required to disclose in the Summary Compensation Table, we believe the
pay-versus-performance calculations, or the information required to
make the calculations, for the additional year would generally be
available in SRCs' disclosures from prior years.
---------------------------------------------------------------------------

    \412\ See supra Section II.E.3.
---------------------------------------------------------------------------

    We also believe that requiring SRCs to provide peer group TSR, a
Company-Selected Measure, a Tabular List, or disclose amounts related
to pensions would be unduly burdensome for SRCs, which, unlike larger
registrants, are not otherwise required to present the TSR of a peer
group or disclosure of how executive compensation relates to
performance in a CD&A, and are subject to scaled compensation
disclosure that does not include pension plans. Finally, we believe a
transition period that would permit SRCs to provide two years of data,
instead of three, in the first applicable filing after the rules become
effective is appropriate, as is a phase-in period to allow SRCs to
provide the required Inline XBRL data beginning in the third filing in
which it provides pay-versus-performance disclosure, instead of the
first.

III. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
    Pursuant to the Congressional Review Act,\413\ the Office of
Information and Regulatory Affairs has designated these rules as not a
``major rule,'' as defined by 5 U.S.C. 804(2).
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    \413\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Compliance Dates

    In order to give companies adequate time to implement these
disclosures, we are requiring registrants to begin complying with Item
402(v) of Regulation S-K in proxy and information statements that are
required to include Item 402 disclosure for fiscal years ending on or
after December 16, 2022.

V. Economic Analysis

A. Background

    We are adopting these final rules to satisfy the statutory mandate
of Section 14(i). The Senate Report that accompanied the statute
references shareholder interest in the relationship

between executive pay and performance as well as the general benefits
of transparency of executive pay practices.\414\ As discussed above, we
believe that the statute is intended to provide further disclosures
concerning a registrant's executive compensation program for
shareholders to consider when making related voting decisions, such as
decisions with respect to the shareholder advisory vote on executive
compensation, votes on other compensation matters, and director
elections.
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    \414\ The Senate Report includes the following with respect to
Section 953(a) of the Dodd-Frank Act: ``It has become apparent that
a significant concern of shareholders is the relationship between
executive pay and the company's financial performance of the
issuers. . . The Committee believes that these disclosures will add
to corporate responsibility as firms will have to more clearly
disclose and explain executive pay.'' See Senate Report supra note
4.
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    The final rules require the disclosure of information that is
largely already reported under current disclosure rules, but that is
currently not computed or presented in the way the final rules will
require. This repackaging of some of the information from existing
disclosures into the required pay-versus-performance disclosure is
intended to allow investors to more quickly or easily process the
information accurately.
    The final rules require registrants to present the values of
prescribed measures of executive compensation and financial performance
for each of their five most recently completed fiscal years (three
years for SRCs) in a standardized table in proxy or information
statements in which executive compensation disclosure is required.
Registrants will also be required to provide ``clear descriptions'' of
the relationships between the compensation and performance measures in
the table (and between TSR and peer group TSR), but will be allowed to
choose the format used to present the relationships, such as graphical
or narrative descriptions (or a combination of the two). The final
rules will also allow registrants to supplement the required elements
of the disclosure with additional measures or additional years of data,
subject to certain restrictions. Registrants will be required to
provide the disclosure in a structured data language using Inline XBRL.
    The final rules reflect several modifications relative to the
proposed rules in response to comments received. For example, one area
of significant comment on the Proposing Release was the proposal's
reliance on TSR (and, for registrants other than SRCs, peer group TSR)
as the exclusive measure of financial performance used to present the
relation of pay with performance.\415\ The Reopening Release discussed,
solicited comment on, and analyzed the economic effects of some
possible additional measures of financial performance that the
Commission was considering requiring. The final rules introduce two of
these additional measures to the table: net income and, for registrants
other than SRCs, a Company-Selected Measure. In addition, the final
rules require registrants other than SRCs to provide a Tabular List of
the most important financial performance measures used to link
executive compensation actually paid, for the most recent fiscal year,
to company performance. The additions will broaden the picture of
registrant performance presented in the disclosure, providing
additional detail and context that could enhance the usefulness of the
disclosure by certain registrants or for certain investors. The
additions will also entail some additional compliance costs and could
make it more difficult for investors to quickly review the disclosure.
---------------------------------------------------------------------------

    \415\ See supra notes 229 and 230.
---------------------------------------------------------------------------

    Many commenters to the Proposing Release also raised concerns that,
under the proposed approach, the year to which company performance
would be attributed and the year in which associated pay would be
recognized would frequently be mismatched,\416\ which could
significantly limit the usefulness of the proposed disclosure. To
address these comments, the final rules require equity awards to be
revalued more frequently than had been proposed in order to better
align pay and any related performance, at the expense of somewhat
greater costs to registrants of computing the prescribed measure of
pay.
---------------------------------------------------------------------------

    \416\ See infra note 631.
---------------------------------------------------------------------------

    We are mindful of the costs and benefits of the final rules. The
discussion below addresses the economic effects of the final rules,
including their anticipated costs and benefits, as well as the likely
effects of the final rules on efficiency, competition, and capital
formation.\417\ The final rules reflect the statutory mandate in
Section 14(i) as well as the discretion we exercise in implementing
that mandate. For purposes of this economic analysis, we address the
costs and benefits resulting from the statutory mandate and from our
exercise of discretion together, recognizing that it is difficult to
separate the costs and benefits arising from these two sources. We also
analyze the potential costs and benefits of significant alternatives to
the final rules.
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    \417\ Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)]
requires the Commission, when engaging in rulemaking where it is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. Further, Section 23(a)(2) of the
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when
making rules under the Exchange Act, to consider the impact that the
rules would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the Exchange Act.
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B. Baseline

    To assess the economic impact of the final rules, we are using as
our baseline the current state of the market without a requirement for
registrants to disclose the relationship between executive compensation
actually paid and the financial performance of the registrant.
1. Affected Parties
    We consider the impact of the final rules on investors and
registrants (and their NEOs). The final rules will apply to all
companies that are registered under Section 12 of the Exchange Act
\418\ (``Section 12'') and are therefore subject to the Federal proxy
rules, except EGCs. The final rules will also not apply to foreign
private issuers or companies with reporting obligations only under
Section 15(d) of the Exchange Act, which are not subject to the proxy
rules. In addition, for some Section 12(g) of the Exchange Act \419\
(``Section 12(g)'') registrants, such as limited partnerships, the
disclosure requirement might not apply in some or all years because
these registrants might not file either proxy or information statements
every year.\420\
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    \418\ 15 U.S.C. 78l.
    \419\ 15 U.S.C. 78l(g).
    \420\ Registrants subject to the final rules will be required to
make pay-versus-performance disclosure under Item 402(v) of
Regulation S-K when they file proxy statements or information
statements in which executive compensation disclosure pursuant to
Item 402 of Regulation S-K is required. Proxy statement disclosure
obligations only arise under Section 14(a) of the Exchange Act [15
U.S.C. 78n(a)] when a registrant with a class of securities
registered under Section 12 chooses to solicit proxies. Whether or
not a registrant has to solicit proxies is dependent upon any
requirement under its charter or bylaws, or otherwise imposed by law
in the state of incorporation or stock-exchange (if listed), not the
Federal securities laws. For example, NYSE, NYSE American, and
Nasdaq require the solicitation of proxies for annual meetings of
shareholders. A Section 12(b) of the Exchange Act [15 U.S.C. 78l(b)]
(``Section 12(b)'') registrant is listed on a national securities
exchange, and therefore likely would solicit proxies and be
compelled to provide the disclosure identified in Item 402(v) of
Regulation S-K annually. Registrants with reporting obligations
under Section 12(g), but not Section 12(b), would not be subject to
any obligation to solicit proxies under the listing standards of an
exchange, but may nevertheless solicit proxies as a result of an
obligation under their charters, bylaws, or law of the jurisdiction
in which they are incorporated. When Section 12 registrants that do
not solicit proxies from any or all security holders are
nevertheless authorized by security holders to take a corporate
action at or in connection with an annual meeting or by written
consent in lieu of such meeting, disclosure obligations also would
arise under Item 402(v) of Regulation S-K due to the requirement to
file and disseminate an information statement under Section 14(c).

