\182\ See letters from Celanese; CCMC 2015; Cook; and NACD 2015.
    \183\ See letter from Cook.
    \184\ See letter from Farient.
    \185\ See letter from SVA.
    \186\ See letters from Hodak; Farient; Infinite; TCA 2015; and
TCA 2022.
    \187\ See letter from CAP; PG 2015; and PG 2022.
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    A number of commenters opposed the reporting of equity as of the
vesting date.\188\ Some of these commenters noted that vesting date
reporting of equity would lead to a timing misalignment between actual
performance and executive compensation actually paid, as the
performance that ``earned'' the equity would have occurred between the
grant date and the vesting date, but only the total amounts of equity
would be reported on the vesting date.\189\ However, two commenters,
who acknowledged the misalignment, indicated that there was no other
approach that would eliminate all misalignment.\190\
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    \188\ See letters from CAP; Celanese; CCMC 2015; Cook; FSR;
McGuireWoods; NACCO; NACD 2015; NAM 2022; Ross; SVA; and TIAA. But
see Hermes (expressly supporting vesting date reporting of equity).
    \189\ See letters from CEC 2015; Celanese; CCMC 2015; Cook;
Faulkner; FSR; Hyster-Yale; NACCO; PG 2015; Pearl; Ross; SBA-FL;
SVA; TIAA; TCA 2015; and WorldatWork.
    \190\ See letters from Aon HCS and Teamsters.
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    Several commenters requested clarifications about the proposed
approach. A few commenters expressed that reporting equity on the
vesting date creates uncertainty in application, and either sought
clarification regarding the vesting date or the meaning of when ``all
applicable vesting conditions were satisfied.'' \191\ One commenter
suggested that an award should be considered vested on the date the
executive is able to monetize the award,\192\ while another suggested
that awards should only be considered ``actually paid'' when
restrictions on equity lapse, even if already vested.\193\ Two
commenters also made suggestions that awards should be considered
vested when the associated performance period is completed, even if the
vesting of the award is still subject to board certification.\194\
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    \191\ See letters from Cook; IBC 2015; Mercer; Pearl; and
Towers.
    \192\ See letters from Davis Polk 2015 and Davis Polk 2022.
    \193\ See letter from CEC 2015.
    \194\ See letters from Mercer and Towers.
---------------------------------------------------------------------------

    Commenters suggested a number of alternatives to vesting date
reporting of equity, including: grant date reporting; \195\ exercise
date reporting; \196\ exercise date reporting of the equity's intrinsic
value; \197\ principles-based reporting (i.e., allowing companies to
make their own modifications to the reporting date); \198\ reporting
``in the fiscal year for which the compensation was considered as
paid''; \199\ and annual reporting, starting in the grant year, of the
year-end fair value of the award, with annual reporting of any change
in the fair value until, and including, the year of vesting.\200\ Two
commenters also suggested the Commission adopt the ``2 \1/2\ month
rule,'' under which equity vesting in the first two and one half months
of the calendar year would be attributed to the prior year.\201\ One
commenter stated that, because the proposed rules would move away from
grant date fair value calculations for equity awards, it would be
important that the disclosure include dividends paid on unvested equity
or equivalents for a given year.\202\
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    \195\ See letters from CAP and NAM 2022.
    \196\ See letters from CEC 2015; Coalition; and FSR.
    \197\ Letter from Corning.
    \198\ See letter from Hall.
    \199\ See letter from TIAA.
    \200\ See letters from Infinite; TCA 2015; and TCA 2022. Other
commenters made similar suggestions that vary slightly from this
suggestion, including by using intrinsic rather than fair value for
options, measuring pay over an aggregate time horizon rather than
presenting data broken out by year, and revaluing vested as well as
unvested equity holdings. See letters from CAP; Farient; Hodak; PG
2015; and Pay Governance, dated Mar. 3, 2022 (``PG 2022'').
    \201\ See letters from Hyster-Yale and NACCO.
    \202\ See letter from TIAA.
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    A few commenters supported the proposed requirement that changes in
the underlying assumptions for valuation that are materially different
from those made in the financial statements as of the grant date must
be disclosed, with one specifically supporting the proposed
requirement,\203\ one supporting requiring any changes from the
assumptions in the current financial statements to be disclosed,\204\
and two opposing the disclosure of changes in valuation
assumptions.\205\
---------------------------------------------------------------------------

    \203\ See letter from CII 2015.
    \204\ See letter from Towers.
    \205\ See letters from Davis Polk 2015 and McGuireWoods.
---------------------------------------------------------------------------

    In response to a request for comment in the Reopening Release, one
commenter indicated that the additional performance measures considered
in the Reopening Release would not exacerbate the timing
misalignment,\206\ while another stated the additional measures would
not improve the misalignment.\207\
---------------------------------------------------------------------------

    \206\ See letter from Aon HCS.
    \207\ See letter from McGuireWoods.
---------------------------------------------------------------------------

iii. Final Amendments
    After consideration of the comments received, we are modifying our
approach to the treatment of equity awards in relation to the total
compensation reported in the Summary Compensation Table. While the
final amendments continue to use ``fair value'' as the measure of the
amount of an equity award, which is consistent with accounting in the
financial statements, we are adjusting the date on which the award is
valued in response to comments, so that the first fair value disclosure
is made in the year of grant, and changes in value of the award are
reported from year to year until the award is vested.\208\ We believe
this approach will better align the timing of the disclosure and
valuation with when

the award is actually ``earned'' by the executive, resulting in
disclosure that more clearly shows the relationship between executive
compensation and the registrant's performance.
---------------------------------------------------------------------------

    \208\ This approach was discussed as an implementation
alternative in the Proposing Release. See Proposing Release at
Section IV.C.3.c. Two commenters specifically noted this
implementation alternative and were supportive of its adoption. See
letters from Infinite; TCA 2015; and TCA 2022.
---------------------------------------------------------------------------

    In particular, the proposed rules would have required the deduction
of the equity award amounts reported in the Summary Compensation Table
total and the addition of:
     The vesting date fair value of stock awards and options
(with or without stock appreciation rights), each computed in
accordance with the fair value guidance under U.S. GAAP.
    The final rules also require the deduction of the equity award
amounts reported in the Summary Compensation Table total; however,
instead of the addition of the vesting date fair value of stock awards
and options, the final rules require the addition (or subtraction, as
applicable) of the following:
     The year-end fair value of any equity awards granted in
the covered fiscal year that are outstanding and unvested as of the end
of the covered fiscal year;
     The amount of change as of the end of the covered fiscal
year (from the end of the prior fiscal year) in fair value of any
awards granted in prior years that are outstanding and unvested as of
the end of the covered fiscal year;
     For awards that are granted and vest in the same covered
fiscal year, the fair value as of the vesting date; \209\
---------------------------------------------------------------------------

    \209\ There is no adjustment for awards that are granted and
determined not to vest in the same covered fiscal year because those
awards result in no compensation actually paid.
---------------------------------------------------------------------------

     For awards granted in prior years that vest in the covered
fiscal year, the amount equal to the change as of the vesting date
(from the end of the prior fiscal year) in fair value;
     For awards granted in prior years that are determined to
fail to meet the applicable vesting conditions during the covered
fiscal year, a deduction for the amount equal to the fair value at the
end of the prior fiscal year; \210\ and
---------------------------------------------------------------------------

    \210\ For any of an executive's equity awards that are
determined to fail to vest, a negative amount equal to the fair
value at the end of the prior fiscal year would be included as part
of the executive's compensation actually paid as of the date the
registrant determines the award will not vest. This negative amount
takes the cumulative reported value of that award to $0 since it did
not vest.
---------------------------------------------------------------------------

     The dollar value of any dividends or other earnings paid
on stock or option awards in the covered fiscal year prior to the
vesting date that are not otherwise reflected in the fair value of such
award or included in any other component of total compensation for the
covered fiscal year.
    We believe fair value is an appropriate measure for compensation
``actually paid.'' Although fair value calculations, like all
accounting estimates, do involve some subjective assumptions, we do not
agree with commenters that stated that the assumptions and projections
included in fair value calculations render such amounts inconsistent
with the concept of ``actually paid.'' \211\ Fair value is an estimate
of the amount by which an executive is compensated as a result of an
award, and therefore represents a reasonable measure of that
executive's ``actual pa[y].'' Specifically, the fair value of an option
is a widely-used measure to estimate the total value of the asset,
including both its value if exercised immediately (``intrinsic value'')
and the additional value created by the holder's contractual right to
exercise at some time in the future (``time value'' of the option). In
our view it also represents a more accurate measure of actual pay than
alternatives recommended by some commenters.
---------------------------------------------------------------------------

    \211\ See supra note 168 and accompanying text.
---------------------------------------------------------------------------

    We are not adopting the approach suggested by some commenters that
we use other measures such as intrinsic value. Intrinsic value would
ignore the option value inherent in exercisable awards prior to
exercise, including the option value inherent in an option award that
is at-the-money or out-of-the-money (i.e., the stock price is equal to
or less than the strike price of the options), and therefore has zero
intrinsic value. Intrinsic value (or any similar measure used to
calculate compensation ``actually paid'') would also be a departure
from the primary disclosures related to equity compensation, and the
recognition and measurement of such compensation in the financial
statements under U.S. GAAP, and we believe would not allow investors to
as easily link and analyze ``compensation actually paid'' with the
other information they are receiving about executive compensation.
Further, in 2004, the accounting for stock-based compensation in U.S.
GAAP was revised to require fair value accounting.\212\ In the revised
accounting standard, it was noted that other equity instruments and the
consideration the issuing entity receives in exchange for them are
recognized in the financial statements based on the fair value of the
instrument at the date issued. The fact that the equity instruments
would be issued for goods or services rendered or to be performed did
not seem to be a reason to measure the cost of the goods or services
performed on a different basis. The standard further noted that most
advocates of intrinsic value favored its use only at a grant date
measurement, and noted that there are weaknesses in its use even in
that case, such as treating most fixed share options as though they
were a ``free good.'' \213\ However, even at the grant date, employee
services received in exchange for share options are not free and there
is value in the employee services performed and the related stock and
stock options received.
---------------------------------------------------------------------------

    \212\ See FASB SFAS No. 123 (Revised 2004), Accounting for
Stock-Based Compensation (``FAS 123R''), which was issued in
December 2004 and superseded Accounting Bulletin Opinion No. 25,
Accounting for Stock Issued to Employees, which was an intrinsic
value approach to stock-based compensation. FAS 123R was codified in
FASB ASC Topic 718.
    \213\ Id.
---------------------------------------------------------------------------

    Registrants and investors are already familiar with fair value
calculations and the determination of the assumptions for such
calculations through their use in existing Commission disclosure
requirements as well as U.S. GAAP. For example, the Grants of Plan-
Based Awards Table requires grant date fair value disclosure of each
individual equity award granted during the last completed fiscal
year.\214\ U.S. GAAP requires information about grant date fair value
for equity awards, including the weighted-average grant-date fair value
of awards that were granted, vested and forfeited during the year and a
description of the significant assumptions used during the year to
determine the fair value of share-based compensation awards.\215\
---------------------------------------------------------------------------

    \214\ See 17 CFR 229.402(d)(2)(vii) and Instruction 8 to 17 CFR
229.402(d).
    \215\ See FASB ASC Topic 718-10-50-2.
---------------------------------------------------------------------------

    We do not agree with the suggestion from commenters that we
consider an option or other award requiring exercise to be ``actually
paid'' only upon its exercise, as we believe doing so would commingle
the registrant's compensatory decision with the executive's investment
decision about when to exercise and would allow executives to influence
pay-versus-performance disclosure by controlling the fiscal year in
which they receive the compensation. We additionally determined that
year-over-year change in fair value better meets the statutory purposes
than grant-date fair value, because valuing awards only at grant date
fails to reflect increases in value to the executive after the grant
date, during the period over which the compensation actually paid is
earned. Even if year-over-year change in fair value is only a
reasonable estimate, we believe it is far more accurate to include this
estimate than to omit such increases in value entirely.

