 402(v) would require the registrant to describe (1) the
relationship between the executive compensation actually paid and
registrant TSR, and (2) the relationship between registrant TSR and
peer group TSR. We believe disclosure about the relationship between
registrant TSR and peer group TSR would provide information that
investors can use to compare a registrant's performance with that of
its peers, and may provide a useful point of comparison to assess the
relationship between the registrant's executive compensation actually
paid and its financial performance compared to the performance of its
peers during the same time period.
    The disclosure about the relationship would follow the table and
could be described as a narrative, graphically, or a combination of the
two, and, as proposed, would be required to be provided in interactive
data format using XBRL. Disclosure of the relationship could include,
for example, a graph providing executive compensation actually paid and
change in TSR on parallel axes and plotting compensation and TSR over
the required time period. Alternatively, disclosure of the relationship
could include showing the percentage change over each year of the
required time period in both executive compensation actually paid and
TSR together with a brief discussion of that relationship. Under our
proposed amendments, while the presentation format used by different
registrants to demonstrate the relationship between executive
compensation actually paid and TSR may vary, the table required by Item
402(v) together with existing disclosures would provide shareholders
with clear information from which to determine the relationship between
executive compensation actually paid and registrant performance so that
shareholders could, if desired, compare the disclosure across
registrants.
    Exchange Act Section 14(i) provides that the disclosure about the
relationship may include a graphic

representation of the information. Commenters provided varying views on
whether to require a graphic presentation. Some commenters indicated
that a graphic representation would help provide meaningful
disclosure,\42\ while other commenters supported a principles-based
approach that would not include a specific requirement for a graphic
representation.\43\ Consistent with the language of Exchange Act
Section 14(i), we are proposing to permit, rather than require, a
registrant to comply with the new requirement to disclose the
relationship between executive compensation actually paid and
registrant performance by including a graphic presentation of the pay-
versus-performance disclosure, in addition to the required table
presenting the values of prescribed measures of executive compensation
and TSR.
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    \42\ See letters from Farient, Meridian and Shareholder Value
Advisors, Inc. (Apr. 27, 2012) (``SVA II'').
    \43\ See letters from ABA, CEC I, and Davis Polk.
---------------------------------------------------------------------------

Request for Comment
    1. Exchange Act Section 14(i) specifies that the pay-versus-
performance disclosure must be provided in any proxy or consent
solicitation materials that relate to annual shareholder meetings. For
the reasons discussed above, we are proposing to require the disclosure
in a registrant's proxy or information statement where Item 402
disclosure is required. Should we instead, or in addition, require the
disclosure in any proxy or information statements relating to an annual
shareholder meeting (or special meeting or written consent in lieu of a
meeting)? Why or why not?
    2. To retain consistency in the executive compensation disclosure
provided in proxy statements and information statements, we propose
that the Item 402(v) disclosure be included in information statements
on Schedule 14C as well as proxy statements on Schedule 14A for which
Item 402 disclosure is required. Is there any reason that the proposed
disclosure mandated by Section 14(i) should be limited to registrants
that are soliciting proxies or consents on Schedule 14A?
    3. Should we also require the proposed disclosure in all other
forms and schedules in which executive compensation disclosure is
required? Would it be useful to shareholders to include the proposed
disclosure in registration statements or annual reports as well? Why or
why not?
    4. Should the disclosure required by Exchange Act Section 14(i) be
a separate requirement under Item 402 of Regulation S-K, as proposed?
Alternatively, should we require the disclosure as part of the CD&A? If
so, please explain why.
    5. Should we require registrants to provide, as proposed, a table
that includes the Summary Compensation Table total compensation, in
addition to the values of the prescribed measures of executive
compensation actually paid and registrant financial performance used
for the pay-versus-performance disclosure? Why or why not?
    6. Should we further prescribe the format of the proposed
disclosure to promote comparability across registrants? For example,
should we require that registrants present the percentage change in
executive compensation actually paid and registrant/peer group
financial performance over each year of the required time period
graphically or in writing? Are there other format requirements we
should consider? Should we provide further guidance on how to present
the information in a way that promotes comparability? Are there ways
our proposed table can be improved?
    7. If we were to require a graphic presentation of the disclosure,
should we specify requirements for this presentation so that each
registrant provides comparable disclosure? Or should we allow
registrants to determine the appropriate graphic presentation, if any?
How should such a graph describe the relationship between executive
compensation actually paid and registrant performance?
    8. Should we provide sample charts or other examples of graphic
presentations that would comply with proposed Item 402(v)? If so,
please provide examples.
    9. Would requiring disclosure of the values of the prescribed
measures of executive compensation actually paid and registrant
financial performance, without additional information about the
``relationship'' of those data points, satisfy Section 14(i) of the
Exchange Act?
    10. Would the stock performance graph required by Item 201(e) of
Regulation S-K modified to add a line representing executive
compensation actually paid provide meaningful disclosure about the
relationship between executive pay and registrant performance? Why or
why not? If so, should we require the stock performance graph, as so
modified to be included in the proxy or information statement as well
as, or instead of, in the annual report to security holders required by
Exchange Act Rules 14a-3 and 14c-3 \44\? Would such disclosure satisfy
Exchange Act Section 14(i)?
---------------------------------------------------------------------------

    \44\ 17 CFR 240.14a-3 and 17 CFR 240.14c-3.
---------------------------------------------------------------------------

    11. Under our current rules, unless specifically incorporated by
reference, the disclosure required by Item 201(e) of Regulation S-K is
not deemed to be ``soliciting material'' or to be ``filed'' with the
Commission or subject to the liabilities of Exchange Act Section
18.\45\ That same treatment is not afforded to the CD&A disclosure.
Under the proposal, the pay-versus-performance disclosure, which would
require disclosure of TSR as defined in Item 201(e) for the registrant
and for a peer group used by the registrant for purposes of the CD&A or
Item 201(e), would be filed in certain proxy or information statements.
Should the disclosure about TSR be deemed to be filed, as proposed? Why
or why not? Alternatively, should the TSR disclosure be deemed to be
``furnished''? If the disclosure was treated as ``furnished'', should
such treatment only apply to peer group TSR? Why or why not?
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78r; see Instruction 8 to Item 201(e) of
Regulation S-K.
---------------------------------------------------------------------------

    12. Would the proposed tabular disclosure of the values of the
executive compensation and registrant financial performance enhance
comparability across registrants? Are there other formats that would be
more useful in that regard?
    13. Should we require that the data be tagged in XBRL format, as
proposed? Should we require a different format, such as, for example,
eXtensible Markup Language (XML)? \46\ Should the proposed tabular
disclosure be changed in any way to facilitate accurate and consistent
tagging? If so, how? Should we require that, as proposed, disclosure
about the relationship between executive compensation and registrant
performance be tagged? Why or why not? Would tagging the relationship
of executive compensation to financial performance enhance
comparability among different registrants? Alternatively, instead of
requiring that the disclosure about the relationship be tagged, should
tagging this disclosure be optional? If a registrant chooses to add
more information to the prescribed

table, should we require this additional information to be tagged as
well, even if registrant-specific extensions are necessary?
---------------------------------------------------------------------------

    \46\ Another possible alternative for providing the information
in interactive data format would be Inline XBRL, which would allow
registrants to file the required information and data tags in one
document rather than requiring a separate exhibit for the
interactive data. Commission rules and the EDGAR system do not
currently allow for the use of Inline XBRL. To the extent that a
determination is made in the future to accept Inline XBRL
submissions, we expect to revisit the format in which this
disclosure requirement is provided.
---------------------------------------------------------------------------