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    We estimate that approximately 4,530 registrants will be subject to
the final rules, including approximately 1,860 SRCs.\421\ The
proportion of SRCs among the affected registrants is expected to be
similar to that which was reported at the time of the Proposing
Release.\422\ Among all registrants subject to the Federal proxy rules,
we estimate that there are approximately 1,275 EGCs, of which
approximately 1,065 are also SRCs, none of which will be subject to the
final rules.\423\
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    \421\ These estimates are based on a review of calendar year
2021 EDGAR filings. The final rules will apply to BDCs to the extent
they are internally managed (i.e., have named executive officers
within the meaning of Item 402 of Regulation S-K) and are not EGCs.
We estimate that there are approximately seven affected BDCs, which
are included in the estimate of affected registrants.
    \422\ Based on 2021 filings, SRCs represent about 41% (1,860 out
of 4,530) of the affected issuers, while the Proposing Release
reported that, based on 2013 filings, about 2,430 out of 6,075, or
40%, of the affected issuers were expected to be SRCs. See Proposing
Release at 30. The Commission amended the smaller reporting company
definition effective September 2018, with the effect of expanding
the number of registrants that qualified as SRCs. See Amendments to
the Smaller Reporting Company Definition, Release No. 33-10513 (June
28, 2018) [83 FR 31992 (July 10, 2018)]. However, EGCs are not
subject to the final rules, and the number of EGCs subject to the
Federal proxy rules, including SRCs that are also EGCs, has grown
more than three-fold since the time of the Proposing Release (from
about 360, as reported in the Proposing Release, to about 1,275
based on our review of 2021 filings), offsetting any increase in the
proportion of SRCs subject to the final rules.
    \423\ These estimates are based on a review of calendar year
2021 EDGAR filings.
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2. Existing Disclosures and Analyses
    The registrants that will be subject to the final rules must
currently comply with Item 402 of Regulation S-K, which requires the
disclosure of extensive information about the compensation of NEOs,
and, except in the case of SRCs, with Item 201(e) of Regulation S-K,
which requires graphical disclosure of registrant TSR and peer group
TSR. They are also subject to financial statement and disclosure
requirements under Regulation S-X. The underlying information necessary
to provide the required pay-versus-performance disclosure is, with
limited exceptions discussed below, already encompassed by these
existing disclosure requirements. However, the existing disclosures
might not present the underlying information in a format that allows
investors to readily assess the alignment of pay and performance.
    Under the final rules, the definition of executive compensation
actually paid for a fiscal year is, generally,\424\ total compensation
as reported in the Summary Compensation Table for that year (i) less
the change in the actuarial present value of pension benefits,\425\
(ii) less the grant-date fair value of any stock and option awards
granted during that year, (iii) plus the pension service cost for the
year and, in the case of any plan amendments (or initiations), the
associated prior service cost (or less any associated credit), and (iv)
plus the change in fair value of outstanding and unvested stock and
option awards during that year (or as of the vesting date or the date
the registrant determines the award will not vest, if within the year)
as well as the fair value of new stock and option awards granted during
that year as of the end of the year (or as of the vesting date or the
date the registrant determines the award will not vest, if within the
year). Adjustments (i) and (iii) with respect to pension plans will not
apply to SRCs because they are not otherwise required to disclose
executive compensation related to pension plans.
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    \424\ The required deductions and additions in computing
executive compensation actually paid are provided in greater detail
in Section II.C above.
    \425\ If the change in actuarial value of pension plans is not
positive, it is not currently included in total compensation and
therefore need not be deducted for the purpose of this adjustment.
---------------------------------------------------------------------------

    Under the baseline, investors generally should already have the
required data to compute a reasonable estimate of executive
compensation actually paid as defined in the final rules, even though
registrants are not required to compute or disclose this measure.
Specifically, under existing requirements of Item 402 of Regulation S-
K, registrants must report, in the Summary Compensation Table, the
value of total compensation and each of its components,\426\ including
the aggregate grant-date fair value of equity awards and, for
registrants other than SRCs, the total change (if positive) in
actuarial present value of pension benefits, for each NEO. The total
compensation and amounts required to be subtracted from this total in
the computation of executive compensation actually paid for each NEO,
or adjustments (i) and (ii) referenced above, are thus already
available in the Summary Compensation Table.\427\
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    \426\ For registrants that are not SRCs, total compensation
consists of the dollar value of the executive's base salary and
bonus, plus the fair market value at the grant date of any new stock
and option awards, the dollar value of any non-equity incentive plan
award earnings, the change (if positive) in actuarial value of the
accumulated benefit under all defined benefit and pension plans, any
above-market interest or preferential earnings on deferred
compensation and all other compensation. The all other compensation
component includes, among other things, the value of perquisites and
other personal benefits (unless less than $10,000 in aggregate) and
registrant contributions to defined contribution plans.
    \427\ While the time period applicable for existing Item 402 of
Regulation S-K disclosures (two years for SRCs and three years for
other affected registrants) is shorter than will be required for the
pay-versus-performance disclosure (three years for SRCs and five
years for other affected registrants), the information required to
make these computations for the additional years would be available
in disclosures from previous years. New registrants would not be
required to report data for years in which they were not reporting
companies.
---------------------------------------------------------------------------

    The amounts that must be added back in this computation, or
adjustments (iii) and (iv) referenced above, are not required to be
directly reported under existing disclosure requirements, but can be
estimated based on existing disclosures. In particular, Item 402 of
Regulation S-K requires further disclosure about equity awards and
pension plans, such as, for non-SRCs, the Grant of Plan-Based Awards
Table and the Pension Benefits Table and the associated narrative and
footnotes, which include the detailed terms of these components of
compensation and certain valuation assumptions. Using these existing
disclosures and other public data, it is possible for investors to make
reasonable (though perhaps not identical) estimates of the annual and
vesting-date fair values of outstanding stock and option grants. In
fact, various third parties, such as proxy advisory service providers
and compensation consultants, currently make similar computations using
existing disclosures in order to construct alternative pay measures as
part of the services they provide to certain investors and/or
registrants.\428\ Market participants other

than those providing actuarial services may have less experience with
the computations required with respect to pension plans. However, it is
still possible to compute an estimate of pension service cost for the
year (plus the prior service cost, or credit, associated with any plan
amendments or initiations) by using existing disclosures and public
data to construct the required actuarial assumptions and
computations.\429\
---------------------------------------------------------------------------

    \428\ See, e.g., Institutional Shareholder Services, ISS United
States Compensation Policies: Frequently Asked Questions (updated
Dec. 17, 2021), available at https://www.issgovernance.com/file/policy/active/americas/US-Compensation-Policies-FAQ.pdf (``ISS
FAQ'') (describing their computation of ``realizable pay'' as ``all
non-incentive compensation paid [and] the value of equity or cash
incentive awards earned or, if the award remains on-going, revalued
at target level as of the end of the measurement period''); Glass
Lewis, Pay-for-Performance Methodology & FAQ (Oct. 2020), available
at https://www.glasslewis.com/wp-content/uploads/2020/10/2020-NA-Compensation-Overview-FAQs.pdf (``Glass Lewis Methodology'')
(describing compensation computations in which the company
``performs its own stock and option valuations and excludes any cash
severance or changes in pension value''); Equilar, Pay for
Performance [Brochure] (Nov. 2020), available at https://www.equilar.com/pay-for-performance (providing screenshots of the
their pay for performance profile, which presents compensation
computed in numerous different ways, including under multiple
definitions of ``realizable pay'' that would require the revaluation
of equity awards after the grant date).
    \429\ While service costs associated with defined benefit plans
are currently disclosed in financial statement footnotes, these
costs are currently not disaggregated by individual. Pension plan
benefit formulas and certain pension-related assumptions (such as
discount rates) are currently disclosed in proxy statements or
financial statement footnotes. Additional assumptions required to
compute service costs, such as expectations with respect to
retirement age, mortality, and future compensation growth, may not
be reported or may differ for this purpose from assumptions
presented in, or implied by, existing disclosures. While an outsider
may not be as well positioned to estimate some of these required
inputs as management, deriving reasonable assumptions should be
possible based on broader population statistics and trends.
---------------------------------------------------------------------------

    That said, these computations can be complex and investors would
bear costs to make such computations or obtain them from third parties.
Further, if investors or third parties were to estimate executive
compensation actually paid based on existing disclosures, these
estimates may differ from each other and from similar estimates made by
registrants themselves. For example, because registrants are not
currently required to disclose the equity valuation assumptions that
they would apply at any time after the grant date (which may differ
from the grant-date assumptions), investors may not know how the
registrant would apply its discretion in choosing from a range of
reasonable assumptions to compute fair values at these other
dates.\430\ Estimates constructed by or on behalf of investors may also
differ from registrant estimates if simplifications are made in order
to more easily produce estimates for a large number of
registrants.\431\
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    \430\ For SRCs, which are not required to provide the Grant of
Plan-Based Awards Table and accompanying narrative and footnotes,
investors may also not know all of the detailed terms of each equity
award, which could affect the accuracy of fair value estimates
constructed by, or on behalf of, investors.
    \431\ See, e.g., Charlie Pontrelli (Equilar), Proxy Advisors and
Pay Calculations (Sept. 29, 2019), Harv. L. F. on Corp. Governance
Blog, available at https://corpgov.law.harvard.edu/2019/09/29/proxy-advisors-and-pay-calculations (noting that ``it is important to
carefully consider the details of the [alternative pay] calculation
in order to avoid misleading conclusions,'' and citing the example
of a situation in which an alternative pay measure was constructed
using a different option valuation model than that used by a company
in its disclosures).
---------------------------------------------------------------------------