    We have changed the reporting and valuation date requirements from
the Proposing Release to first require the year-end reporting and
valuation of awards granted during the fiscal year and then the year-
over-year change in fair value of such awards until the vesting date
(or the date the registrant determines the award will not vest).
    We have made these changes to the reporting and valuation
requirements to address commenters' concerns about potential
misalignment between the time period to which pay is attributed and the
time period in which the associated performance is reported, and the
degree to which this would affect the usefulness of the disclosure. We
believe that, compared to the vesting date valuation approach included
in the Proposing Release, the adopted approach will more effectively
allow registrants to describe the relationship between compensation and
registrant performance, as the reported amounts of compensation will
annually adjust based on the registrant's performance, among other
things, in that year. In addition, we acknowledge commenters'
observation that comparability may be somewhat reduced by the
assumptions that are included in fair value calculations, which, as
noted by a commenter, may differ from issuer to issuer. Because
investors are already familiar with fair value as the measurement
approach for equity awards under U.S. GAAP, they are aware of the
reduced comparability that may occur due to the use of different
assumptions from issuer to issuer. However, we believe that the use of
a consistent measurement approach to equity compensation in the Summary
Compensation Table, the financial statements, and the calculation of
compensation ``actually paid,'' along with the required disclosures
about significant assumptions under U.S. GAAP in the final rules,
allows for comparability with respect to an individual issuer's
disclosures from year to year. Further, as discussed in the Proposing
Release,\216\ we believe that, overall, comparability regarding the
awards included by registrants in the disclosure will be greater under
the adopted approach than it would have been under the proposed
approach, as volatility in executive compensation actually paid across
the disclosure periods that is due simply to vesting patterns should
decrease (as the amount of executive compensation actually paid will be
adjusted each year as it is ``earned'' over the course of the vesting
period).\217\
---------------------------------------------------------------------------

    \216\ See Proposing Release, Section IV.C.3.c (considering the
adopted approach as an implementation alternative).
    \217\ See supra note 210.
---------------------------------------------------------------------------

    Investors will also be able to more easily understand the impact of
performance on awards-based compensation over time, because under the
final rules as adopted investors will be able to observe the amount by
which the value of an executive's compensation changes each year,
rather than only observing the value of that compensation in the year
an award vests. Furthermore, we believe that the adopted approach in
the final rules is similar to the concept of realizable pay,
recommended by some commenters, as it reflects an attempt to measure
the change in value of an executive's pay package after the grant date,
as performance outcomes are experienced.
    This approach to unvested equity compensation is consistent with
the treatment of other unvested elements of compensation under the
final rules, such as unvested pension benefits and contributions to
unvested defined contribution plans. In each case, the adopted approach
reflects this compensation as it is earned rather than at vesting. We
believe the consistent use of this approach should reduce misalignment
between the timing of when compensation is earned and when it is
reported, and allow the disclosure to more clearly represent the
relationship of pay with performance over time.
    We also believe this revised approach for equity awards comports
with the statutory term ``executive compensation actually paid.'' While
non-vested amounts of compensation could be considered unpaid due to
their contingent nature, over time the values reported in connection
with a particular award will aggregate to its ultimate value upon
vesting. Aligning the compensation reporting more closely with when the
compensation changes in value also provides investors with a clearer
picture of ``the relationship between executive compensation actually
paid and the financial performance of the issuer.'' For example, where
an award vests over a three-year period and the registrant's financial
performance is positive in the first of those two years and negative in
the third, reporting the full value of the award only in the vesting
year may give investors the misleading impression that the executive
was not rewarded for positive performance in years one and two and was
rewarded despite negative performance in year three. In addition, the
required reporting of the year-over-year change in fair value of such
awards until the vesting date (or a deduction for prior reported
amounts as of the date the registrant determines the award will not
vest) will account for any amounts that fail to vest; will address
concerns, noted by commenters, that grant date reporting undervalues
compensation ``actually paid''; and will not include those post-vesting
changes that generally reflect the executives' investment decisions,
not compensation.\218\
---------------------------------------------------------------------------

    \218\ Not all post-vesting date changes reflect the executives'
investment decisions, as vested awards could remain subject to other
restrictions (e.g., anti-hedging restrictions or holding
requirements) that would limit the investment decisions available to
an executive.
---------------------------------------------------------------------------

    We recognize that requiring fair value calculations for each equity
award at a date other than the grant date may be burdensome for some
issuers, as noted by some commenters,\219\ particularly those that have
compensation programs with numerous and complex equity grants. However,
in the final rules we are not adopting a safe harbor or simplified
assumptions other than those generally accepted under U.S. GAAP, as
suggested by some commenters.\220\ Since accounting for share-based
compensation in U.S. GAAP was revised in 2004 to require fair value
accounting,\221\ registrants have been accounting for equity
compensation based on a fair value approach and must determine
valuation assumptions every time a new award is granted. While
commenters correctly noted that companies are not as familiar with the
fair valuation of options after the grant date, U.S. GAAP requires the
re-valuation of an award when modified,\222\ so the concept of valuing
a stock award before vesting is also not novel to registrants. As such,
registrants are required to have internal controls and processes over
the valuation of stock awards, including the assumptions used in
determining fair value.\223\ We believe that registrants will likely
rely upon the existing fair value

processes and internal controls for stock-based compensation, which
should mitigate the concerns raised by commenters about assumptions. In
addition, the option and contingent-equity valuation models are well-
developed and related software solutions are widely available, which
will further mitigate those additional burdens and concerns related to
valuation approach and related inputs.
---------------------------------------------------------------------------

    \219\ See, e.g., letters from CAP (stating that ``a fair value
calculation for previously granted stock options at the time of
vesting, registrants will undoubtedly encounter many
complications,'' and noting that few companies have familiarity with
valuing options that have been outstanding for several years); Cook
(stating that ``[c]alculating the fair value of stock options as of
each vesting date will be a time-consuming and tedious process'');
KPMG (stating that ``the vesting date fair value of share options
will be more difficult for companies than determining the grant date
fair value of those awards''); and WorldatWork (describing the
proposed vesting date fair value approach as ``burdensome'').
    \220\ See supra note 174 and accompanying text.
    \221\ See supra note 212 and accompanying text.
    \222\ See FASB ASC Topic 718-20-35.
    \223\ See also 17 CFR 240.13a-14, 13a-15, 15d-14 & 240.15d-15.
---------------------------------------------------------------------------

    The final rules also require footnote disclosure of any valuation
assumptions that materially differ from those disclosed at the time of
grant, as in the proposal.\224\ The proposal did not specify how to
disclose the valuation assumptions. Similar to U.S. GAAP, when multiple
awards are being valued in a given year, a registrant may disclose a
range of the assumptions used or a weighted-average amount for each
assumption. In addition, the fact that certain institutional investors
and third parties (often proxy advisors or compensation consultants)
are already incorporating similar computations in their own pay for
performance analyses,\225\ suggests that the adopted approach is
already considered useful and operational by some investors.
---------------------------------------------------------------------------

    \224\ For example, there may be a material difference in
assumptions if the registrant has made changes to key assumptions
that would have materially changed the grant date fair value if the
assumption(s) applied as of grant date.
    \225\ See infra Section V.B.2.
---------------------------------------------------------------------------

    Further, we are also requiring the dollar value of any dividends or
other earnings paid on stock or option awards in the covered fiscal
year prior to the vesting date to be included in the amount of
executive compensation actually paid, if such amounts are not reflected
in the fair value of such award or included in any other component of
total compensation for the covered fiscal year. As noted by a
commenter, the pay-for-performance disclosure should include dividends
paid on unvested equity or equivalents ``as a result of the move away
from grant date fair value calculations for equity awards.'' \226\
Under the Summary Compensation Table total, any such amounts would be
typically included in the grant date fair value, as no such dividends
or earnings would have been paid on that date. However, if any
dividends or other earnings are paid on stock or option awards over
time, these amounts would decrease future fair value amounts. This
decrease would not be reflective of a decrease in the amount ``actually
paid'' to the executive, to the contrary, the amount of the decrease
would reflect actual dividends or earnings paid to the executive prior
to the valuation. We believe these amounts are compensation ``actually
paid'' and should be reflected in the disclosure.
---------------------------------------------------------------------------

    \226\ See letter from TIAA.
---------------------------------------------------------------------------

D. Measures of Performance

1. Requirement To Disclose TSR and Peer Group TSR
i. Proposed Amendments
    We proposed requiring all registrants subject to the proposed rule
to use TSR as the measure of financial performance of the registrant
for purposes of the required disclosure. In addition, we proposed
requiring registrants that are not SRCs to disclose peer group TSR,
using either the same peer group used for purposes of Item 201(e) of
Regulation S-K or a peer group used in the CD&A for purposes of
disclosing registrants' compensation benchmarking practices.\227\
---------------------------------------------------------------------------

    \227\ See 17 CFR 229.402(b)(xiv).
---------------------------------------------------------------------------

ii. Comments
    Commenters were divided on the use of TSR as a required financial
performance measure, with some commenters generally supportive,\228\
and some generally opposed.\229\ Additionally, some commenters opposed
TSR being used as the sole measure of financial performance.\230\
---------------------------------------------------------------------------

    \228\ See letters from Americans for Financial Reform
Educational Fund, dated Mar. 18, 2022 (``AFREF''); Barnard 2015;
Barnard 2022; BlackRock, dated July 2, 2015 (``BlackRock''); CalPERS
2015; CAP; CFA; CII 2015; Farient; Hook; Infinite; OPERS; Public
Citizen 2015; and TIAA.
    \229\ See letters from American Securities Association, dated
Mar. 14, 2022 (``ASA''); Aspen; Better Markets, dated Mar. 4, 2022
(``Better Markets''); CCMC 2015; CEC 2015; Coalition; Cook;
Dimensional Fund Advisors LP, dated Mar. 3, 2022 (``Dimensional'');
FedEx 2015; FSR; Hay; Honeywell; International Bancshares Corp.,
dated Mar. 3, 2022 (``IBC 2022''); McGuireWoods; NAM 2015; NAM 2022;
NIRI 2015; NIRI 2022; and SBA-FL.
    \230\ See letters from BorgWarner; BRT; Celanese; Hall;
Honeywell; Hyster-Yale; IBC 2015; ICGN; Mercer; NACCO; NACD 2015;
NACD 2022; PG 2015; Pearl; PNC; PDI; Judy Samuelson, dated Mar. 4,
2022 (``Samuelson''); SCG; SCSGP; Simpson Thacher & Bartlett, dated
July 6, 2015 (``Simpson Thacher''); and WorldatWork.
---------------------------------------------------------------------------

    Commenters in favor of including TSR as a required financial
performance measure noted that TSR is well-understood by investors;
\231\ is widely used by companies in setting compensation; \232\ is
generally a fair representation of company performance; \233\ will
assist companies ``in articulating and providing justification for
their compensation practices''; \234\ will increase comparability;
\235\ and reflects stock price fluctuations that regularly occur in
response to publicly known information and company leadership.\236\
Commenters in favor of TSR also observed that requiring its disclosure
is consistent with the language in Section 953(a) that the pay-versus-
performance disclosure should ``tak[e] into account any change in the
value of the shares of stock and dividends of the issuer and any
distributions.'' \237\
---------------------------------------------------------------------------

    \231\ See letters from Barnard 2015; Barnard 2022; CFA; and
Farient.
    \232\ See letters from Barnard 2015; Barnard 2022; BlackRock;
CalPERS 2015; CFA; CII 2015; and Public Citizen 2015.
    \233\ See letters from Barnard 2015; Barnard 2022; CII 2015;
Farient; and OPERS.
    \234\ See letter from CalPERS 2015.
    \235\ See letters from Barnard 2015; Barnard 2022; CAP; CII
2015; Hodak; and TIAA.
    \236\ See letter from Infinite.
    \237\ See letters from AFREF; CAP; CII 2015; and Public Citizen
2015.
---------------------------------------------------------------------------