    14. Should we require that the data be tagged in preliminary proxy
statements and information statements, as well as in definitive proxy
statements and information statements? Why or why not?
    15. Should we exempt smaller reporting companies from the XBRL
requirement, rather than require them to provide such data? Why or why
not? Would the costs be different for smaller reporting companies to
comply with the proposed requirement to provide the data in XBRL format
as compared to other companies? What would be the impact of not
requiring tagging for smaller reporting companies? Should we, as
proposed, provide a phase-in for smaller reporting companies to tag the
disclosure? Why or why not? Should the period be longer or shorter than
three years?
    16. Instruction 1 to Item 402(c)(2)(iii) and (iv) of Regulation S-K
permits a registrant to omit disclosure in the Summary Compensation
Table of the salary or bonus of an NEO if it is not calculable as of
the latest practicable date.\47\ Item 5.02(f) of Form 8-K \48\ sets
forth the requirements for the filing of information that was omitted
from Item 402 disclosure in accordance with Instruction 1 to Item
402(c)(2)(iii) and (iv), including the requirement to include a new
total compensation figure for the NEO. Should we consider permitting
registrants to omit pay-versus-performance disclosure until those
elements of the NEO's total compensation are determined and to provide
the pay-versus-performance disclosure in the same filing under Item
5.02(f) of Form 8-K in which the salary or bonus is disclosed? Is such
relief necessary given that, as proposed, registrants will not be
required to incorporate the disclosure into the Form 10-K? If we were
to provide the relief, should we require any additional or supplemental
disclosure in connection with an amendment to Item 5.02(f)? If so, what
would that disclosure entail?
---------------------------------------------------------------------------

    \47\ For smaller reporting companies, Instruction 1 to Item
402(n)(2)(iii) and (iv) is the corresponding instruction.
    \48\ 17 CFR 249.308.
---------------------------------------------------------------------------

C. Executives Covered

    Exchange Act Section 14(i) does not specify which executives must
be included in the disclosure of ``executive compensation actually
paid.'' For registrants other than smaller reporting companies, we are
proposing that the executives covered by the proposed Item 402(v)
disclosure be the ``named executive officers'' as defined in Item
402(a)(3) of Regulation S-K.\49\ For smaller reporting companies, we
are proposing that the executives covered by the proposed Item 402(v)
disclosure be the same as the ``named executive officers'' required to
be disclosed under Item 402(m).\50\ These are the executive officers
for whom, under our current rules, compensation disclosure is required
in the Summary Compensation Table and the other executive compensation
disclosure requirements. In addition, we are proposing that, for each
year, the compensation information be presented separately for the
principal executive officer \51\ and as an average for the remaining
NEOs identified in the Summary Compensation Table.
---------------------------------------------------------------------------

    \49\ Item 402(a)(3) [17 CFR 229.402(a)(3)] defines the NEOs for
whom Item 402 executive compensation is required as 1) all
individuals serving as the registrant's principal executive officer
or acting in a similar capacity during the last completed fiscal
year (``PEO''), regardless of compensation level, 2) all individuals
serving as the registrant's principal financial officer or acting in
a similar capacity during the last completed fiscal year (``PFO''),
regardless of compensation level, 3) the registrant's three most
highly compensated executive officers other than the PEO and PFO who
were serving as executive officers at the end of the last completed
fiscal year, and 4) up to two additional individuals for whom Item
402 disclosure would have been provided but for the fact that the
individual was not serving as an executive officer of the registrant
at the end of the last completed fiscal year. Because the pay-
versus-performance disclosure is being proposed as new paragraph (v)
to Item 402, the disclosure also would be required for the NEOs.
    \50\ For smaller reporting companies, Item 402(m)(2) [17 CFR
229.402(m)(2)] defines the NEOs for whom Item 402 executive
compensation is required as 1) all individuals serving as the
smaller reporting company's principal executive officer or acting in
a similar capacity during the last completed fiscal year (PEO),
regardless of compensation level, 2) the smaller reporting company's
two most highly compensated executive officers other than the PEO
who were serving as executive officers at the end of the last
completed fiscal year, and 3) up to two additional individuals for
whom disclosure would have been provided but for the fact that the
individual was not serving as an executive officer of the smaller
reporting company at the end of the last completed fiscal year.
    \51\ The term ``principal executive officer'' used in this
release has the same meaning as in Items 402(a)(3) and 402(m)(2) of
Regulation S-K and would include an individual acting in a similar
capacity.
---------------------------------------------------------------------------

    We note that Section 14(i) specifically refers to compensation
required to be disclosed under Item 402 of Regulation S-K. Because Item
402 of Regulation S-K requires disclosure of NEO compensation, we
believe that Congress intended for the rules to provide disclosure
about that group. We also believe that covering only the NEOs should
help to mitigate some of the costs associated with the proposed
disclosure because registrants are already required to make the
determination of who is an NEO and to track information about their
compensation. Commenters that addressed this issue were generally
supportive of requiring that the pay-versus-performance disclosure
cover the NEOs.\52\
---------------------------------------------------------------------------

    \52\ See letters from ABA, Baker, Donelson, Bearman, Caldwell &
Berkowitz (``Baker Donelson''), ClearBridge, Compensia, Brian Foley
& Company (``Foley'') and MDU.
---------------------------------------------------------------------------

    We are proposing to require that the disclosure be provided
separately for the PEO and as an average for the remaining NEOs
identified in the Summary Compensation Table. Several commenters noted
that shareholders have a particular interest in the compensation of the
PEO.\53\ We are further proposing that if more than one person served
as the PEO of the registrant, then the disclosure for the persons who
served as PEO of the registrant shall be aggregated for the years in
which more than one person served as the PEO because this reflects the
total amount that was paid by the registrant for the services of a PEO.
---------------------------------------------------------------------------

    \53\ See letters from Farient, Johnson & Johnson (``J&J''),
Meridian and Pay Governance. One such commenter recommended that we
limit the disclosure solely to the PEO. See letter from Meridian. As
discussed above, however, because Section 14(i) specifically refers
to compensation required to be disclosed under Item 402, and Item
402 applies to a broader group of NEOs than the PEO, we believe the
disclosure should be required about that group.
---------------------------------------------------------------------------

    Finally, we are proposing to require disclosure of the average
compensation actually paid for the remaining NEOs. We believe
disclosure of the relationship of performance to average NEO
compensation would be more meaningful to shareholders than individual
or aggregate NEO compensation. There can be significant variability in
the identity of the registrant's other NEOs over a five-year period.
Moreover, the number of NEOs for whom Item 402 disclosure is required
may fluctuate from year-to-year, which would make an aggregate total
not comparable year over year.\54\ We believe requiring disclosure of
the average compensation would help make the information about these
NEOs more comparable from year to year in spite of the variability in
the composition and number of NEOs who are not the PEO

over the years for which disclosure is required.
---------------------------------------------------------------------------

    \54\ For example, in any year, up to two additional individuals
who were not serving as executive officers at the end of the year
must be included if they otherwise would have been among the most
highly compensated. Additionally, for registrants other than smaller
reporting companies, if more than one person serves as principal
financial officer during the year, each of them must be included in
the Summary Compensation Table.
---------------------------------------------------------------------------

Request for Comment
    17. Should we require that the proposed disclosure cover the NEOs
as defined in Item 402(a)(3) of Regulation S-K, or Item 402(m) for
smaller reporting companies, as proposed? Alternatively, should we
require disclosure for a different group of executives than the NEOs
and, if so, how should such a group be defined? For example, would the
appropriate group be all executive officers as defined in Rule 3b-7
under the Exchange Act? \55\ What additional costs would registrants
incur if they were required to provide information for executives not
currently defined as NEOs?
---------------------------------------------------------------------------

    \55\ 17 CFR 240.3b-7.
---------------------------------------------------------------------------

    18. Should we require registrants to provide the pay-versus-
performance disclosure for NEOs other than the PEO as an average, as
proposed, or should we specify that the disclosure must be made either
in the aggregate (i.e., the sum of all other NEOs' compensation) or on
an individual basis for each NEO? How would these approaches affect,
either positively or negatively, the comparability across registrants?
Alternatively, should registrants provide tabular disclosure of the
executive compensation actually paid on an individual basis for each
NEO but only be required to demonstrate the relationship to financial
performance for the PEO's individual compensation and the average
compensation of the other NEOs? Are there ways other than using an
average for the other NEOs to appropriately account for the possibility
that the size and identity of the group of other NEOs could change each
year? What impact would changes to the group of other NEOs have on the
comparability and usefulness of pay-versus-performance disclosure?
    19. Should we require separate disclosure for the PEO, as proposed?
Should we require, in instances where a registrant had more than one
PEO in a given year, that the amounts for each PEO be added together,
as proposed? Under our executive compensation disclosure rules, if an
individual served in the capacity of PEO during any part of a fiscal
year for which executive compensation disclosure is required,
information about the individual's compensation for the full fiscal
year is required to be disclosed. Should the compensation amount for
the pay-versus-performance disclosure include only compensation
received as the PEO? Should we require separate disclosure for each
individual who served as a PEO during the required time period of
disclosure? Are there alternative approaches we should consider? For
example, where a registrant had more than one PEO in a given year,
should we permit registrants the flexibility to choose instead to
annualize the compensation of the PEO serving at the end of the fiscal
year?
    20. Should we require disclosure for only the PEO? Would
information about the non-PEO NEOs be meaningful or useful for
investors? Would information about the PEO's compensation provide
adequate information to investors about the pay-versus-performance
alignment of other NEOs? Would limiting the scope of disclosure to the
PEO result in meaningful cost savings to registrants, for example by
limiting the extent to which they must perform recalculations of
compensation actually paid (see Section II.D below) or average
calculations? Would limiting the disclosure to the PEO affect the
usefulness of the information for investors?