    Information about registrant financial performance is readily
available to investors under the baseline. The final rules require the
disclosure of historical TSR, peer group TSR, and net income for up to
five years. Disclosure of historical TSR and TSR of a particular peer
group is already required under Item 201(e) of Regulation S-K:
specifically, this item requires the disclosure of the TSR for the
registrant as well as a peer group (a published industry or line-of-
business index, peer issuers selected by the registrant, or issuers
with similar market capitalizations), for the past five years, in
annual reports.\432\ The final rules allow registrants to choose to use
either the peer group required under Item 201(e) of Regulation S-K or,
if the registrant uses a peer group in benchmarking its compensation,
the peer group disclosed in its CD&A in its pay versus performance
disclosure. In the latter case, however, the components of such a peer
group would be disclosed in the CD&A and the shareholder returns of
these companies would be publicly available from many sources, if not
already reported in the CD&A. Similarly, while SRCs are not required to
comply with Item 201(e) of Regulation S-K or CD&A disclosure
requirements and yet would still have to report their own TSR under the
final rules, data about their returns is publicly available. The final
rules do not require SRCs to present the TSR of a peer group. Finally,
all of the affected registrants are currently required to disclose net
income as part of their financial reports filed in Form 10-K, including
three years of data for registrants other than SRCs, and two years of
data for SRCs, with additional history generally available in previous
filings.
---------------------------------------------------------------------------

    \432\ Item 201(e) of Regulation S-K disclosure is only required
in an annual report that precedes or accompanies a registrant's
proxy or information statement relating to an annual meeting of
security holders at which directors are to be elected (or special
meeting or written consents in lieu of such meeting). As discussed
above, an annual meeting could theoretically not include an election
of directors, such that Item 201(e) of Regulation S-K disclosure
would not be required, although pay-versus-performance disclosure
would still be required in such years if action is to be taken with
regard to executive compensation.
---------------------------------------------------------------------------

    We expect that the quantitative disclosure of Company-Selected
Measures called for in the new disclosures is also generally
encompassed by existing financial statement disclosure requirements or
voluntarily disclosed in existing proxy statements. However, if
registrants do not already disclose historical quantitative data for
these measures over the past five years, the required disclosure may
provide new information relative to the baseline to the extent that any
computations required to derive the value of these measures from
reported financial data may not always be straightforward for investors
to replicate. The disclosure of a Company-Selected Measure may also
provide investors with new information in the form of any insight
gained based on the registrant's choice of which of the measures
reported in the CD&A in this or previous years was deemed to be the
most important with respect to the most recent fiscal year.
    While the bulk of the information about compensation and registrant
performance to be included in the new disclosure is currently available
to investors elsewhere, not all of this information is accessible for
large-scale analysis under the baseline. Currently, every affected
registrant is, or will soon be, subject to Inline XBRL tagging
requirements for a subset of its other Commission disclosures,
including the financial statements and financial statement
footnotes.\433\ Thus, information that is already available from these
sources--such as net income, some Company-Selected Measures or
statistics used to compute these measures, and information in footnotes
regarding inputs and assumptions used to compute pension liabilities
and stock-based compensation expense--is already tagged and thus
readily machine-readable. However, other information that will be
reflected in the required pay-versus-performance disclosure, such as
the compensation measures, as well as most of the information required
to compute these measures, is not currently tagged,\434\ and could
therefore become more readily available for analysis as a result of the
final rules.
---------------------------------------------------------------------------

    \433\ See 17 CFR 229.601(b)(101) and 17 CFR 232.405 (for
requirements related to tagging operating company and BDC financial
statements (including footnotes and schedules), audit reports, and
BDC prospectus disclosures, in Inline XBRL); 17 CFR 229.601(b)(104)
and 17 CFR 232.406 (for requirements related to tagging cover page
disclosures in Inline XBRL); and 17 CFR 229.601(b)(107) and 17 CFR
232.408 (for requirements related to tagging filing fee exhibit
disclosures in Inline XBRL).
    \434\ Information currently provided in response to Item 201(e)
of Regulation S-K, Item 402 of Regulation S-K, or voluntarily in
proxy statements is not currently required to be tagged.
---------------------------------------------------------------------------

    For the affected registrants other than SRCs, Item 402 of
Regulation S-K requires a description in the CD&A of how the
registrant's compensation policy relates pay to performance, if

material to the registrant's compensation policies and decisions. This
description must include information about any performance targets that
are a material element of a company's executive compensation policies
or decisions.\435\ While the final rules will newly require registrants
other than SRCs to name the top three to seven most important
performance measures used by the registrant to link NEO pay to
performance in the most recent fiscal year, these registrants likely
already disclose these measures in the CD&A under existing
requirements. However, as in the case of the Company-Selected Measure,
the Tabular List may provide new information relative to the baseline
in the form of any insight gained based on the registrant's choice of
which of the measures reported in the CD&A were deemed to be the most
important with respect to the last completed fiscal year.
---------------------------------------------------------------------------

    \435\ A registrant may omit target levels with respect to
specific quantitative or qualitative performance-related factors
involving confidential trade secrets or confidential commercial or
financial information from the CD&A only if the disclosure of these
target levels would result in competitive harm. See Instruction 4 to
Item 402(b) of Regulation S-K.
---------------------------------------------------------------------------

    Registrants are not currently required to disclose, in a side-by-
side fashion, or report the actual historical relationship between, any
measures of executive compensation and registrant financial
performance. As discussed in the Proposing Release, some registrants
voluntarily provide such disclosures, which are generally limited to
analyses of the compensation of the PEO and which vary with regard to
the compensation and performance measures used.\436\ Such voluntary
disclosures remain a minority practice, with the rate of such
disclosures declining somewhat since the time of the Proposing
Release,\437\ and they remain highly varied.\438\ Whether or not they
directly disclose the relationship of pay with performance, some
registrants disclose alternative measures of pay to demonstrate the
variation in the value of pay after it is granted, but, again, this is
a minority practice and the measures used vary.\439\ Thus, even when
voluntary disclosures are provided, their comparability is limited,
which can make them difficult for investors to use.\440\ Commenters and
other observers have also raised concerns that registrants choose to
present measures that make the alignment of pay and performance appear
more favorable.\441\
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    \436\ See Proposing Release at 32. See also, e.g., letters from
CAP; CEC 2015; Hall; and PG 2015.
    \437\ In 2013, a compensation consulting firm found that, of 250
large public companies examined, 27% provided tabular or graphical
information on the relationship between pay and performance in their
CD&A in 2021, the same firm found that 24% of the 200 large public
companies examined included disclosures comparing pay and
performance. See Proposing Release at n. 120 and Meridian
Compensation Partners, 2021 Corporate Governance & Incentive Design
Survey (Fall 2021), available at https://www.meridiancp.com/wp-content/uploads/2021/09/Meridian-2021-Governance-and-Design-Survey-2.pdf (``Meridian 2021 Report''). A different compensation
consulting firm found in 2021 that 14.1% of the 100 large public
companies examined included a pay for performance graph in their
most recent proxy statements, down from 21.6% five years earlier.
See Equilar, Preparing for Proxy Season 2022 (Nov. 2021), available
at https://info.equilar.com/preparing-for-proxy-season-2022-report-request.
    \438\ See, e.g., Meridian 2021 Report at 22.
    \439\ See, e.g., Meridian 2021 Report at 23 (stating that 24% of
the 200 large registrants reviewed included ``realized'' or
``realizable pay'' disclosure, with 58% of these using ``realizable
pay'').
    \440\ See, e.g., Kosmas Papadopoulos & John Roe (ISS Analytics),
Realizable Pay: Insights into Performance Alignment (Apr. 29, 2019),
Harv. L. Sch. F. on Corp. Governance Blog, available at https://corpgov.law.harvard.edu/2019/04/29/realizable-pay-insights-into-performance-alignment/ (``ISS Realizable Pay Article'') (stating
that ``[d]ifferent companies and different compensation consultants
arrived at different ways of calculating and presenting these
alternative [pay] measures, making it very difficult for investors
to systematically use these disclosures in the analysis of pay and
performance--much to the frustration of investors and companies
alike''). See also, e.g., letters from As You Sow 2015; CAP; and
Public Citizen 2015.
    \441\ See, e.g., letters from AFREF (stating that ``companies
have chosen misleading metrics to justify excessive executive
compensation in the past'') and As You Sow 2015 (stating that
``every company cherry-picks data that makes it appear in the best
possible light''); and Dave Michaels, Misleading CEO Pay-for-
Performance Numbers Target of SEC, Bloomberg (Dec. 17, 2013),
available at http://www.bloomberg.com/news/articles/2013-12-17/misleading-ceo-pay-for-performance-numbers-target-of-sec.
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    Certain investors also have access to analyses of historical pay-
versus-performance data produced by third parties, such as proxy
advisory firms and compensation consultants. These analyses are based
on compensation and performance information disclosed by registrants.
Compared to voluntary disclosures by registrants, these third-party
analyses are available for a larger number of registrants, and apply
more consistent methodologies across registrants. However, this
consistency has led to criticism that the analyses are not
appropriately tailored to the circumstances of different kinds of
registrants.\442\ Further, these analyses are only available to
investors who pay for these services, and the computations and
analytical approaches used vary across the third-party information
providers.\443\ Some other investors generate their own pay-versus-
performance analyses for the registrants in their portfolios, using a
variety of approaches.\444\ Given the resources required, smaller
investors, particularly retail investors, are the least likely, under
the baseline, to subscribe to third party services or to do their own
detailed pay-versus-performance computations for each of their
holdings.
---------------------------------------------------------------------------