    Commenters opposed to the use of TSR, generally or as the sole
measure of performance, as well as a few commenters in favor of the use
of TSR,\238\ noted that TSR has specific limitations, including: not
necessarily being used by the subject company to determine
compensation; \239\ being an unreliable performance measure for thinly-
traded stocks; \240\ incentivizing short-term performance at the
expense of investors' long-term best interests \241\ (which some
commenters indicated could incentivize companies to incorporate
strategies to inflate stock prices over the short term,\242\ or to
engage in buybacks \243\); requiring lengthy explanatory disclosures to
explain any misalignments between compensation and TSR; \244\ causing
companies to adjust their compensation programs to more heavily rely on
TSR; \245\ being subject to fluctuations based on circumstances outside
of the control of companies, industries, and executives; \246\ and
being affected by the

granting and vesting of stock options.\247\ In response to these
concerns, some commenters (including commenters in favor of using TSR
\248\), suggested permitting disclosure of other metrics alongside
TSR.\249\ Other commenters generally stated that there was no single
performance measure that would align with the compensation plan of
every registrant, and therefore suggested adopting a principles-based
approach, allowing companies to choose their own performance
measures.\250\ Alternatively, a number of commenters suggested
requiring registrants to disclose the actual metrics used in
determining their executive compensation,\251\ or revising Item 402 of
Regulation S-K to require disclosure of ``all'' metrics actually used
to determine NEO incentive compensation.\252\
---------------------------------------------------------------------------

    \238\ See letters from AFREF; CalPERS 2015; CFA; and CII 2015.
    \239\ See letters from CCMC 2015 and Coalition.
    \240\ See letters from Hyster-Yale and NACCO.
    \241\ See letters from AFREF; ASA; BlackRock; BRT; CCMC 2015;
CEC 2015; Coalition; FedEx 2015; FSR; Hall; IBC 2015; IBC 2022;
Mercer; NACCO; NACD 2015; NAM 2015; NIRI 2015; Samuelson; SCG;
Simpson Thacher; and WorldatWork. But see letter from OPERS (stating
that the use of TSR alone is not likely to drive short-term
decision-making).
    \242\ See letters from Better Markets; IBC 2022; McGuireWoods;
NACCO; Pearl; and PDI.
    \243\ See letters from AFREF; Better Markets; PDI; and
Samuelson.
    \244\ See letters from Aspen; Celanese; Coalition; Exxon;
Hyster-Yale; NACCO; NAM 2015; NIRI 2015; NIRI 2022; and PNC.
    \245\ See letters from CEC 2015; CCMC 2015; Hall; Hay; Hermes;
FSR; George S. Georgiev, dated Mar. 4, 2022 (``Georgiev'');
McGuireWoods; Mercer; Pearl; PNC; SCSGP; Simpson Thacher; and
WorldatWork.
    \246\ See letters from AFL-CIO 2015; Aspen; CEC 2015;
Dimensional; FSR; Hay; IBC 2015; IBC 2022; McGuireWoods; Mercer;
NACCO; NIRI 2015; NIRI 2022; PDI; Pearl; Samuelson; and SBA-FL.
    \247\ See letter from IBC 2022.
    \248\ See letters from CalPERS 2015; CAP; CFA; CII 2015;
Farient; OPERS; and TIAA.
    \249\ See letters from CalPERS 2015; CAP; CFA; CII 2015; Davis
Polk 2015; Davis Polk 2022 (stating that TSR should be the only
required measure, but that we should permit registrants to
voluntarily disclose other measures, particularly ``[g]iven the
complexity and importance of long-term incentive compensation'');
Farient; Hall; Mercer; NIRI 2015; OPERS; Pearl; Sacred Heart
University, dated July 7, 2015; Simpson Thacher; and TIAA. But see
letter from IBC 2022 (stating, in response to the Reopening
Release's considered additional net income, income or loss before
income tax expense, and Company-Selected Measure measures, that the
inclusion of additional metrics does not fix the fact that the
inclusion of TSR ``overstates'' the importance of TSR).
    \250\ See letters from BRT; Celanese; Exxon; Hall; Hay; Hyster-
Yale; McGuireWoods; NACCO; PNC; SCG; SCSGP; and Simpson Thacher.
    \251\ See letters from AFL-CIO 2015; CCMC 2015; FedEx 2015; Hook
(supporting the proposal, but stating ``I would like to see the
metrics for comparison include focus on longer-term performance'');
Public Citizen 2015 (specifically suggesting that the Commission
``mandate a metric supplemental to the TSR of a company's own
choosing that it contends would capture long-term performance'');
and SBA-FL.
    \252\ See letters from American Federation of Labor and Congress
of Industrial Organizations, dated Mar. 2, 2022 (``AFL-CIO 2022'');
AFREF; California Public Employees Retirement System Investment
Office, dated Mar. 4, 2022 (``CalPERS 2022''); California State
Teachers' Retirement System, dated Mar. 2, 2022 (``CalSTRS''); CII
2022; Georgiev; ICGN; and International Brotherhood of Teamsters,
dated Mar. 3, 2022 (``Teamsters'').
---------------------------------------------------------------------------

    A number of commenters raised questions or made comments regarding
the calculation of TSR. A few commenters suggested that TSR should be
presented as a percentage change instead of an indexed dollar
value.\253\ Others generally raised questions about the method used for
calculating TSR,\254\ with some suggesting TSR should be calculated and
disclosed as a one-year measure,\255\ others suggesting that TSR should
be calculated as a rolling average,\256\ and a third group suggesting
TSR be calculated as a cumulative average over the time period of the
disclosure.\257\ Other commenters suggested that we permit registrants
to decide the time period used to calculate their TSR.\258\
---------------------------------------------------------------------------

    \253\ See letters from AON and Towers.
    \254\ See letters from Anonymous, dated May 27, 2015;
BorgWarner; CEC 2015; Cook; Hall; Honeywell; Mercer; PG 2015; Pearl;
TCA 2015; and Towers.
    \255\ See letters from Cook; Infinite (suggesting that a one-
year TSR would be consistent with Item 201(e) of Regulation S-K, but
that also including three-year and five-year TSRs may provide
helpful context); TCA 2015; TCA 2022; and Towers. But see letter
from Farient (opposing the calculation of TSR as a year-over-year
measurement). See also Davis Polk 2015 (stating that, if the
Commission requires an annual TSR, we should permit registrants to
also disclose a multi-year TSR, because compensation may be based on
multi-year performance).
    \256\ See letters from AFREF (supporting a ``five year
cumulative and rolling average''); CEC 2015 (supporting the use of a
three-year or five-year rolling average TSR); Honeywell (stating
that a multi-year rolling TSR would be more meaningful); ICGN; NACD
2015 (recommending the Commission require a three-year or five-year
TSR in addition to an annual TSR); and NACD 2022 (also recommending
the Commission require a three-year or five-year TSR in addition to
an annual TSR). But see letter from PG 2015 (noting that a five-year
rolling TSR calculation would not be consistent with the Commissions
intent).
    \257\ See letters from Pearl (supporting a cumulative 5-year TSR
measurement); PG 2015 (noting that a cumulative TSR would be
consistent with the Commission's intent, but could ``complicate[ ]
comparisons by causing the starting point for TSR measurement to
change each year''); and Teamsters.
    \258\ See letters from BorgWarner; Davis Polk 2015; Davis Polk
2022 (suggesting that TSR should be calculated ``in a manner that is
consistent with the ways in which the compensation committee
considers TSR in the pay setting process''); Exxon (generally
opposing the use of TSR, but stating that, if we require its use, we
should allow registrants to choose the time period for measuring
cumulative TSR that best suits them); and NIRI 2015; see also letter
from Huddart (suggesting each component of the PEO's compensation
actually paid be associated with a requisite service period, and
then requiring the calculation of TSR and peer group TSR over the
requisite service period of the component of the PEO's compensation
having the largest dollar value in a given year).
---------------------------------------------------------------------------

    Commenters were also divided on our proposal to require
registrants, other than SRCs, to disclose peer group TSR. Some
commenters supported requiring the inclusion of peer group TSR,\259\
while others suggested peer group disclosure should be optional.\260\ A
number of other commenters opposed the requirement to disclose peer
group TSR,\261\ arguing peer group disclosure: is already disclosed in
the performance graph required by Item 201(e) of Regulation S-K; \262\
is beyond the mandate of the Dodd-Frank Act; \263\ will confuse or
mislead investors; \264\ will be expensive and/or time-consuming for
registrants to calculate; \265\ is difficult for registrants to explain
and would require lengthy disclosures; \266\ is difficult to understand
given that frequent changes in peer groups \267\ and different market
conditions or performance cycles affect different ``peer'' companies
differently; \268\ and creates issues relating to the difficulty for
companies to find adequate peers, limiting the ability to make direct
comparisons between registrants.\269\ A number of commenters also
opposed requiring weighted peer group TSR (weighted by market
capitalization), as used in Item 201(e) of Regulation S-K.\270\ In
addition, one commenter suggested we permit multiple peer groups to be
disclosed, if peer group TSR disclosure is required.\271\
---------------------------------------------------------------------------

    \259\ See letters from As You Sow 2015; CalPERS 2015; OPERS; and
TIAA.
    \260\ See letters from AON and Hay.
    \261\ See letters from ActiveAllocator Activist Capital Advisors
L.P., dated Feb. 3, 2022; CCMC 2015; CEC 2015; Celanese; Cook; Davis
Polk 2015; FSR; Georgiev; Hyster-Yale; IBC 2015; IBC 2022; LWC;
McGuireWoods; Meridian; NACCO; NAM 2015; NIRI 2015; NIRI 2022;
Pearl; PNC; SCG; SCSGP; TCA 2015; TCA 2022; and WorldatWork.
    \262\ See letters from Exxon; Georgiev; Pearl; PNC; SBA-FL; and
TCA 2015.
    \263\ See letters from BRT; CEC 2015; Celanese; Davis Polk 2015;
Exxon; FSR; Hay; Meridian; Pearl; PNC; and WorldatWork.
    \264\ See letters from CEC 2015; Celanese; Davis Polk 2015;
Georgiev; Hay; Hyster-Yale; LWC; NACCO; and PNC.
    \265\ See letters from Celanese; Hyster-Yale; and NACCO.
    \266\ See letters from BRT; CCMC 2015 (also noting that
registrants may face public liability for assumptions made regarding
a peer's performance); Davis Polk 2015 (similar); and SCSGP.
    \267\ See letters from Hay; Hyster-Yale; and NACCO.
    \268\ See letters CCMC 2015; Exxon; and Pearl.
    \269\ See letters from Hay; Hyster-Yale; IBC 2015; FSR; NACCO;
NAM 2015; and Pearl.
    \270\ See letters from Allison; AON; Cook; Meridian; and Ross.
    \271\ See letter from Pearl.
---------------------------------------------------------------------------

    Commenters generally supported allowing registrants to have
flexibility in setting their peer groups for the pay-versus-performance
disclosure. Commenters had various suggestions as to how to achieve
this flexibility, including allowing registrants to choose any peer
group referenced in the CD&A \272\ allowing the use of the peer group
from either Item 201(e) of Regulation S-K or the CD&A \273\ or
allowing registrants to choose a peer group other than the Item 201(e)
of Regulation S-K or CD&A peer groups.\274\ These commenters generally
supported requiring registrants to provide disclosure explaining the
make-up of their peer group.\275\ One commenter,

however, opposed giving flexibility to registrants in setting their
peer groups, and instead suggested requiring that the peer group should
be the same as the peer group used in benchmarking executive
compensation.\276\
---------------------------------------------------------------------------

    \272\ See letter from SCSGP.
    \273\ See letter from Quirin.
    \274\ See letters from Barnard 2015; Corning; and Towers
(specifically supporting allowing registrants to use the peer group,
if any, that is used in setting compensation).
    \275\ See letters from Barnard 2015; Quirin; and SCSGP.
    \276\ See letter from AFL-CIO 2015; see also letter from As You
Sow 2015 (stating that ``ideally'' all registrants would use the
benchmarking peer group in their pay-versus-performance disclosure).
---------------------------------------------------------------------------

    Commenters raised questions about the impact of a registrant
changing its peer group. Some commenters advocated for requiring
additional disclosure in the event that a registrant changes its peer
group,\277\ including requiring the disclosure of comparative results
of TSR for all peer groups used in the disclosed time period.\278\
Others questioned what impact the change of a peer group would have on
cumulative TSR,\279\ with some commenters suggesting we only require
disclosure of the current peer group.\280\ One commenter suggested
that, if annual TSR is used, the peer group in place in the respective
year of disclosure should be the peer group used to calculate the peer
group TSR for that year of disclosure.\281\
---------------------------------------------------------------------------