D. Determination of ``Executive Compensation Actually Paid''

    Exchange Act Section 14(i) does not define the phrase ``executive
compensation actually paid,'' but it does require a ``clear description
of any compensation required to be disclosed by the registrant'' under
Item 402 of Regulation S-K.\56\ We are proposing that ``executive
compensation actually paid'' under proposed Item 402(v) of Regulation
S-K would be total compensation as reported in the Summary Compensation
Table,\57\ modified to adjust the amounts included for pension benefits
and equity awards. We believe using as a starting point the total
compensation that registrants already are required to report in the
Summary Compensation Table and making adjustments to those figures
reduces burdens to registrants and also may enhance comparability of
the proposed disclosure across registrants.\58\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78n(i).
    \57\ Item 402(c) of Regulation S-K. Smaller reporting companies
provide the scaled Summary Compensation Table disclosure specified
in Item 402(n) of Regulation S-K.
    \58\ We note that the pay ratio disclosure required by Section
953(b) of the Dodd-Frank Act is required to be based on total
compensation as provided in the Summary Compensation Table. In light
of the different language in Section 953(a), which references
compensation that is ``actually paid,'' we believe it is appropriate
to adjust the treatment of certain components of total compensation
for the disclosure required by Section 953(a) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Although Exchange Act Section 14(i) refers to compensation required
to be disclosed under Item 402 of Regulation S-K, it also uses the
phrase ``actually paid,'' which differs from disclosure required under
Item 402 of ``compensation awarded to, earned by or paid to'' the
NEOs.\59\ We believe that Congress intended executive compensation
``actually paid'' to be an amount distinct from the total compensation
as reported under Item 402 because it used a term not otherwise
referenced in Item 402. As such, we believe that adjustments to some of
the elements in the Summary Compensation Table are appropriate to
reflect executive compensation that is ``actually paid'' within the
meaning of Section 14(i). Total compensation as reported in the Summary
Compensation Table is the appropriate starting point and, as proposed,
would be included in the table as discussed above, but registrants
would need to adjust some elements of compensation determined according
to the Summary Compensation Table reporting requirements to reflect
amounts ``actually paid'' to the NEOs.
---------------------------------------------------------------------------

    \59\ See 17 CFR 229.402(a)(2).
---------------------------------------------------------------------------

    Some commenters were of the view that we should not prescribe the
specific compensation elements to be covered \60\ or the method of
determination of when equity awards are ``actually paid.'' \61\
Instead, these commenters suggested that registrants be permitted
flexibility to determine which compensation elements should be included
in pay-versus-performance disclosure.\62\ While such an approach could
benefit registrants by permitting them to determine the disclosure they
believe best reflects the relationship between executive pay and the
registrant's performance, we believe that such flexibility would limit
comparability across registrants, making the disclosure less useful to
shareholders.\63\
---------------------------------------------------------------------------

    \60\ See letters from ABA, CEC I, ClearBridge and Davis Polk.
    \61\ See letters from ABA, CEC I, Davis Polk, Protective Life
and Society of Corporate Secretaries and Governance Professionals
(``SCSGP'').
    \62\ See letters from ABA, CEC I and Davis Polk. One commenter
stated that ``[a]n issuer should be able to determine which
compensation elements are based on performance and explain the
rationale for why it included those elements in this analysis, and
excluded others.'' See letter from Davis Polk.
    \63\ See, e.g., letters from AFL-CIO and Council of
Institutional Investors (``CII'').
---------------------------------------------------------------------------

    Other commenters recommended that we limit the compensation
required to be disclosed for purposes of the pay-versus-performance
disclosure to the amounts that are based on the financial performance
of the company.\64\ Some commenters supported particular

definitions of ``actually paid'' covering specific compensation
elements,\65\ such as a measure including only the grant date fair
value for all equity awards that are subject to performance-based
vesting conditions and cash amounts awarded based on the financial
performance of the registrant.\66\ Some commenters suggested that
change in pension value should be excluded from the Summary
Compensation Table calculation in computing the new measure.\67\ Other
commenters, by contrast, recommended that the Commission define
``executive compensation actually paid'' as broadly as possible,
regardless of whether a particular component of compensation is awarded
based on performance.\68\
---------------------------------------------------------------------------

    \64\ See letters from Compensia and Center for Executive
Compensation (Oct. 17, 2014) (``CEC II'').
    \65\ See letters from ClearBridge and Pay Governance.
ClearBridge and Pay Governance recommended using particular
definitions of realizable pay.
    \66\ See letter from Compensia.
    \67\ See letters from Baker Donelson, Frederic W. Cook & Co.,
Inc. (``Cook''), and Meridian.
    \68\ See letter from CII. See also letter AFL-CIO (recommending
that the Commission require disclosure of all forms of compensation
as disclosed in the Summary Compensation Table).
---------------------------------------------------------------------------

    We are aware that a number of registrants have used the concepts of
``realizable pay'' and ``realized pay'' in their proxy statements as a
means of comparing pay and performance.\69\ While there continues to be
work among various compensation constituencies to agree upon a
consistent methodology for calculating ``realizable pay'' or ``realized
pay,'' we are not aware that there has yet been broad agreement upon
any particular formula. Registrants may choose to supplement the
disclosure required by proposed Item 402(v) by providing pay-versus-
performance disclosure based on a measure of ``realized pay,''
``realizable pay,'' or another appropriate measure if they believe it
provides useful information about the relationship between compensation
and registrant performance, provided that the supplemental disclosure
is not misleading and not presented more prominently than the required
disclosure.
---------------------------------------------------------------------------

    \69\ The concepts of ``realized pay'' and ``realizable pay'' are
designed to provide different measures of alignment between a named
executive officer's pay and performance, though there are no
standard definitions of either term. Registrants can tailor the
concepts resulting in amounts which generally differ from the
amounts disclosed in the Summary Compensation Table because they
exclude various types of compensation such as the value of unvested
or unexercised equity awards. We note that some proxy advisory
services have also begun to take into account some version of
``realizable pay'' or ``realized pay'' when making say-on-pay voting
recommendations. See, e.g., Institutional Shareholder Services,
Inc., U.S. Corporate Governance Policy 2014 updates (Nov. 21, 2013).
---------------------------------------------------------------------------

    Because the statute does not define ``executive compensation
actually paid,'' we are using our discretion to define that term for
the purpose of proposed Item 402(v) disclosure.\70\ As indicated above,
while we believe the Summary Compensation Table is the appropriate
starting point, we believe some adjustments are appropriate to give
effect to the statutory language and reflect executive compensation
that is ``actually paid.'' Specifically, as discussed below, we propose
to modify the amounts included for pension benefits and equity
awards.\71\ Moreover, we believe that the phrase ``executive
compensation actually paid'' should include all compensation actually
paid, regardless of whether the compensation is awarded based on the
registrant's financial performance. In considering the relationship
between executive compensation actually paid and the registrant's
financial performance, we believe shareholders should be able to take
into account components of compensation regardless of whether or not
they are awarded based on the registrant's performance.
---------------------------------------------------------------------------