    \442\ See, e.g., Compensia, The New ISS Pay-for-Performance
Methodology--A Closer Look at the Gathering Storm (Jun. 12, 2017),
available at https://compensia.com/the-new-iss-pay-for-performance-methodology-a-closer-look-at-the-gathering-storm/.
    \443\ See, e.g., Glass Lewis Methodology and Institutional
Shareholder Services, Pay-for-Performance Mechanics (Dec. 2021),
available at https://www.issgovernance.com/file/policy/active/americas/Pay-for-Performance-Mechanics.pdf (``ISS Methodology''),
for the quantitative methodologies for evaluating pay and
performance alignment used by two major proxy advisory firms.
    \444\ See, e.g., disclosures about the evaluation of executive
compensation by the California Public Employees Retirement System
(``CalPERS''), available at https://www.calpers.ca.gov/docs/executive-compensation-analysis-framework.pdf (``CalPERS
Methodology'') (describing an analysis involving CEO realizable pay
and TSR, in each case for the company as well as its peers); as
compared to the corresponding disclosures by Northern Trust Asset
Management, available at https://www.northerntrust.com/content/dam/northerntrust/pws/nt/documents/investment-management/scorecard-methodology.pdf (``Northern Trust Methodology'') (describing an
analysis involving the grant date value of CEO pay and nine unique
fundamental performance indicators in addition to TSR, in all cases
for the company as well as its peers). See also letter from
BlackRock (providing detail on its say-on-pay analysis framework).
---------------------------------------------------------------------------

    As was the case at the time of the Proposing Release, there
continues to be no consensus around the best approach to analyzing the
alignment of pay and performance, and we do not have complete
information about the approaches used by all investors. However, the
varied statistics and analyses that we can observe \445\ investors
using may still shed some light on the type of information that they
find to be useful for this purpose, particularly as many of the third-
party analyses have evolved over time based on shareholder demand. For
example, while many third party and shareholder analyses use a measure
of pay based on grant date valuations of stock and options,\446\
potentially because this has historically been the most readily
available measure,\447\ most of the recent

analyses that we have observed also include a ``realizable pay''
measure.\448\ While there are various approaches to defining and
computing ``realizable pay,'' it is generally intended to capture both
pay that has been realized by an executive in the period as well as an
updated value, to reflect actual company performance, of outstanding
equity awards that could potentially be realized in the future.\449\ A
recent survey by one proxy advisory firm found that 84 percent of
investors support the use of an outcomes-based pay measure such as
realizable pay in a quantitative pay-for-performance evaluation,\450\
further demonstrating investor demand for such computations.
---------------------------------------------------------------------------

    \445\ We note that the analyses that are disclosed in detail,
and which we are therefore able to observe, are likely among the
more sophisticated that are currently in use.
    \446\ See, e.g., ISS FAQ; Northern Trust Methodology; and Glass
Lewis, Understanding Glass Lewis' Approach to Say on Pay Analysis,
available at https://www.glasslewis.com/say-on-pay/, (last accessed
Jun. 29, 2022) (``Glass Lewis Overview'').
    \447\ See, e.g., Mercer, The Role of Realized and Realizable Pay
in Disclosure and Beyond (2014), available at Mercer LLC's website
(last accessed Aug. 9, 2022) (``Mercer Realizable Pay Article'')
(stating that many investors ``favor [the use of realized and
realizable pay] as an appropriate way to measure and analyze
executive pay'' but that ``[w]hen shareholders assess their
companies' executive pay levels, they do so using the information
most readily available, which includes the . . . summary
compensation table and past performance'').
    \448\ See, e.g., letter from BlackRock; CalPERS Methodology; ISS
FAQ; and Glass Lewis Overview. Beginning in 2020, Glass Lewis
changed its compensation analytics partner, and may no longer be
reporting realizable pay in its proxy research reports for the US
market, though it does report a measure of realized pay; it is
unclear to us whether this shift is temporary or permanent. See,
e.g., Glass Lewis Sample Proxy Research Reports available at https://www.glasslewis.com/sample-proxy-papers (last accessed May 15, 2022)
(including some samples for the US market that include realizable
pay data and others that do not). See also Northern Trust Asset
Management, Executive Compensation Guide for Proxy Voting and
Engagements (Nov. 2018), available at https://cdn.northerntrust.com/pws/nt/documents/investment-management/exec-compensation-guide-digital.pdf (stating that companies should ``showcase realized
versus realizable pay, preferably over five annualized performance
periods'' in their disclosures, even though, per note 444 above,
this shareholder focuses on grant date pay in its analysis of pay-
for-performance alignment).
    \449\ Definitions vary as to whether, for example, options are
valued at fair value or intrinsic value and pay is realized when
awards are vested or exercised. See, e.g., Mercer Realizable Pay
Article and ISS Realizable Pay Article.
    \450\ See Institutional Shareholder Services, 2017-2018 Policy
Application Survey: Summary of Results (Oct. 19, 2017), available at
https://www.issgovernance.com/file/policy/2017-2018-Policy-Application-Survey-Results-Summary.pdf.
---------------------------------------------------------------------------

    With respect to performance measures, the analyses by or on behalf
of investors that we observe all use TSR as a primary measure of
performance.\451\ However, most also supplement TSR with other measures
of financial performance.\452\ For example, some of the performance
measures presented by third parties as part of pay-for-performance
analyses in recent years include operating cash flow growth; earnings
per share growth; growth in earnings before interest, taxes,
depreciation and amortization (``EBITDA''); return on equity; return on
invested capital; return on assets; and various ratios and growth rates
using ``economic value added.'' \453\ The inclusion of these measures
may demonstrate investors' interest in additional measures of
performance, particularly with respect to profitability, when
considering compensation. Shareholder demand for such information is
further supported by a recent survey by one proxy advisory firm, in
which 84 percent of investors surveyed supported the continued
reporting of some of the profitability measures listed above as part of
the proxy advisory firm's proxy research in the area of pay-for-
performance.\454\
---------------------------------------------------------------------------

    \451\ See, e.g., letter from BlackRock; CalPERS Methodology;
Glass Lewis Methodology; ISS FAQ; and Northern Trust Methodology.
    \452\ See, e.g., letter from Blackrock; Glass Lewis Methodology;
ISS FAQ; and Northern Trust Methodology.
    \453\ See, e.g., Glass Lewis Methodology (listing the following
performance measures besides TSR: change in operating cash flow,
earnings per share growth, return on equity, and return on assets,
with ``change in operating cash flow'' replaced with ``tangible book
value per share growth'' for companies in the Banks, Diversified
Financials and Insurance sectors, and with ``growth in funds from
operations'' for certain REITs); and ISS Methodology (listing the
following performance measures besides TSR: EVA Margin, EVA Spread,
EVA Momentum vs. Sales, EVA Momentum vs. Capital, return on equity,
return on assets, return on invested capital, and EBITDA growth,
with EBITDA growth replaced by cash flow growth in certain
industries). ``Economic value added'' (or ``EVA,'' which is a
registered trademark of Stern Value Management, Ltd) is equal to net
operating profit after taxes, less a cost of capital charge.
    \454\ See Institutional Shareholder Services, 2019 Global Policy
Survey: Summary of Results (Sept. 11, 2019), available at https://www.issgovernance.com/file/policy/2019-2020-iss-policy-survey-results-report.pdf.
---------------------------------------------------------------------------

    Overall, we have observed, and commenters have identified, an
increasing sophistication in how investors are evaluating executive
compensation disclosures \455\ as well as an increasing refinement in
how registrants are crafting these disclosures,\456\ particularly after
about a decade of experience with ``say-on-pay'' votes. However,
despite the significant amount of information about executive
compensation disclosed by registrants under the baseline, investors
have expressed some discontent with current disclosures. For example,
commenters have indicated that existing disclosures can be challenging
to review, in that investors find it difficult to collect or interpret
the information in which they are interested.\457\ Commenters also
highlighted shareholder concerns about the length and complexity of
existing compensation disclosures.\458\ These disclosures have
generally increased in length since the time of the Proposing
Release.\459\
---------------------------------------------------------------------------