    \277\ See letters from AFL-CIO 2015; Hermes; and SBA-FL.
    \278\ See letter from Hermes.
    \279\ See letters from Cook and Pearl.
    \280\ See letters from Cook and Quirin.
    \281\ See letter from Cook.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the requirement, as proposed, that all registrants
subject to the final rules use TSR, and that registrants (other than
SRCs) use peer group TSR, as measures of performance. As noted in the
Proposing Release, Section 14(i) does not mandate we require specific
measures in the pay-versus-performance disclosure. However, the statute
does provide that the disclosures should ``tak[e] into account any
change in the value of the shares of stock and dividends of the issuer
and any distributions.'' \282\ While we recognize commenters' concerns
that TSR is not an equally useful measure for all registrants (as it is
not necessarily used by all registrants to set compensation and is seen
by some commenters to be an unreliable performance measure for thinly-
traded stocks), is subject to fluctuations based on circumstances
outside of the control of the registrant, and may be affected by the
granting and vesting of stock options, we believe that TSR is
consistent with that statutory language. In addition, we believe
mandating a consistently calculated measure for all registrants will
further the comparability of the pay-versus-performance disclosures
across registrants, as noted by some commenters.\283\ We acknowledge,
as noted by some commenters, that some registrants may need to provide
somewhat lengthy explanatory disclosures to explain any misalignments
between compensation and TSR; however, we believe those disclosures are
the types of disclosures intended by the language of Section 14(i), and
will help investors understand the relationship between executive
compensation actually paid and the registrant's performance.
---------------------------------------------------------------------------

    \282\ 15 U.S.C. 78n(i).
    \283\ See supra note 235.
---------------------------------------------------------------------------

    We are not requiring registrants to disclose all measures they use
to set executive compensation, as recommended by some commenters,\284\
because we believe such a requirement would be a significant change
from the current executive compensation disclosure requirements, and
would be more appropriately considered by the Commission in a broader
context not related to the Section 953(a) mandate. In addition, as
noted below,\285\ as with other mandated disclosures, registrants would
be permitted to disclose additional measures of performance, so long as
any additional disclosure is clearly identified as supplemental, not
misleading and not presented with greater prominence than the required
disclosure. While this does not provide registrants with the full
flexibility of a principles based approach suggested by some
commenters, we believe this ability to supplement the required
disclosures will provide registrants with adequate discretion to
provide sufficiently fulsome disclosure of the relationship between
their performance and the compensation actually paid to their
executives.
---------------------------------------------------------------------------

    \284\ See supra notes 251-252.
    \285\ See infra Section II.F.3.
---------------------------------------------------------------------------

    We also believe that absolute company performance alone, as
reflected in TSR, may not be a sufficient basis for comparison between
companies, and that peer group TSR will provide investors with more
comprehensive information for assessing whether the registrant's
performance was driven by factors common to its peers or instead by the
registrant's own strategy and other choices. The final rules require a
registrant to disclose weighted peer group TSR (weighted according to
the respective issuers' stock market capitalization at the beginning of
each period for which a return is indicated), using either the same
peer group used for purposes of Item 201(e) of Regulation S-K or a peer
group used in the CD&A for purposes of disclosing registrants'
compensation benchmarking practices. If the peer group is not a
published industry or line-of-business index, the identity of the
issuers composing the group must be disclosed in a footnote. 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 this requirement by incorporation by reference to those
filings. We believe this would avoid the potential for duplicative
disclosure. Consistent with the approach taken in Item 201(e) of
Regulation S-K, as proposed, if a registrant changes the peer group
used in its pay-versus-performance disclosure from the one used in the
previous fiscal year, it will only be required to include tabular
disclosure of peer group TSR for that new peer group (for all years in
the table), but must explain, in a footnote, the reason for the change,
and compare the registrant's TSR to that of both the old and the new
group.\286\ Some commenters advocated for more disclosure when a peer
group changes (including requiring the disclosure of comparative
results of TSR for all peer groups used in the disclosed time period),
while other commenters suggested we only require disclosure of the
current peer group. We believe the adopted approach strikes the
appropriate balance of providing investors information when a peer
group changes, while also not requiring overcomplicated disclosure. In
addition, as proposed, we are requiring weighted peer group TSR, as
calculated under Item 201(e) of Regulation S-K, as registrants are
already familiar with this calculation.\287\
---------------------------------------------------------------------------

    \286\ See 17 CFR 229.402(v)(2)(iv).
    \287\ To calculated weighted peer group TSR, the returns of each
component issuer of the group must be weighted according to stock
market capitalization at the beginning of each period for which a
return is indicated. See Instruction 5 to Item 201(e) of Regulation
S-K.
---------------------------------------------------------------------------

    In response to commenters' questions about the calculation of TSR,
we are clarifying the definition of ``measurement period'' in the final
text of the rule. TSR will continue to be calculated on the same
cumulative basis as is used in Item 201(e) of Regulation S-K, measured
from the market close on the last trading day before the registrant's
earliest fiscal year in the table through and including the end of the
fiscal year for which TSR is being calculated (i.e., the TSR for the
first year in the table will represent the TSR over that first year,
the TSR for the second year will represent the cumulative TSR

over the first and the second years, etc.). We are also clarifying that
both TSR and peer group TSR should be calculated based on a fixed
investment of one hundred dollars at the measurement point. As noted by
a commenter,\288\ the TSR presented in the stock performance graph
includes a starting investment amount on the y-axis, from which the
subsequent TSR amounts are calculated. As the final rules mandate a
tabular not graphical disclosure of TSR, we are clarifying that the TSR
amounts should be calculated based on an initial fixed investment of
one hundred dollars, to clarify for investors what amount is used to
calculate the TSR figures, and to standardize the disclosure across
registrants. We are not requiring, as suggested by some commenters,
that TSR be calculated as a percentage change instead of a dollar
value; be disclosed as a one-year measure; be calculated as a rolling
average; or be calculated based on a time period chosen by the
registrant as we believe all of those approaches would depart from the
existing approach used in Item 201(e) of Regulation S-K, and therefore
could be burdensome to registrants and confusing to investors.
Similarly, we believe that permitting registrants to choose their own
criteria for calculating their TSR and peer group TSR for the pay-
versus-performance disclosure could also lead to investor confusion.
---------------------------------------------------------------------------

    \288\ See letter from CAP (noting that ``TSR is indexed based on
a $100 investment while compensation is reported in dollars so the
scales are fundamentally different'' and suggesting that ``[t]he
easiest solution would be to require companies to calculate
compensation actually paid for 6 years, with the sixth year indexed
to 100, similar to TSR in the stock performance graph'').
---------------------------------------------------------------------------

    We disagree with commenters who raised concerns that peer group TSR
would be confusing to investors, expensive to calculate, and hard to
understand. Peer group TSR is already included in other disclosures,
meaning both investors and registrants are generally familiar with it.
While peer group TSR is not specifically included in Section 14(i), we
believe it is a useful measure for evaluating a registrant's
performance, as noted by other commenters, and we are therefore using
our discretionary authority to require this additional information to
enhance the Dodd-Frank Act mandated disclosures. As we described above,
peer group comparisons are often used by registrants' compensation
committees,\289\ and may help in determining whether a registrant's
performance was driven by factors common to its peers, which may have
been outside of the control of its executives.
---------------------------------------------------------------------------

    \289\ See supra note 69 and accompanying text.
---------------------------------------------------------------------------

    As discussed below,\290\ to address commenters' concerns with
respect to the proposal to use TSR and peer group TSR as the sole
measures of performance (such as causing companies to adjust their
compensation programs to more heavily rely on TSR), we are also
requiring registrants to include net income and a Company-Selected
Measure as performance measures in the tabular disclosure, and also
permitting companies to voluntarily include additional measures of
their choosing in the table, as suggested by some commenters.\291\ The
inclusion of the Company-Selected Measure and the ability of
registrants to voluntarily include additional measures may also address
commenters' concerns with respect to incentivizing short-term
performance at the expense of shareholders' long-term best interests.
We believe these additional measures should help alleviate concerns
expressed by some commenters that disclosing only TSR (for a registrant
and its peer group) would put too much emphasis on that one measure.
---------------------------------------------------------------------------

    \290\ See infra Sections II.D.2; II.D.4; and II.F.3.
    \291\ See supra note 249.
---------------------------------------------------------------------------

2. Requirement To Disclose Net Income
i. Amendments Considered in the Reopening Release
    In the Reopening Release, we requested comment on requiring
registrants to disclose both income or loss before income tax expense
and net income in their pay-versus-performance disclosure.\292\ We
stated we were considering these two measures because in reflecting a
registrant's overall profits (net of costs and expenses), they could be
additional important measures of company financial performance that may
be relevant to investors in evaluating executive compensation, and
could complement the market-based performance measures required in the
Proposing Release (TSR and peer group TSR) by also providing
accounting-based measures of financial performance. In addition, both
net income and income or loss before income tax expense are measures
that are familiar to registrants and investors, as both are generally
required to be presented on the face of the Statement of Comprehensive
Income by Regulation S-X. Net income is also a line item required by
U.S. GAAP and International Financial Reporting Standards (``IFRS'') as
issued by the International Accounting Standards Board.
---------------------------------------------------------------------------

    \292\ As discussed above, in this release, to be consistent with
the language in Regulation S-X, we are using the phrase ``income or
loss before income tax expense'' in lieu of the phrase ``pre-tax net
income,'' which was used in the Reopening Release. See supra note
33.
---------------------------------------------------------------------------

ii. Comments
    Commenters were divided over the potential inclusion of income or
loss before income tax expense and net income. A number of commenters
generally supported the inclusion of the measures as additional
measures in the table; \293\ noting that they will be useful to
investors in assessing executive compensation; \294\ will cause minimal
compliance challenges, as they are already calculated by registrants;
\295\ and will increase comparability.\296\ However, other commenters
opposed requiring registrants to disclose the measures,\297\ noting
they are not relevant for or comparable across all companies \298\
(particularly early stage companies and real estate investment trusts
(``REITs'') \299\); are not used by

many companies in setting executive compensation; \300\ would be
incomplete or misleading without appropriate context; \301\ and can
vary period over period due to one-time adjustments and events such
that the relationship with pay would be distorted.\302\ Other
commenters opposed the measures more generally, as non-company-specific
measures, indicating their inclusion would ``substantially lengthen''
the pay-versus-performance disclosure, without providing specific
insight into the registrant,\303\ would not address the shortcomings of
TSR because they have similar weaknesses (such as encouraging short-
termism or ``overemphasiz[ing] financial performance''),\304\ or would
stifle innovation by encouraging more uniform compensation structures
given the standardized disclosure across registrants.\305\
---------------------------------------------------------------------------

    \293\ See letters from As You Sow, dated Mar. 4, 2022 (``As You
Sow 2022''); Better Markets; Better Markets, Institute for Policy
Studies, Global Economy Project, and Public Citizen, dated Mar. 4,
2022 (``Better Markets et al.''); CalPERS 2022; CalSTRS; CII 2022;
ICGN; Mark C, dated Feb. 21, 2022 (``Mark C''); PRI; Public Citizen,
dated Mar. 4, 2022 (``Public Citizen 2022''); Teamsters; and Troop
Inc., dated Feb. 17, 2022 (``Troop'').
    \294\ See letters from As You Sow 2022; Better Markets; Better
Markets et al.; CalPERS 2022; CalSTRS; CII 2022; ICGN (noting that
net income ``could be useful for companies that have a highly
complex tax structure''); PRI; Public Citizen 2022; Teamsters; and
Troop.
    \295\ See letter from Better Markets; Better Markets et al.;
PRI; and Public Citizen 2022.
    \296\ See letter from PRI.
    \297\ See letters from AB; Aon HCS; ASA; Center on Executive
Compensation, dated Mar. 4, 2022 (``CEC 2022''); Davis Polk 2022;
Dimensional; FedEx Corp., dated Mar. 4, 2022; Georgiev; Infinite;
Legal & General Investment, dated Mar. 3, 2022 (``LGIM'');
McGuireWoods; Nareit, dated Mar. 4, 2022 (``Nareit''); NAM 2022;
NIRI 2022; PG 2022; SCG; and TCA 2022.
    \298\ See letters from AB; CEC 2022; Dimensional; Infinite;
LGIM; Nareit; NIRI 2022; PG 2022; and SCG.
    \299\ See letters from Dimensional (noting that changes to a
company's business plan (such as closing business lines, selling
certain assets, or investing in research and development) could
result in low or negative net income, ``even though the strategies
may ultimately pay off for shareholders over the long term'');
Infinite (noting that income or loss before income tax expense and
net income ``may not provide reliable insight into the results of
management's efforts at developmental or transitional stage
companies''); LGIM (noting that ``different growth stages'' of a
company might necessitate it focusing on metrics other than income
metrics); Nareit (stating that ``[d]ue to certain features of the
way REITs are organized and operated under [F]ederal tax law as well
as certain features of U.S. GAAP,'' income or loss before income tax
expense and net income are not typically used by investors or
management when evaluating the alignment of pay with performance for
REITs); and NIRI 2022 (stating that income measures are ``completely
impractical as measures of financial performance for smaller
companies that are at a startup or early phase and not generating
any net income under GAAP'').
    \300\ See letter from ASA; CEC 2022; and Davis Polk.
    \301\ See letters from ICGN; Infinite; and PG 2022.
    \302\ See letter from Dimensional Infinite; and PG 2022.
    \303\ Letter from Aon HCS.
    \304\ See letters from Georgiev; and McGuireWoods.
    \305\ See letter from SCG.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the final rules to require registrants to include
net income in their tabular disclosure. As discussed above,\306\
registrants would also be required to provide a clear description of
the relationship of net income to executive compensation actually paid,
in narrative or graphical form, or a combination of the two.
---------------------------------------------------------------------------