    \70\ Proposed Item 402(v)(2).
    \71\ These terms have the same definitions as in Item 402 of
Regulation S-K.
---------------------------------------------------------------------------

1. Changes in Actuarial Pension Value
    We propose to deduct the change in the actuarial present value of
all defined benefit and pension plans from the Summary Compensation
Table total for purposes of proposed Item 402(v).\72\ This Summary
Compensation Table measure includes the change in actuarial present
value of pension benefits previously accrued based on changes in
interest rates, executive age, and other actuarial inputs and
assumptions, which may introduce significant volatility into this
measure, as well as the actuarial present value of accrued pension
benefits earned by the executive based on an additional year of
service.\73\ Item 402(v) would require, however, that the actuarially
determined service cost for services rendered by the executive during
the applicable year be added back.\74\ Thus, the portion of the total
change in actuarial pension value that results solely from changes in
interest rates, executive's age and other actuarial inputs and
assumptions regarding benefits accrued in previous years would be
excluded.
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    \72\ The change in actuarial present value, generally, reflects
the difference between the actuarial present value of accumulated
benefits at the end of the fiscal year and at the end of the prior
fiscal year. This amount would be deducted only if the value is
positive, and therefore included in the sum reported in column (h)
of the Summary Compensation Table. Where such amount is negative,
and therefore reported only in a footnote to column (h), it should
not be reflected for purposes of proposed Item 402(v). See
Instruction 3 to Item 402(c)(2)(viii). Smaller reporting companies
would not need to deduct this amount because the Summary
Compensation Table requirements for smaller reporting companies do
not require disclosure of the change in actuarial present value.
    \73\ While commenters were divided on which elements of
compensation should be included, some commenters supported
calculating compensation by excluding changes in pension value and
above-market earnings on deferred compensation from the compensation
in the Summary Compensation Table. See letters from Meridian, Baker
Donelson, and Cook.
    \74\ Service cost is defined in FASB ASC Topic 715 as the
actuarial present value of benefits attributed by the pension plan's
benefit formula to services rendered by the employee during the
period. The measurement of service cost reflects certain
assumptions, including future compensation levels to the extent
provided by the pension plan's benefit formula.
---------------------------------------------------------------------------

    We believe that including only the service cost for services
rendered by the executive during the applicable year is a more
appropriate measure for purposes of determining compensation ``actually
paid'' during the applicable year because it is limited to pension
costs for benefits earned during that year. The amount we proposed to
include may be viewed to approximate the value that would be set aside
currently by the registrant to fund the pension benefits payable upon
retirement for the service provided during the applicable year. We
recognize that registrants may differ as to whether they use defined
benefit or defined contribution retirement plans, and this proposed
change to the amount disclosed in the Summary Compensation Table is
intended to provide a more meaningful comparison across registrants of
the amounts ``actually paid'' under both types of plan. For defined
contribution plans, the Summary Compensation Table requires disclosure
of registrant contributions or other allocations to vested and unvested
defined contribution plans for the applicable fiscal year,\75\ which
will also be included in computing compensation actually paid for
purposes of the new disclosure.
---------------------------------------------------------------------------

    \75\ Item 402(c)(2)(ix)(E).
---------------------------------------------------------------------------

    We do not expect that the proposed adjustments will require the
collection of significant new data by registrants, or reveal
significant new information to shareholders relative to the
compensation disclosure that is currently required. The pension's
annual service cost is not required to be reported separately, but can
be calculated based on information reported in, and in footnotes to,
the Pension Benefits Table. We believe that, for purposes of proposed
Item 402(v), using the actuarially determined service

cost rather than the Summary Compensation Table pension measure may
increase comparability of compensation provided through defined benefit
and defined contribution plans because of the variability of the
actuarial inputs and assumptions among different registrants.
2. Earnings on Non-Qualified Deferred Compensation
    Consistent with the current disclosure requirements of the Summary
Compensation Table, the compensation calculation under proposed Item
402(v) would include above-market or preferential earnings on deferred
compensation that is not tax-qualified because these amounts represent
compensation accrued during the relevant year.\76\ Above-market or
preferential earnings on deferred compensation represent amounts
accrued during the year based on the registrant's compensatory decision
to pay an above-market return. Excluding this element from disclosure
of compensation ``actually paid'' until its eventual payout would make
disclosure contingent on an NEO's decision to withdraw or take a
distribution from his or her account, rather than the registrant's
compensatory decision to pay the above-market return. Such an approach
would be inconsistent with the Summary Compensation Table disclosure of
the underlying deferred amounts when earned,\77\ which we would carry
forward to proposed Item 402(v), and could result in the relationship
of this amount to company performance never being disclosed.
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    \76\ These earnings are reported pursuant to Item
402(c)(2)(vii), or, for smaller reporting companies, Item
402(n)(2)(viii). These earnings, like the aggregate change in
defined benefit plan actuarial present value also reported pursuant
to Item 402(c)(2)(viii), or Item 402(n)(2)(viii), are excluded for
purposes of a registrant's NEO determination pursuant to Instruction
1 to Item 402(a)(3), or, for smaller reporting companies,
Instruction 1 to Item 402(n)(2)(viii). In adopting this Instruction,
the Commission stated it was appropriate to exclude these items
because their amounts generally are not determined by the
Compensation Committee. Rather, they are ``compensation elements
that principally reflect executives' decisions to defer compensation
and wealth accumulation in pension plans, or are unduly influenced
by age or years of service.'' See Executive Compensation and Related
Person Disclosure, Release 33-8732A (Aug. 29, 2006) [71 FR 53158
(Sept. 8, 2006)], at Section II.C.6 (``Executive Compensation
Release''). These reasons, however, do not seem relevant to a
determination of whether such compensation is ``actually paid'' for
purposes of the disclosure mandated by Section 14(i).
    \77\ Instruction 4 to Item 402(c), or, for small reporting
companies, Instruction 4 to Item 402(n).
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3. Equity Awards
    We are proposing that equity awards be considered actually paid on
the date of vesting and valued at fair value on that date, rather than
fair value on the date of grant as required in the Summary Compensation
Table.\78\ Before vesting, an executive does not have an unconditional
right to an equity award. For example, the terms of both options and
restricted stock awards typically provide for forfeiture of the award
if the executive leaves the registrant's employment before the vesting
date or if specified performance criteria are not met. Accordingly, we
do not believe that an option or other equity award should be
considered ``actually paid'' for purposes of this disclosure before the
applicable vesting conditions are satisfied. Satisfaction of these
conditions, which are determined by the registrant, can be viewed as
representing payment by the registrant. Moreover, using vesting-date
valuations will result in a compensation measure that includes, upon
the vesting date, the grant-date value of equity awards plus or minus
any change in the value of equity awards between the grant and vesting
date. Such changes in the value of equity grants after the grant date
represent a direct channel, and one of the primary means, through which
pay is linked to registrant performance.
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    \78\ Grant date fair value disclosure reflects compensation
committee decisions during the relevant fiscal year relating to
equity awards. See Proxy Disclosure Enhancements, Release No. 33-
9089 (Dec. 16, 2009) at Section II.A.2 [74 FR 68334] (Dec. 23,
2009).
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    We do not believe that an award requiring exercise should be
considered actually paid only upon its exercise, because once the award
is vested the executive can control how and when the award is
monetized, and thus could influence pay-versus-performance disclosure
by controlling the fiscal year in which the executive receives the
compensation. Changes in the fair value of the award after vesting
generally reflect investment decisions made by the executive rather
than compensation decisions made by the registrant.
    The value of stock awards upon vesting is disclosed in the Option
Exercises and Stock Vested Table.\79\ Registrants are not currently
required to report the value of option awards upon vesting if they are
not exercised. However, registrants can apply existing models and
methodologies to compute these values. Also, it is possible for
shareholders to make reasonable estimates of these vesting-date fair
values of options based on current disclosures.
---------------------------------------------------------------------------

    \79\ See Item 402(g)(2)(v). Smaller reporting companies are not
required to provide this table.
---------------------------------------------------------------------------