    \455\ See, e.g., letters from AFL-CIO 2022; IBC 2022; and PG
2022 (stating that ``the SEC's proposal, in contrast, appears to be
out of step with these more sophisticated approaches of relating pay
and performance'').
    \456\ See, e.g., letters from Blackrock; NIRI; Pearl; and SCG.
    \457\ See, e.g., letters from AFL-CIO 2022; Better Markets et
al.; Dimensional; Barbara S. Mortenson, dated May 30, 2015; Public
Citizen; SVA; and Teamsters. See also Council of Institutional
Investors, CII Roundtable Report: Real Talk on Executive
Compensation (March 27, 2018), available at https://www.cii.org/special_reports, at 10 (discussing concerns with the transparency of
executive compensation).
    \458\ See, e.g., letters from Allison; CCMC; and Ross. See also
Stanford University, RR Donnelley & Equilar, 2015 Investor Survey:
Deconstructing Proxy Statements--What Matters to Investors (Feb.
2015), available at http://www.sec.gov/comments/4-681/4681-3.pdf
(``Stanford 2015 Investor Survey'').
    \459\ See, e.g., Equilar, Preparing for Proxy Season 2020
(November 2019), available at https://info.equilar.com/2019-0201-Proxy-Report-2020 (stating that the average CD&A length among the
100 large companies reviewed grew by almost 500 words from 2014 to
2017). Part of the increase in length of existing disclosures may be
due to other regulatory mandates that have been adopted in the
interim. See, e.g., Pay Ratio Disclosure, Release No. 33-9877 (Aug.
5, 2015) [80 FR 50103]; and Disclosure of Hedging by Employees,
Officers and Directors, Release No. 33-10593 (Dec. 20, 2018) [84 FR
2402].
---------------------------------------------------------------------------

3. Executive Compensation Practices
    The structure of executive compensation, and how it varies across
the affected registrants, will influence the effects of the final rules
and how those effects will vary across registrants. For example,
because the final rules require that equity awards and compensation
related to pension plans be reflected differently than in the Summary
Compensation Table, the prevalence and variation in usage and design of
these items in executive compensation packages may affect the benefits
of the disclosures as well as the burden involved in making the
required calculations to provide the disclosures. Similarly, variation
in the number and nature of performance metrics in executive
compensation plans may also affect the variation in costs and benefits
of the final rules across registrants.
    The final rules require that executive compensation actually paid
include the annual change in fair value, through year-end or the
vesting date, if earlier, of any outstanding stock and option awards. A
majority of CEO direct compensation is delivered in the form of such
equity awards, and their contribution to the total value of such
compensation at the grant date has grown in recent years.\460\ The use
of

stock grants,\461\ and the frequency of such grants to the CEO, by some
of the potentially affected registrants is reported in the table
below.\462\
---------------------------------------------------------------------------

    \460\ See, e.g., Gallagher, CEO and Executive Compensation
Practices Report: 2021 Edition (Oct. 2021), available at https://
www.ajg.com/us/executive-compensation-report-2021/ (``Gallagher 2021
Study'') (stating that the portion of total direct compensation
represented by equity awards grew to 71% in 2020 from 65% in 2016
for CEOs of registrants in the Russell 3000 index).
    \461\ Throughout this release, the term ``stock grant'' or
``stock award'' is used to refer to the award of instruments such as
common stock, restricted stock, restricted stock units, phantom
stock, phantom stock units, common stock equivalent units or any
other similar instruments that do not have option-like features.
    \462\ These statistics are based on staff analyses of
compensation data from the Standard & Poor's Execucomp database,
which in turn is sourced from company proxy statements. Execucomp
covers firms in the S&P Composite 1500 Index (which includes the S&P
500, S&P MidCap 400, and S&P SmallCap 600) as well as some firms
that were previously removed from the index but are still trading
and some requested by Execucomp clients. Years mentioned refer to
fiscal years, under the convention that companies with fiscal
closings after May 31 in a given year are assigned to that fiscal
year while companies with fiscal closings on or before May 31 in a
given year are assigned to the previous fiscal year. Use of the term
``CEO'' is based on the use of this term in the Execucomp database,
and is believed to be equivalent to the term ``PEO'' used in this
release and in the final rules.

                   Table 1--Use of Executive Stock Grants by Registrants Covered by Execucomp
----------------------------------------------------------------------------------------------------------------
                                                          All firms in  Firms in S&P  Firms in S&P  Firms in S&P
                                                            database         500       MidCap 400   SmallCap 600
----------------------------------------------------------------------------------------------------------------
Firms in Sample.........................................         1,694           497           393           580
Stock Grants to 2020 CEO:
    % of CEOs Granted Stock in 2020.....................          81.0          87.5          85.0          82.2
Among subset of firms for which 2020 CEO was also CEO in
 2019 and 2018:
    % of CEOs Granted Stock 0 out of Past 3 Years (2018-         11.2%          8.7%          8.3%         11.7%
     2020)..............................................
    % of CEOs Granted Stock 1 out of Past 3 Years (2018-          5.9%          4.6%          6.3%          5.5%
     2020)..............................................
    % of CEOs Granted Stock 2 out of Past 3 Years (2018-         16.6%         14.2%         19.1%         16.3%
     2020)..............................................
    % of CEOs Granted Stock 3 out of Past 3 Years (2018-         66.3%         72.5%         66.3%         66.5%
     2020)..............................................
Stock Grants to Other 2020 NEOs:
    % of Firms that Granted Stock to Any NEO other than           86.8          92.6          90.3          88.4
     CEO in 2020........................................
    Among Firms that Made Such Grants, Average Number of           4.2           4.0           3.9           3.9
     Other NEOs Granted Stock in 2020...................
----------------------------------------------------------------------------------------------------------------

    Per the first row of each panel of Table 1, roughly 80 to 90
percent of registrants, both large and small, make use of stock grants
to CEOs and other NEOs in a given year. The last row of the first panel
of Table 1 indicates that about two-thirds of registrants, and slightly
more among the largest registrants, make such grants to the CEO every
year. The prevalence and frequency of stock grants have not changed
markedly since the time of the Proposing Release.\463\
---------------------------------------------------------------------------

    \463\ See Proposing Release at Table 1.
---------------------------------------------------------------------------

    The use of option grants,\464\ and the frequency of such grants to
the CEO, by some of the potentially affected registrants is reported in
the table below.\465\
---------------------------------------------------------------------------

    \464\ Throughout this release, the term ``option'' is used to
refer to instruments such as stock options, stock appreciation
rights and similar instruments with option-like features.
    \465\ See supra note 462.

                Table 2--Use of Executive Stock Option Grants by Registrants Covered by Execucomp
----------------------------------------------------------------------------------------------------------------
                                                          All firms in  Firms in S&P  Firms in S&P  Firms in S&P
                                                            database         500       MidCap 400   SmallCap 600
----------------------------------------------------------------------------------------------------------------
Firms in Sample.........................................         1,694           497           393           580
Option Grants to 2020 CEO:
    % of CEOs Granted Options in 2020...................          22.4          31.2          20.9          20.9
Among subset of firms for which 2020 CEO was also CEO in
 2019 and 2018:
    % of CEOs Granted Options 0 out of Past 3 Years               61.5          50.4          59.8          67.7
     (2018-2020)........................................
    % of CEOs Granted Options 1 out of Past 3 Years               13.0          12.3          15.8          12.4
     (2018-2020)........................................
    % of CEOs Granted Options 2 out of Past 3 Years               14.7          20.7          14.5          10.6
     (2018-2020)........................................
    % of CEOs Granted Options 3 out of Past 3 Years               10.8          16.6           9.9           9.3
     (2018-2020)........................................
Option Grants to Other 2020 NEOs:
    % of Firms that Granted Options to Any NEO other              31.2          42.1          28.5          29.1
     than CEO in 2020...................................
    Among Firms that Made Such Grants, Average Number of           3.1           3.3           3.1           2.8
     Other NEOs Granted Options in 2020.................
----------------------------------------------------------------------------------------------------------------

    Per the first row of the first panel of Table 2, roughly 30 percent
of the largest registrants, and about 20 percent of smaller
registrants, grant options to their CEOs in a given year. This
represents a significant drop, of greater than half, in the use of
options to incentivize CEOs across all categories since the time of the
Proposing Release.\466\ The decline in option grants to CEOs has
largely been offset by an increase in the number and size of
performance-contingent stock grants,\467\ marking the continuation of a
trend also discussed in the Proposing Release.\468\ Per the first row
of the second panel of Table 2, the granting of options to any other
NEO is a bit more prevalent, with

roughly 40 percent of the largest and about 30 percent of smaller
registrants using such grants in a given year, but these rates have
also dropped significantly since the time of the Proposing
Release.\469\ In contrast to stock grants, option grants are also less
frequent; per the last row of the first panel of Table 2, about 10 to
15 percent of registrants grant options to the CEO every year.
---------------------------------------------------------------------------

    \466\ See Proposing Release at Table 2, reporting that 64.1%,
49.0%, and 43.1% of S&P 500, S&P MidCap 400, and S&P SmallCap 600
constituents respectively granted options to their CEO in 2012.
    \467\ See, e.g., Pay Governance, S&P 500 CEO Compensation
Increase Trends (Jan. 13, 2021), available at https://www.paygovernance.com/viewpoints/s-p-500-ceo-compensation-increase-trends-4; and Gallagher, CEO and Executive Compensation Practices
Report: 2020 Edition (February 2021), available at https://
www.ajg.com/us/news-and-insights/2021/feb/ceo-executive-compensation-practices-report-2020/.
    \468\ See Proposing Release at n. 133 and the accompanying text
(discussing the increased prevalence of performance-contingent
equity grants).
    \469\ See Proposing Release at Table 2.
---------------------------------------------------------------------------