    \306\ See supra Section II.A.2.iii.
---------------------------------------------------------------------------

    Although, as noted by some commenters, net income itself may not be
frequently used by registrants directly in setting compensation, we
believe that net income is closely related to other profitability
measures that we believe, based on Commission staff experience, may be
used by registrants in setting compensation, while also being widely
understood and standardized, as a required disclosure item under
Regulation S-X, U.S. GAAP, and IFRS. The inclusion of net income as an
additional financial performance measure could complement the market-
based performance measure of TSR, and, to the extent that TSR does not
(in the view of management) fully reflect a company's performance,
could help to provide investors more ready access to an additional key
measure of the company's recent financial performance. As noted in the
Reopening Release, to the extent that net income would otherwise be
considered by investors when evaluating the alignment of pay with
performance, its inclusion in the table may lower the burden of
analysis for those investors.
    We also believe that the standardized disclosure of net income
could assist investors in generally understanding and analyzing the
relationship between pay and performance. While, as noted by some
commenters, net income may not be relevant for all registrants at all
times,\307\ including it may allow investors to have a standard
baseline from which to analyze a registrant's pay-versus-performance
disclosure. Moreover, by requiring a Company-Selected Measure and
giving registrants the ability to disclose additional registrant-
specific measures, we believe registrants can avoid concerns raised by
commenters that financial performance would be overemphasized or
disclosure overly standardized \308\ by the required disclosure of net
income.
---------------------------------------------------------------------------

    \307\ See supra notes 298-300 and accompanying text.
    \308\ See supra notes 304-305 and accompanying text.
---------------------------------------------------------------------------

    The final rules do not require disclosure of income or loss before
income tax expense, as considered in the Reopening Release. Net income
and income or loss before income tax expense are highly
correlated,\309\ so we believe requiring both could lead to
unnecessarily duplicative disclosure, which could have raised questions
for investors trying to understand what, if any, meaningful differences
there were between the measures. This potentially duplicative
disclosure also would have required registrants to prepare additional
relationship disclosure (about the relationship between income or loss
before income tax and executive compensation actually paid), which
would have created an additional burden on registrants, and may have
been less clear for investors. By requiring only one of the two net
income measures, we also partially address the concern that adding both
net income and income or loss before income tax expense could
``substantially lengthen'' the pay-versus-performance disclosure. In
addition, we believe net income may, based on statistics provided by a
commenter, be used by significantly more companies in linking pay to
performance than income or loss before income tax expense.\310\
---------------------------------------------------------------------------

    \309\ Based on staff analysis of data from Compustat, net income
and income or loss before income tax expense are roughly 95 percent
correlated.
    \310\ See letter from CEC 2022.
---------------------------------------------------------------------------

3. Tabular List of the Registrant's ``Most Important'' Performance
Measures
i. Amendments Considered in the Reopening Release
    In the Reopening Release, we requested comment on requiring
registrants to provide a ranked tabular list of the five \311\ most
important measures that they use to link executive compensation
actually paid during the fiscal year to company performance, over the
time horizon of the disclosure. We requested comment on the inclusion
of such a ranked list, in part, in response to commenters who stated
that the proposal should be revised to require disclosure of the
quantitative metrics or key performance targets companies actually use
to set executive pay.\312\ We noted that this disclosure, if required,
would be supplemental to the existing CD&A disclosure, which requires
registrants to disclose ``all material elements of the compensation
paid,'' including, for example, which ``specific items of corporate
performance are taken into account in setting compensation policies and
making compensation decisions,'' but does not specifically mandate
disclosure of the performance measures that determined the level of
recent NEO compensation actually paid. We noted that, under the
considered approach, registrants would be able to cross-reference to
existing disclosures elsewhere in the applicable disclosure document
that describe the various processes and calculations that go into
determining NEO compensation as it relates to these performance
measures, if they elected to do so.
---------------------------------------------------------------------------

    \311\ The Reopening Release provided that, if the registrant
considers fewer than five performance measures when it links
executive compensation actually paid during the fiscal year to
company performance, the registrant would be required to disclose
only the number of measures it actually considers.
    \312\ See, e.g., letters from AFL-CIO 2015; CII 2015; Public
Citizen 2015; and SBA-FL.
---------------------------------------------------------------------------

ii. Comments
    A number of commenters supported the inclusion of a ranked
list.\313\ Some of the commenters who supported the ranked list also
suggested additional

disclosures to supplement the list itself, including requiring ``clear
description of the relationship between the measures and executive
compensation,'' \314\ the metrics and methodology used to calculate the
measures,\315\ and the ``percentage of total compensation paid at the
vesting date'' with respect to each of the measures included in the
list.\316\ In addition, some commenters supported requiring or
permitting environmental, social and governance (``ESG'') metrics to be
included in the ranked list.\317\ One commenter also specifically
supported using a tabular format for the list, stating that it would
help make company-to-company comparisons.\318\
---------------------------------------------------------------------------

    \313\ See letters from As You Sow 2022; Better Markets; Better
Markets et al.; CalSTRS; Ceres and Ceres Accelerator for Sustainable
Capital Markets, dated Mar. 4, 2022 (``Ceres''); CII 2022;
Dimensional; Infinite; ICGN; Mark C (stating that the list ``would
give investors greater transparency into [registrants'] policies as
well as more tangible metrics by which to make their investment
decisions''); PRI; Public Citizen 2022; and Responsible Asset
Allocator Initiative at New America, and The Predistribution
Initiative, dated Mar. 3, 2022 (``RAAI''); see also letter from
AFREF (supporting the ranked list as an alternative to not
disclosing `all' performance measures).
    \314\ Letter from PRI.
    \315\ See letter from ICGN.
    \316\ Letter from Infinite.
    \317\ See letters from As You Sow 2022; Better Markets; Ceres;
PRI; Public Citizen 2022; and RAAI.
    \318\ See letter from ICGN.
---------------------------------------------------------------------------

    A number of other commenters opposed the ranked list,\319\ with
some indicating that its ranking requirement would be difficult to
satisfy, as registrants do not rank their measures in the compensation
setting process and measures can interact in determining pay in complex
ways. Some commenters objected that the list oversimplifies the
compensation setting process, particularly because there could be
difficulty ranking multiple measures, which might be related or hold
equal importance at any given time.\320\ Others indicated the list and
associated clarifications and explanations would increase the length
and complexity of disclosure and associated burdens with little or no
corresponding benefit.\321\ In contrast, one commenter indicated that
it was not aware of any additional costs to disclose the five most
important performance measures, and that the disclosure of sensitive or
competitive information should not be necessary to provide the
list.\322\ One commenter suggested that the ranked list was beyond the
scope of the Dodd-Frank Act mandate,\323\ and others noted that similar
disclosure is already available in the CD&A.\324\
---------------------------------------------------------------------------

    \319\ See letters from Aon HCS; ASA; CEC 2022; Davis Polk 2022;
IBC 2022; McGuireWoods; NAM 2022; NIRI 2022; PG 2022; SCG; and TCA
2022.
    \320\ See letters from Aon HCS; Davis Polk 2022; IBC 2022; LGIM;
NAM 2022; and SCG.
    \321\ See letters from Aon HCS; CEC 2022; Davis Polk 2022; and
IBC 2022.
    \322\ See letter from ICGN.
    \323\ See letter from SCG.
    \324\ See letters from CEC 2022; Davis Polk 2022; McGuireWoods;
and SCG.
---------------------------------------------------------------------------

    There were also a number of commenters who commented on the ``most
important'' concept, which we considered applying both to the ranked
list and the Company-Selected Measure (discussed below). Two commenters
suggested that defining the ``most important'' measures would be
burdensome for companies,\325\ particularly given that many companies
overlap and interrelate the measures they use to set compensation. One
commenter, who opposed the requirement to include a Company-Selected
Measure, stated that, if a ``most important'' concept is included in
the final rules, the Commission should not define ``most important'' on
behalf of registrants.\326\ However, another commenter suggested that
the Commission make explicit that the ``most important'' measures are
those that drove the outcome of compensation payments, not those that
were the most important in compensation decision-making.\327\ Some
commenters suggested that the Commission clarify whether certain
market-linked measures could be considered the ``most important''
measures,\328\ with one suggesting that companies should be able to
select the measure they believe to be most important ``regardless of
whether that measure is one that it uses in a performance or market
condition in the context of an incentive plan.'' \329\ One commenter
suggested that the ``most important'' concept would be improved, ``if
the definition includes the registrant's assessment that the measure
will assist investors in better understanding how the registrant's pay
programs contribute to the company's long-term shareholder return,''
\330\ while another suggested that the standard to evaluate ``most
important'' should be ``most useful'' for the company.\331\
---------------------------------------------------------------------------

    \325\ See letters from Davis Polk 2022 and NAM 2022.
    \326\ See letter from Davis Polk 2022.
    \327\ See letter from Infinite.
    \328\ See letters from Georgiev and Infinite.
    \329\ Letter from Davis Polk 2022 (opposing the requirement to
include a Company-Selected Measure, but stating that, if it is
required, the measure should be able to be one that is not linked to
a performance or market condition). See also Executive Compensation
and Related Person Disclosure Release No. 33-8732A (Aug. 29, 2006)
[71 FR 53158] at n. 167 (discussing the use of performance
conditions and market conditions in equity incentive plans).
    \330\ Letter from CII 2022.
    \331\ See letter from ICGN.
---------------------------------------------------------------------------

    A number of commenters supported allowing the companies' ``most
important'' measures to be non-financial measures.\332\
---------------------------------------------------------------------------

    \332\ See letters from AFREF; As You Sow 2022; Better Markets;
CalSTRS; Ceres; CII 2022; Georgiev; PRI; and RAAI. See also letter
from LWC (stating that companies should be required to discuss ESG
metrics, and if ESG metrics are not used by the company, ``the
company should be required to explain why not'').
---------------------------------------------------------------------------

    Two commenters specifically commented on the time period over which
the ``most important'' measures should be measured: one supported using
the measure that was the ``most important'' over the time horizon of
the disclosure,\333\ while the other suggested that the ``most
important'' evaluation should be made annually.\334\
---------------------------------------------------------------------------

    \333\ See letter from CII 2022.
    \334\ See letter from Davis Polk 2022.
---------------------------------------------------------------------------

    A few commenters were concerned that requiring companies to
disclose a specific ``most important'' measure may lead companies to
provide disclosure that highlights the measure that makes the company
look the best.\335\
---------------------------------------------------------------------------

    \335\ See letters from AFL-CIO 2022; AFREF; and Mark C.
---------------------------------------------------------------------------

iii. Final Amendments
    The final rules require registrants provide a list of their most
important financial performance measures used by the registrant to link
executive compensation actually paid during the fiscal year to company
performance (``Tabular List''), and permit registrants to include non-
financial performance measures in the Tabular List if such measures are
among their most important performance measures.\336\ However, in
response to comments received on the Reopening Release, certain of the
requirements for this list differ from the approach discussed in the
Reopening Release.
---------------------------------------------------------------------------