    In particular, the terms of unexercised option awards in a given
year, including their exercise prices and expiration dates, are
required to be disclosed (together with information about other
outstanding awards) in the Outstanding Equity Awards at Fiscal Year-End
Table.\80\ Information about the valuation assumptions used by the
registrant to calculate the grant-date value of option awards can be
found in footnotes to the Summary Compensation Table (which may refer
to disclosures made on Form 10-K) for the year corresponding to the
grant date.\81\ Disclosures about the vesting conditions that applied
to the awards can be used to determine which of the option awards are
newly vested.\82\ The translation of the reported terms of these
options into their fair values at vesting requires the choice of a
valuation methodology and the use of public data and reasonable
assumptions (potentially with reference to the registrant's disclosed
grant-date valuation assumptions) to obtain the additional inputs
required for option valuation at vesting date. Estimates thus computed
by shareholders could differ from estimates computed by the registrant
and, as mentioned above, current disclosure rules do not require
registrants to compute and disclose their own estimates of these
values.
---------------------------------------------------------------------------

    \80\ See Item 402(f)(2)(v) and (vi). For smaller reporting
companies, see Item 402(p)(2)(v) and (vi). Some options may be
exercised in the same year as vesting. Whether an option award that
was exercised had vested in the same year can be determined by
comparing the Outstanding Equity Awards at Fiscal Year-End Table per
Item 402(f) or, for smaller reporting companies, Item 402(p), to the
same table for the prior year, and identifying as exercised options
those that are no longer reported as outstanding. In such cases, the
terms of these awards can be determined from the Outstanding Equity
Awards at Fiscal Year-End Table and related footnotes for the prior
year or, for options granted in the same year as exercise (which
will not appear in disclosures for the prior year) in footnotes to
the Summary Compensation Table for the same year.
    \81\ See Instruction 1 to Item 402(c)(2)(v) and (vi). For
smaller reporting companies, see Instruction 1 to Item 402(n)(2)(v)
and (vi).
    \82\ Registrants are required to describe the material
conditions of awards, including a general description of the formula
or criteria to be applied in determining the amounts payable, and
the vesting schedule, in the narrative disclosure to the Summary
Compensation Table and Grants of Plan-Based Awards table per Item
402(e) in the year in which an option award is granted. Smaller
reporting companies are required to describe the material conditions
of awards in the narrative disclosure to the Summary Compensation
Table per Item 402(o) in the year in which an option award is
granted. The vesting date of options held at fiscal-year end must be
disclosed by footnote to the Outstanding Equity Awards at Fiscal-
Year End table required by Item 402(f), or, for smaller reporting
companies, Item 402(p), of Regulation S-K.
---------------------------------------------------------------------------

    Accordingly, for purposes of proposed Item 402(v), the amounts
reported pursuant to Items 402(c)(2)(v) and (vi) would be subtracted
from total compensation reported in the Summary

Compensation Table, and the following would be added in their place:
\83\
---------------------------------------------------------------------------

    \83\ Proposed Item 402(v)(3) would require registrants to
disclose in a footnote to the table required under paragraph (v)(1),
the total compensation amount reported in the Summary Compensation
Table for the covered fiscal year for each NEO as provided in
paragraph (c)(2)(x), or, for smaller reporting companies, paragraph
(n)(2)(x), and the individual amounts deducted from, and
modifications to, the amounts reported in the Summary Compensation
Table in generating the amounts disclosed pursuant to Item 402(v)
for the PEO(s). For NEOs other than the PEO, proposed Item 402(v)(3)
would require disclosure of these amounts as averages.
---------------------------------------------------------------------------

     For awards of stock, that vested in the applicable year,
the fair value at vesting date, computed in accordance with the fair
value guidance in FASB ASC Topic 718; and
     For awards of options with or without tandem stock
appreciation rights (``SARs'') that vested in the applicable year, the
fair value at vesting date, computed in accordance with the fair value
guidance in FASB ASC Topic 718. As proposed, a registrant would be
required to disclose vesting date valuation assumptions if they are
materially different from those disclosed in its financial statements
as of the grant date.

We believe shareholders may be interested in vesting date valuation
assumptions to the extent they believe that changes in the value of
equity grants after the grant date are a primary channel through which
pay is linked to performance. We believe that requiring disclosure of
vesting date valuation assumptions would make these computations
readily accessible to shareholders, which may be useful to shareholders
to the extent they are interested in computing slightly different
measures or using parts of the computations for other purposes.
Further, if during the last completed fiscal year the registrant
adjusted or amended the exercise price of previously vested options or
SARs held by an NEO, whether through amendment, cancellation or
replacement grants, or any other means, or otherwise has materially
modified such awards, proposed Item 402(v) would require the registrant
to include the incremental fair value, computed as the excess fair
value of the modified award over the fair value of the original award
upon vesting of the modified award. If the modified award is subject to
multiple vesting dates, the pro rata incremental fair value would be
determined and included in compensation actually paid at each vesting
date.

    For example, a registrant grants an option (``original award'') for
1,000 shares of common stock with an exercise price of $20 per share.
By its terms, the original award vests upon completion of a two-year
service period. Upon vesting, the then fair value of the original award
is included in compensation actually paid. After the original award
vests, assume the registrant modifies its terms to reduce the exercise
price to $15 per share with 50% vesting immediately and 50% vesting
upon completion of another two-year service period (``modified
award''). The incremental fair value that is included in compensation
actually paid will be computed at each of the modified award's two
vesting dates based on the then excess fair value of the ratable 500
shares using the modified award terms compared with the original award
terms. In this example, compensation actually paid would be determined
three times, as the full fair value of the original award at its
vesting and the pro rata incremental fair value amounts at each of the
two vesting dates of the modified award.\84\
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    \84\ See proposed Instruction 1 to Item 402(v). Note that if the
original award had been modified before it vested, the compensation
actually paid would be determined only twice, as the pro rata fair
value of the modified award at each of its two vesting dates.
---------------------------------------------------------------------------

Request for Comment
    21. Does our proposed definition appropriately capture the concept
of ``executive compensation actually paid?'' Why or why not? Are there
elements of compensation excluded by our proposed definition that
should not be? Alternatively, does the proposed definition include any
items that should be excluded? If so, which ones and why?
    22. Our proposal is designed, in part, to enhance comparability
across registrants. Is comparability across registrants relevant or
necessary in determining which compensation elements should be covered
by the pay-versus-performance disclosure? Why or why not?
    23. Under our proposed approach, the disclosure may not necessarily
align a particular executive's compensation with the time period during
which the registrant's performance may be attributed to the executive.
For example, this may be the case where a turn-around specialist is
hired and provided a substantial incentive payment up front in order to
assume the task of improving the company's performance. Should our
approach account for this? If so, should we require this to be
addressed in supplemental disclosure? Are there other approaches we
should consider?
    24. Instead of our proposal, should we permit a principles-based
approach that would allow registrants to determine which elements of
compensation to include, so long as they clearly disclosed how the
amount was calculated? Why or why not? How should such a provision be
structured? What requirements should we include?
    25. Are there alternative methods of determining which compensation
is relevant to pay-versus-performance disclosure that we should
consider?
    26. Instead of our proposal, should we require only the use of the
total compensation reported in the Summary Compensation Table and
permit registrants to supplement this disclosure as they determine best
reflects how their compensation relates to company performance? How
would this approach affect the usefulness, comparability and cost of
the pay-versus-performance disclosure?
    27. Does our proposal to require only the actuarial present value
of benefits attributable to services rendered during the applicable
fiscal year, rather than the change in actuarial present value of
pension benefits that is required by the Summary Compensation Table,
appropriately reflect compensation ``actually paid'' to NEOs during
that year for purposes of the pay-versus-performance disclosure
mandated by Section 14(i)?
    28. Is our proposal to include in the Item 402(v) calculation only
above-market or preferential earnings on deferred compensation that is
not tax-qualified appropriate? Should the calculation instead include
all earnings on deferred compensation that are not tax-qualified rather
than just the above-market portion? Should the calculation only include
the above-market portion once any vesting conditions applicable to
those earnings have been satisfied?
    29. Should we value equity awards at vesting date fair value as
proposed? Should we instead value equity awards at grant date fair
value as currently required by Item 402(c)(2)(v) and (vi) or fair value
at some other point in time? If so, why? Should we require disclosure
of vesting date valuation assumptions if they are materially different
from those disclosed in a registrant's financial statements as of the
grant date, as proposed? Would the disclosure of these assumptions
provide meaningful information to shareholders?
    30. What concerns, if any, are presented if we require equity
awards to be valued at vesting date fair value as opposed to grant date
fair value? Would any concerns be mitigated by the inclusion in the
table of the total compensation amount as provided in the Summary
Compensation Table?