    Because the final rules require the valuation of equity awards
annually until the time of vesting, we have also considered the
variation in vesting schedules. Equity awards may be subject to time-
based or performance-based vesting, or a combination of the two. Awards
with time-based vesting may vest in full at the end of their vesting
period (``cliff vesting'') or in increments over the period of vesting
(``graded vesting'').
    Market practices regarding vesting schedules have remained
relatively consistent since the time of the Proposing Release.\470\ We
estimate that about 45 percent of stock grants are subject to time-
based vesting, though this has declined slightly (by about three
percentage points) since the time of the Proposing Release with the
growth in reliance on performance-contingent stock.\471\ Of the time-
vesting stock awards, roughly one-third have cliff-vesting schedules
while the vast majority of the remaining have graded vesting in annual
increments.\472\ For the stock awards that vest based on achieving
performance conditions (approximately 55 percent of stock awards), the
vast majority have cliff-vesting schedules.\473\ Approximately ten
percent of awards with performance-based vesting also have an
additional time-based vesting period at the end of the performance
period.\474\ For option awards, the vast majority have time-based,
graded vesting in annual increments.\475\ Given the decline in option
awards (which tend to have graded vesting schedules) and the increasing
prevalence of performance-contingent stock (which tends to cliff-vest)
discussed above, there has been a corresponding increase in cliff-
vesting overall.\476\
---------------------------------------------------------------------------

    \470\ See Proposing Release at 35 for additional estimates with
respect to vesting structures at and prior to the time of the
Proposing Release based on third-party studies. We were unable to
obtain updated third-party studies, but have instead provided
statistics based on staff analysis of available data. These
statistics are largely consistent with the estimates presented in
the Proposing Release.
    \471\ This estimate is based on staff analysis of data about
equity grants by 1,100 large registrants from 2018 to 2020 (or, for
estimates around the time of the Proposing Release, from 2012 to
2015) from the ISS IncentiveLab Database.
    \472\ Id. About 95% of the awards with graded vesting vest in
annual increments. Results are similar if we compute such an
estimate around the time of the Proposing Release.
    \473\ See supra note 471. About 85% (about 80% around the time
of the Proposing Release) of the awards with performance-based
vesting cliff-vest.
    \474\ See supra note 471. Results are similar if we compute such
an estimate around the time of the Proposing Release.
    \475\ See supra note 471. About 95% of the option grants have
time-based vesting, of which about 85% have graded vesting, of which
about 95% vest in annual increments. Results are similar if we
compute such estimates around the time of the Proposing Release.
    \476\ See supra note 471. At the time of the Proposing Release,
roughly 45% of new equity awards cliff-vested; this rate has now
increased to about 55%.
---------------------------------------------------------------------------

    For affected registrants other than SRCs, compensation related to
pension plans is also measured differently in executive compensation
actually paid, as reported under the final rules, than it is in the
Summary Compensation Table. The use of pension plans and the years of
credited service at some of the potentially affected registrants are
reported in the table below.\477\
---------------------------------------------------------------------------

    \477\ See supra note 462.

                        Table 3--Use of pension plans by registrants covered by Execucomp
----------------------------------------------------------------------------------------------------------------
                                                          All firms in  Firms in S&P  Firms in S&P  Firms in S&P
                                                            database         500       MidCap 400   SmallCap 600
----------------------------------------------------------------------------------------------------------------
Firms in Sample.........................................         1,694           497           393           580
2020 Pension Plans:
    % of CEOs with Pension Plans........................          22.5          36.4          24.4          14.3
Among Firms with CEO Plans, Median Years of Credited              19.3          21.5          17.6          16.9
 Service in Pension Plan................................
% Firms with Pension Plans for any NEO other than CEO...          29.0          45.7          29.5          19.1
Among Firms with Other NEO Plans, Average Number of                2.8           2.9           2.7           2.5
 Other NEOs with Pension Plans..........................
----------------------------------------------------------------------------------------------------------------

    There has been a decrease of about ten percentage points in the
prevalence of pension plans for CEOs or other NEOs since the time of
the Proposing Release.\478\ Per Table 3, such pension plans, and, for
those with pension plans, a higher number of years of creditable
service, remain more common among larger registrants. For the affected
registrants other than SRCs, the final rules require that executive
compensation actually paid include only the service cost for the year
(and any prior service cost, or credit, associated with plan amendments
or initiations), a value which is not currently required to be reported
at this disaggregated level and which will usually differ from the
total change in actuarial value of pension benefits included in total
compensation reported in the Summary Compensation Table. In particular,
the value currently included in total compensation reflects the change
in actuarial pension value related to changes in the value of benefits
accrued in prior years as well as the value of benefits earned during
the applicable fiscal year. As such, the value currently included with
respect to pensions in total compensation reported in the Summary
Compensation Table will generally be more volatile (because of changes
in interest rates and other actuarial assumptions) than the value to be
included with respect to pensions in the executive compensation
actually paid measure. The degree of difference between these two
computations will generally increase with an executive's total number
of years of credited service (and thus the extent of benefits already
accumulated) under the pension plan.
---------------------------------------------------------------------------

    \478\ See Proposing Release at Table 3.
---------------------------------------------------------------------------

    Besides the decreased prevalence of option awards and pension
plans, and the increased reliance on performance contingent-stock
awards, there have also been changes since the time of the Proposing
Release in the performance metrics used by registrants in their
incentive plans. For example, as noted in the Reopening Release, there
appears to have been a decline in the use of TSR as the sole metric
used in long-term

incentive plans, in those cases where the awards' vesting or quantities
are contingent on one or more performance metrics.\479\ Among large
companies, most use one to three financial metrics in their CEO's long-
term incentive plan, with two metrics being the most common
number.\480\ The most commonly used metric among these companies is
still TSR, followed by profitability measures (particularly measures of
operating income), and then scaled profitability measures (such as
return on equity or return on invested capital).\481\ Commenters
pointed out that the metrics used are often non-GAAP financial
measures.\482\
---------------------------------------------------------------------------

    \479\ See, e.g., Meridian 2020 Survey (summarizing responses to
a survey from 108 companies, and discussing, among other
developments, a decline in the use of TSR as the sole performance
metric in long-term incentive plans, from 47% in 2016 to 30% in
2020, and the recent use by some companies of TSR as a modifier to
results initially determined by one or more other financial
metrics). However, as a result of the difficulty in setting absolute
or accounting performance targets given recent uncertainty due to,
e.g., the COVID-19 pandemic, some market participants predict at
least a temporary increase in the reliance on relative TSR as a
performance metric. See, e.g., Aon 2020 Study.
    \480\ See, e.g., Meridian Compensation Partners, LLC, 2021
Trends and Developments in Executive Compensation (April 30, 2020),
available at https://www.meridiancp.com/insights/2021-meridian-trends-and-developments-survey/ (``Meridian 2021 Survey'')
(summarizing responses to a survey from 309 large companies, and
indicating that 35%, 51%, and 12% of the respondents used one, two,
and three metrics respectively in long-term incentive plans); and
Aon 2020 Study (presenting, in Figure 8, the number of metrics used
in the CEO's long-term incentive plan among S&P 500 companies,
broken down by industry, with an average of two metrics used in
every industry).
    \481\ See, e.g., Meridian 2021 Survey (summarizing responses to
a survey from 309 large companies, and indicating that TSR is the
most commonly used long-term incentive performance metric, with use
reported by 60% of the respondents); and Aon 2020 Study (indicating,
in Figure 9, that TSR is the most commonly used metric in the CEO's
long-term incentive plan among S&P 500 companies in most industries,
where the use of TSR ranges from 22% to 61% of companies depending
on the industry). Even when TSR is not used as an explicit
performance metric, we note that these incentives are usually
delivered in the form of stock awards, whose value will vary with
the stock price.
    \482\ See, e.g., letters from As You Sow 2022; CII 2022; IBC
2022; Nareit; Pawliczek; and Teamsters. See also Nicholas Guest,
S.P. Kothari, and Robert Pozen, Why Do Large Positive Non-GAAP
Earnings Adjustments Predict Abnormally High CEO Pay? Acct. Rev.
(forthcoming 2022), available at https://doi.org/10.2308/TAR-2019-0003.
---------------------------------------------------------------------------