    \336\ See 17 CFR 229.402(v)(6). We are clarifying that the
measures required to be included in the registrant's list of its
most important financial measures are ``financial performance
measures,'' given that the language in Section 14(i) specifically
references financial performance. For purposes of Item 402(v) of
Regulation S-K, as adopted,''financial performance measures'' means
measures that are determined and presented in accordance with the
accounting principles used in preparing the issuer's financial
statements, any measures that are derived wholly or in part from
such measures, and stock price and total shareholder return. A
financial performance measure need not be presented within the
financial statements or otherwise included in a filing with the
Commission to be included in the Tabular List or be the Company-
Selected Measure. See 17 CFR 229.402(v)(2)(vi). ``Non-financial
performance measures'' are performance measures other than those
that fall within the definition of financial performance measures.
---------------------------------------------------------------------------

    First, in response to comments, we are not requiring the Tabular
List to be ranked. As noted by a number of commenters, numerically
ranking measures may be difficult for companies, given the frequent
interplay between different measures within a company's compensation
program. We believe an unranked list will provide investors with
insights into companies' executive compensation programs by still
presenting them with the ``most important'' measures, while avoiding
potentially burdensome calculations

and analysis that could be involved in specifically designating a
first, second, third, etc. ``most important'' measure. We are not
requiring registrants to provide the methodology used to calculate the
measures included in the Tabular List. We believe such a requirement
would be burdensome on registrants, particularly when the measures are
already well understood by investors or otherwise disclosed. However,
registrants should consider if such disclosure would be helpful to
investors to understand the measures included in the Tabular List, or
necessary to prevent the Tabular List disclosure from being confusing
or misleading.
    Second, under the final rules, the ``most important'' determination
is made on the basis of looking only to the most recently completed
fiscal year, as opposed to ``the time horizon of the disclosure,'' as
described in the Reopening Release. We believe this approach will
alleviate commenters' concerns that identifying the ``most important''
measures would be difficult, particularly when companies have
overlapping or interrelating measures, by narrowing the universe of
measures to be considered when selecting the ``most important'' to
those used in the prior year (instead of the prior five years). In
addition, we believe focusing the disclosure on the registrant's ``most
recently completed fiscal year'' will accommodate changes in
compensation programs and in the compensation related to specific
measures over time, and avoid situations where a registrant is
disclosing measures that are no longer used in, or important to, its
executive compensation program, but would still be ``most important''
based on the measure's usage in prior years disclosed in the table.
    Finally, although the Reopening Release considered a list that
would include the five most important measures, the final rules we are
adopting require disclosure of at least three,\337\ and up to seven
financial performance measures,\338\ and also permit registrants to
include non-financial performance measures in that list. We believe
that providing registrants with flexibility in the number of measures
they can include in the list may also lessen the difficulty, noted by
commenters, of identifying a registrant's ``most important'' measures.
For example, a registrant with three, four, five, or six equally ``most
important'' measures would not need to increase or decrease their
``most important'' measure disclosure to specifically disclose five
measures. We acknowledge that, for certain issuers, this concern may
still remain due to the minimum of three and limit of seven measures
imposed by the final rules; however we are of the view that providing
an upper bound for the list will reduce the risk of lengthy, overly
complicated lists, which would fail to advance the statutory objective
of providing clear and simple comparisons of pay with performance. In
addition, we believe allowing an unlimited number of measures could in
some cases result in misleading or confusing disclosures by obscuring
which performance measures are principally driving compensation
actually paid.
---------------------------------------------------------------------------

    \337\ If the registrant considers fewer than three financial
performance measures when it links executive compensation actually
paid during the fiscal year to company performance, under the final
rules and as considered in the Reopening Release, the registrant
will be required to disclose only the number of measures it actually
considers. Registrants that do not use any financial performance
measures to link executive compensation actually paid to company
performance would not be required to present a Tabular List.
    \338\ Based on staff experience, the majority of companies use
fewer than seven metrics, in total, in their incentive plans. See
also, e.g., Meridian Compensation Partners, LLC, 2020 Trends and
Developments in Executive Compensation (April 30, 2020), available
at https://www.meridiancp.com/wp-content/uploads/Meridian-2020-Trends-and-Developments-Survey-Final.pdf (``Meridian 2020 Survey'')
(indicating that, while the measures used in long-term and annual
incentive plans are often different, only 2% of 108 companies
surveyed by Meridian used three or more performance measures in
their long-term incentive plans or their annual incentive plans);
and Aon plc, The Latest Trends in Incentive Plan Design as Firms
Adjust Plans Amid Uncertainty (October 2020), available at https://humancapital.aon.com/insights/articles/2020/the-latest-trends-in-incentive-plan-design-as-firms-adjust-plans-amid-uncertainty (``Aon
2020 Study'') (surveying the CEO short- and long-term incentive
plans at a sample of the S&P 500, across all industries, and finding
that for short-term incentive plans, ``[a]ll industries, excluding
energy, reveal most companies use one to two metrics'' and that
``[a]cross all sectors of the S&P 500, companies, on average, use
two metrics for long-term incentives''). Given this, we believe a
range of at least three and up to seven metrics should give almost
all companies flexibility in listing their ``most important''
measures, even if they determine that all of their financial
performance measures are the ``most important.''
---------------------------------------------------------------------------

    As discussed in the Reopening Release, the final rules specify that
measures required to be included in the Tabular List are financial
performance measures that, in the registrant's assessment, represent
the most important financial performance measures used by the
registrant to link compensation actually paid during the fiscal year to
company performance. As discussed in the Reopening Release, we believe
that a list of the measures that the registrant assesses to be the
``most important'' may enable investors to more easily assess which
performance measures actually have the most impact on compensation
actually paid and make their own judgments as to whether that
compensation appropriately incentivizes management. In addition, we
believe this list will provide investors with helpful context for
interpreting the pay-versus-performance disclosure, more generally,
particularly when analyzing the other measures included in the table,
by showing which (if any) of those measures are considered
``important'' by the registrant, in determining pay. While we recognize
that some commenters supported permitting non-financial performance
measures to be included in the list, the final rules specify that the
only required disclosures in the Tabular List are ``financial
performance measures'' given the ``financial performance'' language in
Section 14(i). However, in response to commenters, the final rules
provide that registrants have the option of including non-financial
performance measures in the Tabular List. Registrants may do so only if
such measures are included in their three to seven most important
performance measures, and they have disclosed at least three (or fewer,
if the registrant only uses fewer) most important financial performance
measures. Regardless of whether registrants elect to disclose non-
financial performance measures in their Tabular List, they still may
only disclose a maximum of seven measures in the list.
    Under the final rules, registrants may disclose the Tabular List in
three different ways.\339\ First, registrants may present one list with
at least three, and up to seven, performance measures, which in the
registrant's assessment represent the most important performance
measures used by the registrant to link compensation actually paid to
the registrant's NEOs, for the most recently completed fiscal year, to
company performance, similar to the ranked list contemplated in the
Reopening Release.
---------------------------------------------------------------------------

    \339\ See 17 CFR 229.402(v)(6)(i).
---------------------------------------------------------------------------

    Second, registrants may break up the Tabular List disclosure into
two separate lists: one for the PEO and one for the remaining NEOs.
Third, registrants may break up the Tabular List disclosure into
separate lists for the PEO and each NEO. If the registrant elects to
provide the Tabular List disclosure in multiple lists (the second or
third options, described above), each list must include at least
three,\340\ and

up to seven, financial performance measures. As in situations where a
registrant elects to provide one Tabular List, registrants electing to
provide the Tabular List disclosure in multiple lists may include non-
financial performance measures in such lists if such measures are among
their most important performance measures. Requiring the Tabular List
to include measures related to both PEO and NEO compensation is
consistent with the approach taken throughout Item 402(v) of Regulation
S-K and we believe this consistency in disclosure will make the
disclosure more readily understandable to investors.
---------------------------------------------------------------------------

    \340\ If the registrant considers fewer than three financial
performance measures when it links compensation actually paid to the
specific NEO (or group of NEOs) included in the list, during the
fiscal year to company performance, the registrant will be required
to disclose only the number of measures it actually considers.
---------------------------------------------------------------------------

    As noted above, commenters suggested that such a list was beyond
the scope of the Dodd-Frank Act mandate, and that similar disclosure is
already available in the CD&A.\341\ We believe the Tabular List would
further the objectives of the Section 14(i) mandated disclosure, as it
provides another avenue for investors to understand the relationship
between executive compensation actually paid and the registrant's
financial performance. It is within our authority to specify the form
and content of this disclosure as well as to require additional
information to enhance the Dodd-Frank Act mandated disclosures. While
it is possible that some registrants provide similar disclosure in the
CD&A, we note that the CD&A requires disclosure of performance measures
that are ``material elements of the registrant's compensation of named
executive officers,'' \342\ not the ``most important'' measures used by
the registrant to link executive compensation actually paid to company
performance. There would be an overlap between those two disclosure
requirements when the ``most important'' measures are also ``material
elements of the registrant's compensation of named executive
officers''; however, they are not necessarily the same. Even in
situations where the performance measures included in the Tabular List
are already included in CD&A disclosure, we believe that the
presentation of the measures in the Tabular List should allow investors
to more readily understand what measures in the registrant's view are
the ``most important'' to its compensation program, and thus better
understand the relationship between registrant performance and
executive compensation, as the statute provides.
---------------------------------------------------------------------------

    \341\ See letters from CEC 2022; Davis Polk 2022; McGuireWoods;
and SCG.
    \342\ Item 402(b) of Regulation S-K.
---------------------------------------------------------------------------

    Finally, as considered in the Proposing Release, under the final
rules, registrants may cross-reference to other disclosures elsewhere
in the applicable disclosure document that describe the registrant's
processes and calculations that go into determining NEO compensation as
it relates to these performance measures, if they elect to do so.
4. Requirement To Disclose a Company-Selected Measure
i. Amendments Considered in the Reopening Release
    The Reopening Release requested comment on requiring registrants to
disclose a Company-Selected Measure--a measure that in the registrant's
assessment represents the most important performance measure (that is
not already included in the table) used by the registrant to link
executive compensation actually paid during the fiscal year to company
performance, over the time horizon of the disclosure. We considered
adding this requirement in order to both provide additional useful
disclosure to investors regarding the measures the registrant actually
used to set compensation, and to lessen the likelihood that the
mandated measures in the tabular disclosure would misrepresent or
provide an incomplete picture of how pay relates to performance. We
believed that requiring disclosure of a Company-Selected Measure would
not be overly burdensome on registrants, as, by definition, the
Company-Selected Measure would be a measure already considered by
registrants when making executive compensation determinations, and may
already be discussed, in a different form, in the CD&A.
ii. Comments
    A number of commenters provided feedback on potential disclosure of
a Company-Selected Measure, as discussed in the Reopening Release. Some
commenters supported mandatory disclosure of a Company-Selected
Measure,\343\ with one suggesting that the Company-Selected Measure (or
Measures) should be the only mandated performance measure(s).\344\ One
commenter, who generally favored requiring registrants to disclose
``all'' measures used by registrants in linking executive compensation
paid to performance, suggested that the Company-Selected Measure should
be limited to financial measures, to provide an ``alternative'' to TSR,
and suggested that companies should be permitted to omit the Company-
Selected Measure if they do not have a single measure used to assess
financial performance for compensation purposes.\345\ Another commenter
suggested requiring the disclosure of multiple Company-Selected
Measures, such as three such measures, with corresponding peer group
disclosure to prevent registrants from ``cherry-pick[ing] measures.''
\346\ Other commenters suggested that the Company-Selected Measure
should be based on the compensation paid to the PEO, not all of the
NEOs.\347\
---------------------------------------------------------------------------

    \343\ See letters from As You Sow 2022; Better Markets; CalPERS
2022; CalSTRS; Dimensional; Georgiev; Infinite; ICGN; Nareit
(specifically supporting the fact that it would provide REITs with
flexibility to disclose a measure more relevant for them); PG 2022;
PRI; RAAI; Teamsters; and Troop.
    \344\ See letter from NAM 2022.
    \345\ See letter from Georgiev.
    \346\ Letter from Dimensional; see also letter from Georgiev
(suggesting registrants be permitted to include multiple Company-
Selected Measures).
    \347\ See letter from Davis Polk 2022 (opposing the mandatory
disclosure of a Company-Selected Measure, but stating that, if it is
required, it should be based on compensation paid to the PEO) and
Infinite.
---------------------------------------------------------------------------