    31. Should any other components of compensation, such as registrant
contributions to defined contribution plans, also be included only
after any applicable vesting conditions have been satisfied?
    32. For equity awards that require exercise, is our proposal to
consider them ``actually paid'' when vested the appropriate point in
time for purposes of Item 402(v) disclosure? If not, please explain.
Should we instead require that for an award that requires exercise to
be considered ``actually paid,'' it must also be exercisable, making
the valuation date the date on which the award is both vested and
exercisable? Is there an alternative approach we should consider?
    33. Are there other specific elements of compensation in the
Summary Compensation Table that we should exclude or modify for
purposes of the pay-versus-performance disclosure called for under
proposed Item 402(v)?

E. Measure of Performance

    We are proposing to require that registrants use TSR (as defined in
Item 201(e) of Regulation S-K) as the measure of financial performance
of the registrant for purposes of pay-versus-performance
disclosure.\85\ Exchange Act Section 14(i) does not specify how
registrant financial performance is to be measured, although the
language in the statute requires financial performance to take into
account any change in the value of the shares of stock and dividends of
the registrant and any distributions of the registrant. We believe
using TSR as the measure of financial performance is consistent with
this requirement and we received several comments that supported this
approach.\86\
---------------------------------------------------------------------------

    \85\ Item 201(e) of Regulation S-K, which prescribes disclosure
for the stock performance graph included in the annual report to
security holders required by Rules 14a-3 and 14c-3, provides that
cumulative total shareholder return is calculated by ``dividing the
(i) sum of (A) the cumulative amount of dividends for the
measurement period, assuming dividend reinvestment, and (B) the
difference between the registrant's share price at the end and the
beginning of the measurement period; by (ii) the share price at the
beginning of the measurement period.'' 17 CFR 229.201(e).
    \86\ See letters from ClearBridge, Compensia, Farient, Meridian
and MDU.
---------------------------------------------------------------------------

    Several commenters in the pre-proposal stage indicated that
absolute company performance may not be a sufficient basis for
comparison and advocated disclosure of registrant performance relative
to that of a peer group.\87\ Consistent with these suggestions, we also
are proposing to require registrants, other than smaller reporting
companies, to disclose peer group total shareholder return, using
either the same peer group used for purposes of Item 201(e) of
Regulation S-K,\88\ or, a peer group used in the CD&A for purposes of
disclosing registrants' compensation benchmarking practices.\89\ If the
peer group is not a published industry or line-of-business index, the
registrant would be required to disclose the identity of the issuers. A
registrant that has previously disclosed the composition of issuers in
its peer group in prior filings with the Commission would be permitted
to comply with the proposed requirement by incorporation by reference
to those filings. We believe this would avoid the potential for
duplicative disclosure.
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    \87\ See letters from Farient, J&J, MDU, Pay Governance,
Shareholder Value Advisors.
    \88\ 17 CFR 229.201(e)(1)(ii).
    \89\ See Item 402(b)(xiv) of Regulation S-K (17 CFR
229.402(b)(xiv)). We note that smaller reporting companies are not
subject to Item 201(e) and that requiring disclosure of peer group
total shareholder return would require smaller reporting companies
to collect and disclose information that they are not currently
required to disclose.
---------------------------------------------------------------------------

    Requiring registrants to use a consistently calculated measure,
such as TSR, should increase the comparability of pay-versus-
performance disclosure across registrants. Using TSR also would provide
a measure of financial performance that is objectively determinable
from the share price of the registrant and not open to subjective
determinations of performance. In addition, using a measure that
registrants are already required to determine and disclose, and with
which shareholders already are familiar, would reduce the burden of
providing and analyzing pay-versus-performance disclosure as compared
to requiring registrants to calculate and shareholders to review a new
measure of financial performance.
    Some commenters suggested permitting registrants to choose the
performance measure best-suited for their company.\90\ One commenter
suggested that registrants should be required to present additional
performance measures.\91\ We note that, as with other mandated
disclosures, registrants would be permitted to provide supplemental
measures of financial performance so long as any additional disclosure
is clearly identified, not misleading and not presented with greater
prominence than the required disclosure.
---------------------------------------------------------------------------

    \90\ See letters from ABA, CEC I, Davis Polk, Protective Life
and SCSGP.
    \91\ See letter from Public Citizen (recommending that
registrants be required to present the relationship of compensation
with four performance measures: Total shareholder return, return on
assets, return on equity, and the growth in earnings per share).
---------------------------------------------------------------------------

Request for Comment
    34. Should we require registrants to use TSR as the performance
measure? Would the comparability across registrants resulting from this
proposal benefit shareholders? Would prescribing the use of TSR hinder
registrants from providing meaningful disclosure about the relationship
between executive pay and financial performance? Would requiring the
use of TSR result in shareholders or management focusing too much on
this single measure of performance or emphasizing short-term stock
price improvement over the creation of long-term shareholder value? If
so, are there ways we could mitigate that risk?
    35. Should we allow registrants flexibility in choosing the
relevant measure of performance they are required to disclose? Besides
TSR, what other measures of financial performance take into account any
change in the value of the shares of stock and dividends and
distributions of the registrant, as required by the statute? Are there
metrics other than TSR that measure a company's performance and meet
the requirements of the statute? If so, would they result in
disclosures that are more or less meaningful than TSR? How is corporate
performance measured today? How is this information incorporated into
investment decisions?
    36. If companies do not currently use TSR as a factor in
determining executive compensation, could requiring disclosure of this
relationship cause companies to change their compensation strategy to
focus on this factor? If so, what would be the effect?
    37. Does TSR, standing alone, provide sufficient information about
a registrant's performance such that a registrant would provide only
the information that would be mandated by this rule? Will registrants
opt to provide additional information based on their own calculations
or metrics to provide additional context for investors to consider the
alignment of pay versus performance?
    38. Should we permit voluntary use of other measures of performance
in addition to TSR, as proposed? Should we instead include specific
requirements relating to the use of alternative performance measures in
the proposed rules?
    39. Should we require disclosure of TSR on an absolute basis, as
well as disclosure of peer group TSR, as proposed? Why or why not? Are
there other parameters we should consider

requiring registrants to implement for the selection of peer groups?
    40. Should we require disclosure about the registrant's selection
of the peer group? For example, if a registrant using a peer group
changes its peer group from one used in the previous fiscal year,
should we require a brief narrative explaining the reasons for the
change? \92\
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    \92\ See, e.g., Item 201(e)(4) of Regulation S-K, which provides
that if a registrant chooses a different index for the stock
performance graph than the one used in the previous fiscal year,
then the registrant is required to explain the reason for the change
and is also required to compare total return with both the old and
the new index.
---------------------------------------------------------------------------

    41. Our proposal requires a registrant to use the same peer group
used for purposes of Item 201(e) or the CD&A. Should a registrant be
permitted to choose between these two options, or should we prescribe
which peer group should be used? Why or why not? Should a registrant be
permitted to choose a peer group different from that used for purposes
of Item 201(e) or its CD&A? Please explain. Should there be any
restrictions on how registrants select their peer groups?