    Some commenters indicated that another recent change in
compensation practices has been an increased linkage of pay to ESG
performance.\483\ Our research confirms that this appears to be a
growing practice, but that consideration of ESG metrics does not often
seem to be tied to specific quantitative goals and that ESG metrics are
generally used in short-term incentive plans.\484\ These plans, such as
annual bonus programs, generally make up a significantly smaller
portion of total executive pay as compared to long-term incentive
plans.\485\ As in the case of metrics for long-term incentive plans,
among large companies, most use one to three financial metrics in their
CEO's short-term incentive plan, with two financial metrics being the
most common.\486\ The most commonly used metric among these companies
is profitability (particularly measures of operating income), followed
by revenues, and then measures of cash flow.\487\ It is also common to
include business unit performance goals and non-financial metrics, such
as measures of individual performance, strategic goals, or ESG
metrics.\488\ There may be overlap in the measures used in executive's
short-term incentive plans and those used in their long-term incentive
plans, but more often than not these metrics are different.\489\
---------------------------------------------------------------------------

    \483\ See, e.g., letters from Aon HCS; CII 2022; Georgiev; and
Infinite.
    \484\ See, e.g., Meridian Compensation Partners, LLC, 2021 Study
on Environmental, Social and Governance Metrics in Incentive Plans
(Oct. 7, 2021), available at https://www.meridiancp.com/wp-content/uploads/2021/10/Meridian-2021-ESG-Survey.pdf (reporting the results
of a review of the proxy statements of 315 large U.S. companies for
the use of ESG metrics in incentive plans).
    \485\ See, e.g., Gallagher 2021 Study (reporting, in Figure 1.4,
that for Russell 3000 companies in the year 2020, long term
incentives represented 71% of the value of total direct compensation
to CEOs, compared to 17% of such value being attributed to annual
bonuses).
    \486\ See, e.g., Meridian 2021 Survey (summarizing responses to
a survey from 309 large companies, and indicating that 37%, 46%, and
11% of the respondents used one, two, and three financial metrics
respectively in short-term incentive plans); and Aon 2020 Study
(presenting, in Figure 1, the number of financial metrics used in
the CEO's short-term incentive plan among S&P 500 companies, broken
down by industry, with an average of two metrics used in every
industry except Energy, with an average of three metrics, and Real
Estate, with an average of one metric).
    \487\ See, e.g., Meridian 2021 Survey and Aon 2020 Study.
    \488\ Id.
    \489\ See, e.g., Pearl Meyer & Partners, LLC, Overlap of
Executive Incentive Plan Performance Measures: Is the Concern
Warranted? (December 2019), available at https://www.pearlmeyer.com/overlap-executive-incentive-plan-performance-measures-concern-warranted.pdf.
---------------------------------------------------------------------------

    There is no consensus in the market on the number of metrics that
should be used in designing executive compensation, with some
advocating for the use of more metrics \490\ and others advocating for
fewer.\491\
---------------------------------------------------------------------------

    \490\ See, e.g., letter from Better Markets 2022 (stating that
any issuer using less than five performance metrics is ``likely
focusing NEO performance on too small a group of metrics''); and
Radhakrishnan Gopalan, John Horn, and Todd Milbourn, Comp Targets
That Work, Harvard Bus. Rev., Sept. 2017, at 102, available at
https://hbr.org/2017/09/comp-targets-that-work (indicating that
using too few metrics can ``create opportunities to manage to the
targets'' and suggesting that companies use multiple metrics that
are not too closely correlated).
    \491\ See, e.g., Norges Bank Investment Management, CEO
Remuneration Position Paper (Apr. 7, 2017), available at https://www.nbim.no/en/the-fund/responsible-investment/our-voting-records/position-papers/ceo-remuneration (stating that shares awarded to a
CEO should not be subject to any performance conditions, which ``are
often ineffective and may result in unbalanced outcomes''); and
Council of Institutional Investors, Policies on Executive
Compensation (Sept. 17, 2019), available at https://www.cii.org/files/ciicorporategovernancepolicies/20190918NewExecCompPolicies.pdf
(``CII 2019 Policies'') (criticizing the ``numerous and wide-
ranging'' metrics that contribute to the complexity of performance-
based pay).
---------------------------------------------------------------------------

    Overall, it is clear that the structure of executive compensation
continues to evolve, as noted by commenters,\492\ and further changes
may be on the horizon. For example, recent tax law changes \493\ and
concerns about the complexity and effectiveness of performance-
contingent stock awards \494\ could encourage registrants to reduce
their reliance on such awards. Uncertainty in the wake of the COVID-19
pandemic \495\ and lower say-on-pay approval \496\ at large companies
in recent years, as compared to previous years, could also drive
changes in compensation structure,

though it remains difficult to predict whether these factors will have
lasting effects and what such effects are likely to be.
---------------------------------------------------------------------------

    \492\ See, e.g., letters from CEC 2022; Davis Polk; and SCG.
    \493\ See IRS Notice 2018-68, 2018-36 I.R.B. 418 (regarding,
among other things, the revision to Section 162(m) that removed the
exception for qualified performance-based compensation in
determining the amount of remuneration for any covered employee that
would not be deductible by a registrant for tax purposes). See also
Kevin Murphy & Michael Jensen, The Politics of Pay: The Unintended
Consequences of Regulating Executive Compensation, 3 J. L. Fin. &
Acct. 189 (2018) (stating that amendments to Section 162(m) passed
in 2017 would reduce or eliminate negative consequences of this
rule, such as the ``recent (and ill-advised) escalation of
performance-share plans''). However, recent studies have generally
not found evidence of significant changes in compensation structure
in reaction to this change in tax law. See infra note 596.
    \494\ See, e.g., Marc Hodak, Are Performance Shares Shareholder
Friendly? 31 J. App. Corp. Fin., No. 3, 126 (Summer 2019); and CII
2019 Policies.
    \495\ See, e.g., Pay Governance, The COVID-19 Pandemic's
Fleeting and Lasting Impact on Executive Compensation (Apr. 2022),
available at https://www.paygovernance.com/viewpoints/the-covid-19-pandemics-fleeting-and-lasting-impact-on-executive-compensation.
    \496\ See, e.g., Semler Brossy, 2022 Say on Pay & Proxy Results
(May 26, 2022), available at https://semlerbrossy.com/insights/2022-say-on-pay-report/ (documenting a decline in say-on-pay voting
support at S&P 500 companies in 2021 and 2022 relative to previous
years).
---------------------------------------------------------------------------

C. Discussion of Economic Effects

    The final rules require registrants to present, in one location,
information that for the most part is disclosed in various other
locations (and using different computations) under existing rules, and
to tag the new disclosure using a machine-readable data language
(Inline XBRL). The anticipated benefits and costs of the final rules
are therefore driven by the impact that this additional format for
presenting information may have on investors and registrants, rather
than by the disclosure of new underlying informational content that
investors could not already access or that would require registrants to
collect significant new data. The economic benefits and costs of the
final rules, including impacts on efficiency, competition and capital
formation, are discussed below. We also discuss the relative benefits
and costs of significant, reasonable alternatives to the implementation
choices reflected in the final rules.
1. Introduction
    As discussed in the Proposing Release, compensating executive
officers with pay that varies with registrant performance may encourage
executive officers, through financial incentives, to exert effort and
make decisions that create shareholder value. However, there are also
potential negative consequences of such compensation plans. For
example, some such plans may cause executives to focus overly on short-
term performance to the detriment of long-term performance, or may make
some executives less likely to take on risky but (from a typical
shareholder's perspective) valuable projects if they are unwilling to
take the chance that the project could fail and result in lower
compensation than would result from less risky projects.
    An optimal compensation policy is generally considered to be one
that maximizes shareholder \497\ value in the long term by balancing
the need to provide executives with the incentive to perform well
against the monetary costs and potential detrimental effects of the
compensation policy. What constitutes an optimal compensation policy,
including which performance metrics should be considered and how much
compensation should vary with these metrics, is difficult to ascertain
and will vary with a registrant's individual circumstances. Academic
research remains mixed as to whether prevailing compensation structures
are optimal, are too closely linked to company performance, or should
be more sensitive to company performance.\498\ Thus, it is unclear
whether changes that would more closely link executive pay with
registrant performance than current compensation structures would have
a positive, a negative, or no impact on shareholder value creation.
---------------------------------------------------------------------------

    \497\ Some argue that optimal compensation would maximize
broader stakeholder value, not just the value of shareholders, while
others respond that long-term shareholder value incorporates effects
on other stakeholders. See, e.g., letter from TCA 2022.
    \498\ See, e.g., Alex Edmans, Xavier Gabaix & Dirk Jenter,
Executive Compensation: A Survey of Theory and Evidence, in Benjamin
Hermalin & Michael Weisbach (eds.), Handbook Econ. Corp. Gov.
(2017), at 383-539 (``Edmans et al. 2017 Survey Paper'')
(summarizing theoretical and empirical research on executive
compensation, including on its sensitivity to performance, and
noting that the results are mixed, and that ``[e]ven seemingly
fundamental questions, such as the causal effect of pay on firm
outcomes, . . . remain largely unanswered''). For seminal studies
presenting differing views, see, e.g., Alex Edmans & Xavier Gabaix,
Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting
Theories. 15 Eur. Fin. MGMT (2009), at 486-496; Michael Jensen &
Kevin Murphy, Performance Pay and Top-Management Incentives. 98 J.
Pol. Econ 225 (1990); and Lucian Bebchuk & Jesse Fried, Pay Without
Performance: The Unfulfilled Promise of Executive Compensation,
Harvard University Press (Oct. 2006).
---------------------------------------------------------------------------