    Some commenters suggested that the Company-Selected Measures be
disclosed alongside the methodology used to calculate it,\348\ with two
commenters specifically suggesting the Company-Selected Measure must be
``auditable/assurable'' \349\ or accompanied by ``an explanation of its
calculation and a complete GAAP reconciliation, if possible.'' \350\
Two commenters specifically said that, if ESG metrics are used as
Company-Selected Measures, additional information about the metrics
used should be disclosed.\351\
---------------------------------------------------------------------------

    \348\ See letters from AFREF; CII 2022; and ICGN.
    \349\ Letter from ICGN.
    \350\ Letter from Teamsters.
    \351\ See letters from Dimensional and PRI.
---------------------------------------------------------------------------

    A number of commenters opposed the mandatory inclusion of a
Company-Selected Measure,\352\ stating that the idea that there is one
``most important'' measure ``oversimplifies'' the compensation setting
process,\353\ and that different measures cannot be considered in
``isolation.'' \354\
---------------------------------------------------------------------------

    \352\ See letters from Aon HCS; ASA; CEC 2022; Davis Polk 2022;
IBC 2022; McGuireWoods; and TCA 2022 (stating that the Company-
Selected Measure should be ``allow[ed] for,'' while other prescribed
measures should be eliminated).
    \353\ Letter from IBC 2022.
    \354\ Letter from CEC 2022.
---------------------------------------------------------------------------

    As discussed above, a number of commenters supported allowing the
companies' ``most important'' measures to be non-financial
measures,\355\ with

some supportive of allowing non-financial measures to be a registrant's
Company-Selected Measure.\356\ Other commenters opposed either allowing
non-financial measures to be included as Company-Selected Measures,
indicating that doing so ``would be at odds with both the language and
intent of Section 953(a),'' \357\ or requiring or encouraging companies
to incorporate ESG metrics in setting executive pay.\358\
---------------------------------------------------------------------------

    \355\ See supra note 332. See also letter from Davis Polk 2022
(opposing the mandatory disclosure of a Company-Selected Measure,
but stating that, if it is required, ``it should be permitted to
encompass factors other than measures that relate to financial
performance'').
    \356\ See letters from AFREF; CII 2022; Ceres; and PRI.
    \357\ See letter from Center for Capital Markets
Competitiveness, dated Mar. 4, 2022.
    \358\ See letter from Dimensional.
---------------------------------------------------------------------------

    Commenters were divided on whether Company-Selected Measures should
be permitted to be changed from year to year, and if so, what
disclosure should be required. One commenter was directly opposed to
regular changes in the Company-Selected Measure, stating the measure
should be required to remain the same for at least five years, in order
to avoid companies rationalizing the ``best'' measure each year.\359\
Other commenters supported allowing annual changes to the Company-
Selected Measure, so long as accompanying disclosure about the reason
for the change or a period of disclosure of the `old' and `new'
measures was provided.\360\ One commenter alternatively suggested that
the Company-Selected Measure should be the ``most important'' measure
over a given period, and not the ``most important measure'' for all
five years in the table.\361\
---------------------------------------------------------------------------

    \359\ See letter from Better Markets et al.
    \360\ See letters from CalPERS 2022; CII 2022; Davis Polk 2022
(opposing the mandatory disclosure of a Company-Selected Measure,
but stating that, if it is required, it should allow for variability
over different years); ICGN; and Troop.
    \361\ See letter from PG 2022.
---------------------------------------------------------------------------

    One commenter suggested that, if the ``most important'' measure is
already included in the tabular disclosure, the next-most important
measure should be included as the Company-Selected Measure,\362\ while
another commenter (who generally opposed the inclusion of the Company-
Selected Measure) stated that, if it is a measure otherwise required to
be disclosed in the table, the Company-Selected Measure should be able
to be an already-included measure.\363\
---------------------------------------------------------------------------

    \362\ See letter from PDI.
    \363\ See letter from Davis Polk 2022.
---------------------------------------------------------------------------

iii. Final Amendments
    The final rules require registrants to disclose a Company-Selected
Measure in the table required under new 17 CFR 229.402(v)(1). The
Company-Selected Measure must be a financial performance measure
included in the Tabular List, which in the registrant's assessment
represents the most important performance measure (that is not
otherwise required to be disclosed in the pay-versus-performance table
required under new Item 402(v) of Regulation S-K) used by the
registrant to link compensation actually paid to the registrant's NEOs,
for the most recently completed fiscal year, to company performance. If
the registrant's ``most important'' measure is already included in the
tabular disclosure, the registrant would select its next-most important
measure as its Company-Selected Measure. As discussed above,\364\
registrants would also be required to provide a clear description of
the relationship of the Company-Selected Measure to executive
compensation actually paid, in narrative or graphical form, or a
combination of the two.\365\
---------------------------------------------------------------------------

    \364\ See supra Section II.A.2.iii.
    \365\ As with the Tabular List, we are also not requiring
registrants to provide the methodology used to calculate the
Company-Selected Measure. We believe such a requirement would be
overly burdensome on registrants, particularly when the measure is
already well understood by investors or otherwise disclosed.
However, registrants should consider if such disclosure would be
helpful to investors to understand the Company-Selected Measure, or
necessary to prevent the Company-Selected Measure disclosure from
being confusing or misleading.
---------------------------------------------------------------------------

    We believe that providing a quantified Company-Selected Measure,
along with the Tabular List, will provide investors with useful context
for understanding the measures actually used by registrants in their
compensation programs. In order to allow investors to understand the
measure that is most important, we are only requiring registrants to
provide one Company-Selected Measure. However, we recognize some
registrants may have additional performance measures (including non-
financial measures) that they believe are ``important'' measures and
that could warrant quantified disclosure. We note that, under the Plain
English principles (discussed below \366\), registrants may provide
additional performance measures as new columns in the table. However,
such additional disclosures may not be misleading or obscure the
required information, and the additional performance measures may not
be presented with greater prominence than the required disclosure.\367\
If a registrant elects to provide any additional performance measures
in the table, each additional measure must also be accompanied by a
clear description of the relationship between executive compensation
actually paid to the registrant's PEO, and, on average, to the other
NEOs, and that measure.\368\ We believe clarifying that registrants
have the flexibility to include additional measures will, to some
degree, alleviate concerns raised by some commenters in response to the
Reopening Release that selecting one Company-Selected Measure was
overly simplistic and did not reflect how companies actually approach
their compensation programs, while also providing registrants the
opportunity to provide context to the other mandatory measures
disclosed in the table.
---------------------------------------------------------------------------

    \366\ See infra Section II.F.3.
    \367\ Consistent with the Plain English principles, if a
registrant elects to include multiple additional measures in the
table, it should consider whether the addition of those measures
modifies the disclosure in such a way that the disclosure becomes
misleading, the required information in the table becomes obscured,
or the additional measures are presented with greater prominence
than the required disclosure. In addition, in situations where
registrants elect to describe multiple measures because they believe
multiple measures are equally the ``most important,'' they would
still be required to select one Company-Selected Measure, but could
provide explanatory disclosure, for example, about why additional
measures are added and the reason that the Company-Selected Measure
was selected.
    \368\ See 17 CFR 229.402(v)(5).
---------------------------------------------------------------------------

    As the Company-Selected Measure must be a measure included in the
Tabular List,\369\ the determination of ``most important'' that
registrants must use for selecting Company-Selected Measures is the
same as the determination they must use for selecting required measures
for the Tabular List (i.e., the ``most important'' determination is
made based on the most recently completed fiscal year and the measures
required to be disclosed are financial measures of performance). We are
limiting the measures required to be included in the Tabular List (and
to be included as the Company-Selected Measure) to financial
performance measures given the statutory language referencing ``the
relationship between executive compensation actually paid and the
financial performance of the issuer.'' \370\ We recognize that some
registrants may consider one or more non-financial performance measures
to be their most important measures for executive compensation
purposes. In addition to the option under the final rules to include
such measures in the Tabular list, under the Plain English principles,
those registrants can supplement their mandatory pay-versus-performance
disclosure with disclosure

about those non-financial performance measures, as discussed
below.\371\
---------------------------------------------------------------------------

    \369\ See 17 CFR 229.402(v)(2)(vi).
    \370\ 15 U.S.C. 78n(i) (emphasis added).
    \371\ See infra Section II.F.3.
---------------------------------------------------------------------------

    The table will include the numerically quantifiable performance of
the issuer under the Company-Selected Measure for each covered fiscal
year. For example, if the Company-Selected Measure for the most recent
fiscal year was total revenue, the company would disclose its
quantified total revenue performance in each covered fiscal year. The
Company-Selected Measure could change from one filing to the next, and
we acknowledge that some commenters were concerned that registrants may
change their Company-Selected Measure in order to present the
relationship of pay to performance in a positive light.\372\ However,
we believe limiting the Company-Selected Measure to compensation linked
to performance for the most recently completed fiscal year will provide
investors with visibility into the registrant's current executive
compensation program, and avoid situations in which the Company-
Selected Measure is not a measure that is currently used by the
registrant (i.e., when a measure is only the ``most important'' measure
based on historical usage). In addition, as is the case for the Tabular
List, we believe limiting the Company-Selected Measure to the most
recent fiscal year will allow registrants to more easily calculate and
assess which measure is the ``most important.''
---------------------------------------------------------------------------

    \372\ See letters from Better Markets et al. (suggesting that
the Company-Selected Measure should remain the same for five years
to prevent firms from using a measure that best justifies
compensation in a given year); see also letters from CalPERS 2022
(suggesting that if the Company-Selected Measure is changed, the
prior and current Company-Selected Measures should both be reported
for some period of time).
---------------------------------------------------------------------------

    Similarly to the Tabular List, we do not believe it would be
appropriate to limit the Company-Selected Measure to a measure relating
only to the PEO's compensation, because our understanding is that
Congress intended for the rules to provide disclosure about both PEOs
and the remaining NEOs.
    We are not mandating that the methodology used to calculate the
Company-Selected Measure be included in the registrant's disclosure.
However, as discussed above,\373\ registrants will be required to
provide a narrative, graphical, or combined narrative and graphical
description of the relationships between executive compensation
actually paid to the PEO, and, on average, the other NEOs, and the
Company-Selected Measure, and may cross-reference to other disclosures
elsewhere in the applicable disclosure document that describe the
processes and calculations that go into determining NEO compensation as
it relates to the Company-Selected Measure, if they elected to do so.
In addition, registrants are permitted to supplement their Company-
Selected Measure disclosure, so long as any additional disclosure is
clearly identified as supplemental, not misleading and not presented
with greater prominence than the required disclosure.
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    \373\ See supra Section II.A.2.iii.
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    Further, we recognize that a registrant's Company-Selected Measure,
or additional measures included in the table, may be non-GAAP financial
measures. Under existing CD&A requirements, if a company discloses a
target level that applies a non-GAAP financial measure in its CD&A, the
disclosure will not be subject to the general rules regarding
disclosure of non-GAAP financial measures, but the company must
disclose how the number is calculated from its audited financial
statements.\374\ Because the disclosure required by the final rules is
intended, among other things, to supplement the CD&A, we believe it is
appropriate to treat non-GAAP financial measures provided under Item
402(v) of Regulation S-K consistently with the existing CD&A
provisions. As a result, the final rules specify that disclosure of a
measure that is not a financial measure under generally accepted
accounting principles will not be subject to Regulation G and Item
10(e) of Regulation S-K; however, disclosure must be provided as to how
the number is calculated from the registrant's audited financial
statements.
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    \374\ See Instruction 5 to Item 402(b) of Regulation S-K. The
general non-GAAP financial measure provisions are specified in
Regulation G [17 CFR 244.100 through 102] (``Regulation G'') and
Item 10(e) of Regulation S-K [17 CFR 229.10(e)] (``Item 10(e) of
Regulation S-K'').
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E. Time Period Covered