F. Time Period Covered

    Section 14(i) does not specify the time period that the pay-versus-
performance disclosure must cover. Several commenters expressed concern
that meaningful pay-versus-performance disclosure would need to address
the time periods over which pay and performance are evaluated.\93\
Commenters recommended a variety of solutions to provide meaningful
disclosure, recommending varying types of disclosure over varying time
periods.\94\
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    \93\ See, e.g., letters from ClearBridge, Pay Governance and
SCSGP.
    \94\ See letters from Brian Foley & Company, ClearBridge and Pay
Governance (supporting a one-year and a three-year aggregate
disclosure to capture annual and long-term compensation); J&J
(including a copy of their proxy materials in which they disclosed
their PEO's annual compensation over five years in relation to total
shareholder return and provided a separate table showing aggregate
compensation over a three-year period relative to a peer group); and
from Baker Donelson, Cook, Meridian, and MDU (supporting a five-year
time period).
---------------------------------------------------------------------------

    For registrants other than smaller reporting companies, we are
proposing to require registrants to provide the pay-versus-performance
disclosure for the five most recently completed fiscal years.\95\ As
noted above, several commenters supported a disclosure period of five
years.\96\ While the Summary Compensation Table required by Item 402(c)
of Regulation S-K requires compensation disclosure for each of the last
three completed fiscal years, we note that the stock performance graph
required by Item 201(e) of Regulation S-K requires disclosure for the
previous five fiscal years, although it does not include any
compensation information. We believe that requiring disclosure of the
relationship between executive compensation and registrant performance
over the five most recently completed fiscal years is appropriate
because it provides a meaningful period over which a relationship
between annual measures of pay and performance over time can be
evaluated.\97\
---------------------------------------------------------------------------

    \95\ See proposed Item 402(v)(2) of Regulation S-K.
    \96\ See letters from Baker Donelson, Frederic Cook, MDU (noting
that a five-year measurement period moderates annual volatility and
leads to more balanced comparisons), and Meridian.
    \97\ We are proposing to require smaller reporting companies to
provide the disclosure over three years because they are not subject
to Item 201(e) and provide Summary Compensation Table disclosure for
two completed fiscal years. See Item 402(n) of Regulation S-K.
---------------------------------------------------------------------------

    Smaller reporting companies would be required to provide the
disclosure for the three most recently completed fiscal years.\98\ Our
executive compensation rules require smaller reporting companies to
provide disclosure for only the last two completed fiscal years,\99\
but we believe that requiring pay-versus-performance disclosure for
three fiscal years, instead of two, provides more useful information
from which investors can evaluate the relationship between a
registrant's executive compensation actually paid and its financial
performance, and provides a longer time horizon over which to observe
any potential trends. We also are proposing to provide a transition
period for registrants to provide the disclosure. Existing smaller
reporting companies would be required to provide the disclosure for
only the last two fiscal years in the first applicable filing after the
rules become effective. In subsequent years such companies would be
required to provide disclosure for the last three fiscal years.\100\
Any other registrants would be required to provide the proposed Item
402(v) disclosure for three fiscal years, instead of five, in the first
applicable filing after the rules become effective, and provide
disclosure for an additional year in each of the two subsequent annual
proxy filings where disclosure is required.
---------------------------------------------------------------------------

    \98\ See proposed Instruction 8 to Item 402(v)(2) of Regulation
S-K.
    \99\ See Item 402(n) of Regulation S-K.
    \100\ See proposed Instruction 1 to Item 402(v).
---------------------------------------------------------------------------

    We are also proposing that a registrant provide pay-versus-
performance disclosure only for years that it was a reporting company
pursuant to Section 13(a) or Section 15(d) of the Exchange Act. Thus, a
newly-reporting registrant would be required to provide pay-versus-
performance disclosure for only the most recently ended fiscal year in
any proxy statement or information statement in which executive
compensation disclosure pursuant to Item 402 of Regulation S-K is
required in its first year as a reporting company, and in the two most
recently completed fiscal years in any proxy statement or information
statement in which executive compensation disclosure pursuant to Item
402 of Regulation S-K is required in its second year as a reporting
company. This treatment is consistent with the phase-in period for new
reporting companies in their Summary Compensation Table
disclosure.\101\
---------------------------------------------------------------------------

    \101\ See Instruction 1 to Item 402(c) of Regulation S-K.
Similarly, Item 201(e)(2) provides that if the registrant has been
registered under Section 12 for a shorter period of time than the
prescribed measurement period, the period covered by the performance
graph may correspond to that time period.
---------------------------------------------------------------------------

Request for Comment
    42. Does a five-year disclosure period (for registrants other than
smaller reporting companies) and a three-year disclosure period (for
smaller reporting companies), as proposed, provide meaningful pay-
versus-performance disclosure? Should the timeframes be shorter or
longer? For example, should we require only three years of disclosure
for all registrants consistent with the time period required by the
Summary Compensation Table for registrants other than smaller reporting
companies? What impact would a different time period have on the
disclosure and its usefulness to shareholders?
    43. Should we provide the proposed transition period for existing
registrants? Why or why not? Should the transition period be shorter or
longer? Does it depend on the type of registrant?
    44. Should we permit registrants voluntarily to include fiscal
years beyond the five-year period, as proposed? Please explain why or
why not. Is there a risk that some registrants may choose the time
period which is most favorable for performance? How could we mitigate
this risk?
    45. Is the proposed phase-in for new reporting companies
appropriate? Is sufficient information readily available for these
companies to provide adequate pay-versus-performance disclosure in any
proxy statements or information statements requiring Item 402
disclosure in their first two years as a reporting company? If not,
what are the costs of

developing this information? Would pay-versus-performance disclosure
for only the most recently completed fiscal year in the first proxy
statement filed by a newly-reporting company, as proposed, provide
sufficient and meaningful information for shareholders to evaluate the
executive compensation actually paid as compared to the registrant's
financial performance, given the limited time period covered? Does the
importance of the information to shareholders justify the costs of
preparing the disclosure without a phase-in period?
    46. Should the pay-versus-performance disclosure be required to use
annual data from the five most recently completed fiscal years, as
proposed, or aggregated data for the five most recently completed
fiscal years? If the years are aggregated, should the relationship
between pay and performance be demonstrated across peers because it can
no longer be demonstrated over time? Alternatively, should the pay-
versus-performance comparison be presented for both the last completed
fiscal year and in aggregate for the five most recently completed
fiscal years? If so, please explain why a different period and
different level of aggregation than proposed would be more informative
to shareholders or otherwise more appropriate.
    47. Are there other transition issues or accommodations that we
should consider? For example, should emerging growth companies\102\
that are statutorily excluded from the requirements of Section 14(i) be
provided the same phase-in period of pay-versus-performance disclosure
applicable to other registrants when they first become subject to the
proposed requirement to provide five fiscal years of pay-versus-
performance disclosure?
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    \102\ Section 102(a)(2) of the JOBS Act excludes ``emerging
growth companies'' from the requirements of Section 14(i). In
accordance with this provision, we are not proposing to require an
emerging growth company to provide pay-versus-performance
disclosure.
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G. Clear Description

    Exchange Act Section 14(i) requires a ``clear description'' of the
compensation disclosure required by Item 402 of Regulation S-K. We
believe the requirement in Item 402(a)(2) of Regulation S-K \103\ for
``clear, concise and understandable disclosure'' and the Plain English
principles in Exchange Act Rules 13a-20 \104\ and 15d-20 \105\ give
effect to the requirement in new Section 14(i) of the Exchange Act for
clear compensation disclosure. When the current compensation disclosure
requirements were adopted, we also amended Exchange Act Rules 13a-20
and 15d-20 so that the Plain English principles would apply to the
amended compensation disclosure.\106\ In adopting the Plain English
requirement for compensation disclosure, we stated, ``clearer, more
concise presentation of executive and director compensation . . . can
facilitate more informed investing and voting decisions in the face of
complex information about these important areas.'' \107\ We think this
statement applies equally to pay-versus-performance disclosure. In
addition, we noted that the Plain English principles applicable to
compensation disclosure would permit registrants to ``include tables or
other design elements, so long as the design is not misleading and the
required information is clear, understandable, consistent with
applicable disclosure requirements, consistent with any other included
information, and not misleading.'' \108\ As a result, registrants are
permitted to provide additional information beyond what is specifically
required by our rules so long as the information is not misleading and
does not obscure the required information.
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    \103\ 17 CFR 229.402(a)(2).
    \104\ 17 CFR 240.13a-20.
    \105\ 17 CFR 240.15d-20.
    \106\ See Executive Compensation Release, supra note 76.
    \107\ Id.
    \108\ Id.
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Request for Comment
    48. Are there changes to our rules that are necessary or
appropriate in order to give effect to the requirement in Section 14(i)
of the Exchange Act for a clear description of the Item 402(v)
compensation disclosure?
    49. Is it appropriate to apply the Plain English principles to the
pay-versus-performance disclosure? If not, please explain why.

H. Smaller Reporting Companies

    As proposed, smaller reporting companies as defined in Item
10(f)(1) of Regulation S-K \109\ would be required to provide Item
402(v) disclosure. In an effort to minimize the reporting costs for
these registrants, consistent with the Commission's treatment of
smaller reporting companies in other areas (e.g., executive
compensation), these companies would be permitted to provide scaled
disclosure, as follows:
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    \109\ 17 CFR 229.10(f)(1).
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     First, smaller reporting companies would be required to
present Item 402(v) disclosure for the three most recently completed
fiscal years, as opposed to the five most recently completed fiscal
years required for other registrants. This is consistent with our
general approach to scaling the requirements for executive compensation
disclosure provided by smaller reporting companies.
     Second, smaller reporting companies would not be required
to disclose amounts related to pensions for purposes of disclosing
executive compensation actually paid because they are subject to scaled
compensation disclosure that does not include pension plans.
     Finally, smaller reporting companies would not be required
to present a peer group TSR. Smaller reporting companies are not
subject to Item 201(e) and therefore are not otherwise required to
present the TSR of a peer group, and they are not required to present a
CD&A.

In addition, as proposed, the rule includes a transition period that
would permit an existing smaller reporting company to provide two years
of data, instead of three, in the first applicable filing after the
rules become effective, and three years of data in subsequent proxy
filings.
    Smaller reporting companies are only required to provide Summary
Compensation Table disclosure for the two most recently completed
fiscal years. While the time period applicable for the proposed
disclosure is longer than what smaller reporting companies currently
are required to disclose in the Summary Compensation Table, we note
that the information required to make the pay-versus-performance
calculations for these additional years would be available in
disclosures from prior years.
    As proposed, smaller reporting companies would be required to
provide the disclosure in the prescribed table in XBRL format, but we
are proposing a phase-in under which smaller reporting companies would
be required to provide the data in XBRL beginning with the third filing
in which it provides pay-versus-performance disclosure.\110\ This
phase-in is intended to permit smaller reporting companies to plan and
implement their data tagging with the benefit of the experience of
other registrants that do not have a phase-in.

It also will give them a longer period of time over which to spread
first-year data tagging costs. While we recognize that requiring this
disclosure to be provided in interactive data format would impose
additional costs and burdens on these companies, beyond what they
currently incur in producing interactive data for other purposes in
other filings, we anticipate that these expenses would be relatively
lower than what they currently incur in producing interactive data for
other purposes given the limited disclosures that would be required to
be tagged.
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    \110\ Providing a phase-in for smaller reporting companies is
consistent with how we have previously implemented certain new
disclosure requirements applicable to these companies. See, e.g.,
Interactive Data to Improve Financial Reporting, Release No. 33-9002
(Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)]; Shareholder Approval
of Executive Compensation and Golden Parachute Compensation, Release
No. 33-9178 (Jan. 25, 2011) [76 FR 6010 (Feb. 2, 2011)].
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    We do not expect the compliance burden associated with providing
this disclosure to be substantial given that much of the information
required by the proposed rule is derived from information currently
required under existing Regulation S-K. We also note that smaller
reporting companies are subject to the say-on-pay advisory votes
required under Exchange Act Rule 14a-21,\111\ which the pay-versus-
performance disclosure required under proposed Item 402(v) is intended
to facilitate. We believe that shareholders of smaller reporting
companies may benefit from having the proposed pay-versus-performance
disclosure when casting their say-on-pay advisory votes and that such
disclosure can be provided without imposing undue costs on smaller
registrants.
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    \111\ See Release No. 33-9178, supra note 10 (``We do not
believe that smaller reporting companies should be permanently
exempt from the say-on-pay vote, frequency of say-on-pay votes and
golden parachute and vote because we believe investors have the same
interest in voting on the compensation of smaller reporting
companies and in clear and simple disclosure of golden parachute
compensation in connection with mergers and similar transactions as
they have for other issuers.'').
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Request for Comment
    50. Would the proposed scaled disclosure requirements for smaller
reporting companies provide meaningful disclosure to investors without
imposing undue costs and burdens on these companies? Are there ways we
could modify the proposed disclosure requirements to reduce the costs
and still provide useful information for shareholders? For example,
should we require only a two-year disclosure period for smaller
reporting companies (similar to the timeframe for which they are
required to provide disclosure in the Summary Compensation Table)?
    51. Should we exempt smaller reporting companies from the proposed
pay-versus-performance disclosure requirements? Why or why not? What
impact, if any, would the absence of the proposed disclosure have on
the ability of shareholders of smaller reporting companies to
effectively exercise of their say-on-pay voting rights? Would
shareholders be able to assess the relationship between the company's
financial performance and the compensation paid absent the disclosure
required under proposed Item 402(v)? Would the proposed disclosure be
more or less meaningful to shareholders in the absence of CD&A and Item
201(e) performance graph disclosure? What are the burdens on smaller
reporting companies of requiring pay-versus-performance disclosure and
would the benefits of requiring this disclosure for smaller reporting
companies justify the burdens? If not, please explain why not. Should
registrants that exit smaller reporting company status be provided the
same phase-in period applicable to other registrants when they first
become subject to the proposed requirement to provide five fiscal years
of pay-versus-performance disclosure?

III. General Request for Comments

    We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on the amendments, and any suggestions for additional changes. With
respect to any comments, we note that they are of greatest assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments and by alternatives
to our proposals where appropriate.
    In addition, we request data to quantify the costs and the value of
the benefits described in this release. We seek estimates of these
costs and benefits, as well as any costs and benefits not already
defined, that may result from the adoption of these proposed
amendments. We also request qualitative feedback on the nature of the
benefits and costs we have identified and any benefits and costs we may
have overlooked.
    To assist in our consideration of these costs and benefits, we
specifically request comment on the following:
    52. Would there be any significant transition costs imposed on
registrants as a result of the proposal, if adopted? Please be detailed
and provide quantitative data or support, as practicable.
    53. Have we struck the appropriate balance between prescribing
rules to satisfy the requirements of Exchange Act Section 14(i) and
allowing registrants to disclose pay-versus-performance information
most relevant to shareholders?
    54. Are there alternatives to the proposals we should consider that
would satisfy the requirements of Section 14(i) of the Exchange Act?

IV. Economic Analysis

A. Background

    As discussed above, Section 953(a) of the Dodd-Frank Act added
Section 14(i) to the Exchange Act, directing the Commission to require
registrants to disclose in any proxy or consent solicitation material
for an annual meeting of the shareholders the relationship between
executive compensation actually paid and the financial performance of
the registrant. Section 14(i) of the Exchange Act does not define key
terms, such as ``executive compensation actually paid'' or issuer
``financial performance,'' or prescribe a specific format for this
disclosure. As a result, we apply discretion in our proposed
implementation of the provision.
    New Item 402(v) proposed by the Commission to satisfy the mandate
of Section 14(i) requires the disclosure of information that is largely
already required to be reported under current disclosure rules, but
that is currently not computed or presented in the way the proposal
would require. The proposal requires registrants to present the values
of prescribed measures of executive compensation and performance for
each of their five most recently completed fiscal years (three years
for smaller reporting companies) in a standardized table. Registrants
would be required to provide a clear description of the relationship
between these measures, but would be allowed to choose the format used
to present the relationship, such as a graph or narrative description.
The proposal would also allow registrants to supplement the required
elements of the disclosure with additional measures or additional years
of data. The disclosure would be required to be provided in tagged data
format using XBRL.
    The proposed amendments would require that the compensation covered
by the disclosure be ``executive compensation actually paid.''
Registrants would also be required to include the Summary Compensation
Table measure of total compensation in the tabular disclosure for
purposes of comparison. The proposal defines executive compensation