1. Proposed Amendments
    We proposed requiring all registrants, other than SRCs, to provide
the pay-versus-performance disclosure for the five most recently
completed fiscal years, and requiring SRCs to provide disclosure for
the three most recently completed fiscal years. We also proposed
providing transition periods for registrants: SRCs would only be
required to provide the Item 402(v) of Regulation S-K disclosure for
the last two fiscal years in the first applicable filing after the
rules became effective; and all other registrants would be required to
provide the disclosure for three fiscal years, in the first applicable
filing after the rules became effective, and to provide disclosure for
an additional year in each of the two subsequent annual proxy filings
where disclosure is required.
    The Proposing Release also provided that the pay-versus-performance
disclosure would only need to be provided for years in which a
registrant was a reporting company pursuant to Section 13(a) of the
Exchange Act \375\ or Section 15(d) of the Exchange Act \376\
(``Section 15(d)''), consistent with the phase-in period for new
reporting companies in their Summary Compensation Table
disclosure.\377\
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    \375\ 15 U.S.C. 78m(a).
    \376\ 15 U.S.C. 78o(d).
    \377\ See Instruction 1 to 17 CFR 229.402(c) and Instruction 1
to 17 CFR 229.402(n).
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2. Comments
    Several commenters supported the proposed disclosure periods,\378\
while several others generally opposed them.\379\ Some commenters who
opposed the proposed disclosure periods stated that the periods were
too short to measure management's performance; \380\ while others
argued the periods were too long, creating burdensome costs for
registrants, and were inconsistent with other approaches taken in the
proxy statement.\381\
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    \378\ See letters from CII 2015; CFA; Farient; LWC; OPERS;
Quirin; SVA; and TIAA.
    \379\ See letters from AON; BorgWarner; CEC 2015; Celanese; Hay;
Hyster-Yale; McGuireWoods; NACCO; PNC; SCG; and WorldatWork.
    \380\ See Letters from Hyster-Yale and NACCO.
    \381\ See letters from BorgWarner; Celanese; Hay; and
WorldatWork.
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    Commenters suggested a number of different alternative time
periods. Some commenters suggested permitting registrants to
voluntarily disclose additional years in the tabular disclosure,\382\
while others opposed permitting additional years of disclosure.\383\
Some other commenters recommended the Commission use a three-year
period,\384\ with some of those commenters noting that three-year
periods will have less NEO turnover, meaning registrants will need to
make less explanatory disclosure.\385\ One commenter suggested we only
require the disclosure for one year.\386\ Another commenter suggested
allowing registrants to set the time period

covered, with a minimum requirement, such as three years.\387\ Finally,
one commenter did not propose a specific time period, but rather
suggested the longer the period the better.\388\
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    \382\ See letters from CFA; NACD 2015; Andrea Pawliczek, dated
Mar. 4, 2022; and Simpson Thacher.
    \383\ See letters from Barnard 2015 and Quirin.
    \384\ See letters from AON; Celanese; FSR; Hay; Honeywell;
McGuireWoods; SCG; and WorldatWork; see also letters from Davis Polk
2015 and Davis Polk 2022 (each recommending a one-year period, but
suggesting a three-year period as an alternative to their
suggestion).
    \385\ See letters from AON and SCG.
    \386\ See letters from Davis Polk 2015 and Davis Polk 2022.
    \387\ See letter from Hall.
    \388\ See letter from Hermes.
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    Commenters were also divided on the suggested transition period.
Some commenters supported the transition period,\389\ while one
commenter opposed it.\390\ Others questioned whether there would be
significant enough costs to justify applying a transition period.\391\
One commenter specifically supported a transition period for newly
public companies.\392\
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    \389\ See letters from BRT; CFA; Hook; McGuireWoods; and TIAA.
    \390\ See letter from Barnard 2015.
    \391\ See letters from CII 2015 and Hermes.
    \392\ See letter from Pearl.
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    Commenters offered a few alternatives to the proposed transition
period, including a one-year transition period, not requiring reporting
until the anniversary of the effective date of the rule,\393\ and a
longer transition period.\394\
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    \393\ See letters from BRT and NIRI 2015.
    \394\ See letter from Pearl.
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3. Final Amendments
    We are adopting the time periods as proposed. We believe that
requiring registrants, other than SRCs, to provide pay-versus-
performance disclosure for a five year period will provide a meaningful
period over which a relationship between annual measures of pay and
performance over time can be evaluated. Further, we are requiring that
the disclosure be in order beginning with the most recent fiscal year.
We believe that requiring a shorter time period, for all registrants,
may not provide investors with enough data to evaluate the pay-versus-
performance relationship, while requiring a longer period may be overly
burdensome to registrants. We also believe that the scaled disclosure
requirement under which SRCs may elect to provide three years of pay-
versus-performance disclosure will provide investors with an
appropriate time horizon over which to observe a relationship between
pay and performance, while also remaining consistent with the scaled-
disclosure approach generally applied to SRCs under our executive
compensation rules. While SRCs generally are only required to provide
two years of executive compensation disclosure in filings with the
Commission, because the final rules include a transition period that
permits an existing SRC to provide two years of disclosure, instead of
three, in the first applicable filing after the rules become effective,
and three years of disclosure in subsequent filings, we do not believe
requiring three years of pay-versus-performance data will be unduly
burdensome on SRCs.\395\
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    \395\ See infra Section II.G (discussing the required
disclosures for SRCs).
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    We are also adopting the transition periods and the requirement
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, as proposed. We believe both of
these provisions will mitigate concerns expressed by some commenters
regarding the costs of the potential disclosure, while also, over time,
providing investors with a meaningful way to evaluate a registrant's
period pay-versus-performance disclosure. In order to give companies
adequate time to implement the new disclosures, we are providing that
companies are required to comply with Item 402(v) of Regulation S-K in
proxy and information statements that are required to include the Item
402 of Regulation S-K disclosure for fiscal years ending on or after
December 16, 2022.
    With respect to some commenters' suggestions that we should permit
registrants to voluntarily provide additional years of disclosure, as
noted below, under the Plain English principles, the final rules will
permit registrants to provide additional years of disclosure, so long
as doing so would not be misleading and would not obscure the required
information.

F. Permitted Additional Pay-Versus-Performance Disclosure

1. Proposed Amendments
    We proposed applying the Plain English principles in 17 CFR
240.13a-20 and 17 CFR 240.15d-20 to the pay-versus-performance
disclosures. We noted that, under those principles, registrants would
be permitted to provide additional information beyond what is
specifically required by the rules so long as the information is not
misleading and would not obscure the required information. As discussed
in the Proposing Release, we note 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.'' \396\
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    \396\ See Executive Compensation and Related Person Disclosure,
Release No. 33-8732A (Aug. 29, 2006) [71 FR 53158 (Sept. 8, 2006)],
at Section II.C.6.
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2. Comments
    Some commenters supported applying the Plain English principles to
the pay-versus-performance disclosure, noting that their application
would be beneficial for both investors and the financial
community.\397\
---------------------------------------------------------------------------

    \397\ See letters from McGuireWoods and PG 2015; see also letter
from Hermes (supporting a ``plain English'' requirement for the pay-
versus-performance disclosure, but questioning whether its
application ``can be mandated through regulation'').
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3. Final Amendments
    The final amendments allow registrants to provide additional pay-
versus-performance information beyond what is specifically required by
Item 402(v) of Regulation S-K, so long as doing so would not be
misleading and would not obscure the required information. For example,
registrants that are already providing voluntary pay-versus-performance
disclosures may generally continue to provide such disclosures in their
present format, or could include disclosure of long-term performance
metrics measured over periods longer than a single fiscal year.\398\
Subject to these same principles, registrants will be permitted to
include additional compensation and performance measures, or additional
years of data, in the newly required table. Any supplemental measures
of compensation or financial performance and other supplemental
disclosures provided by registrants must be clearly identified as
supplemental, not misleading, and not presented with greater prominence
than the required disclosure. For example, depending on the facts and
circumstances, a registrant could use a heading in the table indicating
that the disclosure is supplemental, or include language in the text of
its filing stating that the disclosure is supplemental. As noted above,
to the extent additional performance measures are included in the
table, these must also be accompanied by a clear description of their
relationship to executive compensation actually paid to the PEO

and to the average such compensation of the other NEOs. As discussed in
the Proposing Release, and noted by commenters, we believe applying the
Plain English principles to the pay-versus-performance disclosure will
facilitate investors' understanding and decision-making with respect to
the pay-versus-performance disclosure.
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    \398\ As noted above, the placement and presentation of the
information required by the final rules relative to existing
disclosures may not obscure the required disclosures, place the
required disclosures in a less prominent position, or otherwise
mislead or confuse investors. In addition, a registrant should
consider whether retaining its existing pay-versus-performance
disclosure would be duplicative of the disclosures required by the
final rules, and, if so, it may need to consider mitigating any such
duplication.
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G. Required Disclosure for Smaller Reporting Companies

1. Proposed Amendments
    The Proposing Release would have required SRCs to provide
disclosure under Item 402(v) of Regulation S-K, but the disclosure
would be scaled for those companies, consistent with SRCs' existing
scaled executive compensation disclosure requirements. Specifically, as
proposed, SRCs would:
     Only be required to present three, instead of five, fiscal
years of disclosure under new Item 402(v) of Regulation S-K;
     Not be required to disclose amounts related to pensions
for purposes of disclosing executive compensation actually paid;
     Not be required to present peer group TSR;
     Be permitted to provide two years of data, instead of
three, in the first applicable filing after the rules became effective;
and
     Be required to provide disclosure in the prescribed table
in XBRL format beginning in the third filing in which it provides-pay-
versus performance disclosure.
    In the Reopening Release, the Commission indicated that it was
considering requiring SRCs to disclose the income or loss before income
tax expense and net income measures, but not the Company-Selected
Measure or the list of their five most important measures.
2. Comments
    Some commenters supported fully exempting SRCs from the pay-versus-
performance disclosure requirements, stating that the disclosure
requirements would be disproportionally burdensome to SRCs; \399\
executive disclosure issues are less acute at SRCs; \400\ and TSR is a
more problematic measure for SRCs due to the relative illiquidity and
volatility of SRCs' shares.\401\ One commenter suggested that the
Commission exempt SRCs from the disclosure requirements for five years,
so that the Commission could first analyze the impact of the disclosure
requirements on larger registrants.\402\ Another commenter suggested
that the pay-versus-performance disclosure be voluntary for SRCs.\403\
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    \399\ See letters from CCMC 2015; Mercer; Pearl; TCA 2015; and
TCA 2022.
    \400\ See letter from CCMC 2015.
    \401\ See letters from Mercer and Pearl.
    \402\ See letters from NIRI 2015 and NIRI 2022.
    \403\ See letter from ICGN.
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    Other commenters stated that we should not exempt SRCs from the
disclosure requirements.\404\ One commenter opposed to exempting SRCs
indicated that a lack of transparency could have negative market
effects for SRCs.\405\ In addition, one commenter specifically
supported requiring SRCs to disclose income or loss before income tax
expense, net income, the Company-Selected Measure, and the list of the
five most important measures.\406\
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    \404\ See letters from AB; Better Markets; CalPERS 2015;
CalSTRS; CII 2015; Eileen Morrell, dated Mar. 6, 2022 (``Morrell'');
SBA-FL; and Troop.
    \405\ See letter from CalPERS 2015.
    \406\ See letter from CII 2022.
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    With respect to the timing of the disclosure, one commenter, who
supported SRCs being subject to the full pay-versus-performance
disclosure requirement, suggested a one year ``grace period.'' \407\
Another commenter suggested that SRCs provide five years of data, but
that we provide SRCs with a three year transition period requiring two
years of data in the first applicable filing after the rules became
effective, and increasing until the fourth applicable filing after the
rules become effective, when all five years of data would be
required.\408\
---------------------------------------------------------------------------

    \407\ See letter from AB.
    \408\ See letter from Hermes.
---------------------------------------------------------------------------

    As discussed above, a number of commenters supported requiring all
registrants to use Inline XBRL to tag their pay-versus-performance
disclosure,\409\ with one specifically stating that all filers are now
familiar with Inline XBRL.\410\ On the other hand, one commenter
specifically suggested, in response to the Proposing Release, that we
exempt SRCs from any XBRL tagging requirement.\411\
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    \409\ See letters from CII 2022; Huddart; ICGN; and XBRL US.
    \410\ Letter from XBRL US.
    \411\ See letter from Hay.
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3. Final Amendments
    We are adopting the scaled disclosure requirements for SRCs as
described in the Proposing Release (and with respect to the net income
measure, the Reopening Release). For the reasons noted above,\412\ we
believe requiring SRCs to provide three instead of five years is
appropriate, and is aligned with SRCs' existing scaled executive
compensation disclosure requirements. While the three-year period
applicable for the disclosure is longer than what SRCs currently are