    In addition to uncertainties about the optimality of pay-versus-
performance alignment, there are challenges in measuring such
alignment. For example, the available performance statistics may not
adequately measure a given executive's contribution to a registrant's
performance, such as when registrant performance is strongly related to
market moves, sector opportunities, commodity prices, or other factors
unrelated to managerial effort or skill.\499\ Even if the performance
measure were not subject to such concerns, it could be difficult to
match registrant performance with the associated executive actions and,
perhaps, related compensation because of timing differences. For
example, an executive may be rewarded with extra compensation for an
accomplishment in the year it is made, even though a registrant's
expected profits related to this executive performance (such as an
investment or restructuring decision) might not follow until several
years later. Similarly, a registrant's stock price may rise at the
announcement of a new PEO who is expected to add significant value to
the registrant, even though he or she may not commence employment and
begin receiving compensation until the following year. The alignment of
an executive's financial incentives with registrant performance can
also be difficult to evaluate without also considering holdings of
vested equity which link an executive's wealth accumulation to the
performance of the company whether or not they were obtained as
compensation.\500\ Such issues may lead to concerns with any
standardized approach to presenting the relationship between pay and
performance.
---------------------------------------------------------------------------

    \499\ See, e.g., Marianne Bertrand & Sendhil Mullainathan, Are
CEOS Rewarded for Luck? The Ones Without Principals Are, 116 Q. J.
of Econ. 901 (2001). Other situations in which registrant
performance statistics may differ from an executive's performance
include cases in which the statistics measure managerial effort but
not of the particular manager in question (which may be particularly
likely in the case of NEOs other than the PEO) and situations in
which other factors such as registrant size affect the translation
of a given level of managerial effort into the measured statistics.
    \500\ See, e.g., Kevin J. Murphy, Executive Compensation: Where
We Are, and How We Got There, Handbook Econ. Fin., Volume 2 (George
Constantinides, Milton Harris & Ren[eacute] Stulz eds., 2013), at
211-356 (``Murphy 2013 Study'') (stating that incentive compensation
is negatively correlated with manager's vested equity interests,
reflecting the redundancy of granting further equity awards to
executives whose wealth is already substantially tied to the
company's equity).
---------------------------------------------------------------------------

    Despite the uncertainty and challenges involved in evaluating the
relation of pay with performance, pay-versus-performance alignment is
likely important to investors. In fact, academic research concludes
that the incentives created for executives through the linkage of their
pay with registrant performance outcomes may be the most value-relevant
feature of current executive compensation plans, beyond even the level
of executive pay.\501\ Accordingly, investors may consider the
optimality of pay-versus-performance alignment as part of their
evaluation of executive compensation packages when making voting
decisions relating to the compensation of the NEOs and the election of
directors, as well as when making investment decisions.\502\
---------------------------------------------------------------------------

    \501\ See, e.g., Edmans et al. 2017 Survey Paper (stating that
``[the] level of pay receives the most criticism, but usually
amounts to only a small fraction of firm value. Badly structured
incentives, on the other hand, can easily cause value losses that
are orders of magnitudes larger.'').
    \502\ See, e.g., Stanford 2015 Investor Survey (stating that 64%
of institutional investors surveyed indicated that their firms used
pay-for-performance alignment information from proxy statements to
make voting decisions; 34% of those surveyed indicated that this
information was used to make investment decisions).
---------------------------------------------------------------------------

2. Benefits
    For the most part, the final rules require a different presentation
of certain existing information rather than the disclosure of new
underlying informational content. The primary benefits of the final
rules relative to the

baseline will therefore depend on the extent to which the computations
provided or the format used for the required disclosure makes it easier
or less costly for investors to evaluate how executive compensation
relates to registrant performance.
    As discussed above, investors currently have access to detailed
information disclosed by registrants with respect to executive
compensation and registrant financial performance, but some investors
have expressed dissatisfaction with existing disclosures. Data from the
currently required, standardized tables and accompanying information
may require further computation and analysis before investors can
evaluate actual historical pay-versus-performance alignment under the
baseline. Also, voluntary disclosures that provide more direct measures
of the historical pay-versus-performance relationship are provided by a
minority of registrants and lack standardization and comparability, as
discussed in the Baseline section above. The more standardized
quantitative analyses of pay-versus-performance alignment provided by
the major proxy advisory firms to their clients, as well as the
analyses undertaken by certain large institutional investors on their
own, demonstrate shareholder demand for additional computations
regarding this relationship, beyond existing disclosures.\503\
---------------------------------------------------------------------------

    \503\ See, e.g., supra notes 443 and 444.
---------------------------------------------------------------------------

    Investors may therefore benefit from the final rules to the extent
that the new presentation of data required by these final rules lowers
their burden of analysis in evaluating the executive compensation
policies of the affected registrants. If the repackaging of some of the
information from existing disclosures into the required pay-versus-
performance disclosure, and the Inline XBRL tagging of this disclosure,
allows investors to more quickly or easily process the information
accurately, the final rules may generate productive efficiencies by
preventing duplicative analytical effort by investors. If the
disclosure helps investors process and understand compensation data
faster, this information may also be more quickly incorporated in
market prices, marginally increasing the informational efficiency of
markets.
    The final rules should make it much easier for an investor
reviewing a proxy statement to relate registrant performance with
concurrent changes in the value of compensation, because the amount
disclosed as executive compensation actually paid will more closely
track these changes than currently required compensation disclosure.
Further, for a number of reasons, the disclosure required under the
final rules is expected to be significantly more comparable across
registrants and across time than existing required disclosures in the
CD&A regarding how pay relates to performance as well as current
voluntary pay-versus-performance disclosures. This enhanced
comparability will likely enable more efficient processing of the
information. For example, the consistent tabular format will likely
make the information easier to find, and standardization of the
measures of pay, TSR, and net income will allow investors to understand
what these measures represent without having to examine varying
definitions used by different registrants. In addition, prescribing
particular measures of pay and performance reduces the ability of
registrants to only include measures that lead to more favorable pay-
versus-performance disclosures, which, in turn, would reduce their
utility and comparability. The specific definition of executive
compensation actually paid under the final rules also enhances the
comparability of the disclosures, as discussed in more detail below, as
it treats similar economic situations relatively consistently, allowing
investors to more easily evaluate the disclosure in the context of the
disclosure of other registrants.
    Some commenters agreed that such disclosures may reduce the time,
effort, and/or cost required to review proxy statements,\504\ with
several noting that the proposed disclosure could be used by investors
to more easily review disclosures to identify which registrants'
compensation arrangements they should investigate in greater
detail.\505\ Also, many commenters supported the importance of the
consistency and comparability of the disclosures.\506\
---------------------------------------------------------------------------

    \504\ See, e.g., letters from Farient; Hermes; LGIM; OPERS; SVA;
and TIAA.
    \505\ See, e.g., letters from Hermes and OPERS.
    \506\ See, e.g., letters from American Tower; As You Sow 2015;
Barnard 2015; Barnard 2022; CalSTRS; CAP; CFA; CII 2015; Farient;
Hermes; Hook; KPMG; OPERS; PDI; PRI; Quirin; Teamsters; and TIAA.
---------------------------------------------------------------------------

    On the other hand, a number of commenters indicated that meaningful
comparability of pay-versus-performance disclosure is not feasible or
not desirable given, for example, the degree of variation in the
circumstances of registrants and the vast, differing array of
considerations that go into their compensation programs.\507\ We
acknowledge that perfect comparability may be impossible to achieve,
and that some registrants may choose to supplement the required
disclosures to better communicate their specific situation. However,
compensation and performance, and their alignment, also cannot be
properly evaluated in a vacuum. Broader economic conditions and the
labor market for executive talent have significant effects on the
appropriate level and performance-sensitivity of pay.\508\ Pay-versus-
performance disclosures that can be compared across registrants should
facilitate investors' consideration of these factors. Registrants
already have substantial flexibility to provide tailored disclosures in
proxy statements with respect to the relation of pay with performance.
However, as discussed above, many investors are obtaining standardized
third-party analyses of pay-versus-performance across different
registrants, or constructing their own, which demonstrates demand for
more consistent, comparable disclosure.
---------------------------------------------------------------------------

    \507\ See, e.g., letters from BorgWarner; Celanese; Exxon; FSR;
NAM 2015; NIRI 2015; SCG; SCSGP; and Simpson Thacher.
    \508\ See, e.g., Edmans et al. 2017 Survey Paper.
---------------------------------------------------------------------------

    Some commenters indicated that, whether or not comparability is
desirable, the proposed amendments would not actually provide
disclosures that could be compared across registrants.\509\ These
commenters stated that the proposed disclosure would not be comparable
because, for example, equity granting and vesting practices vary across
registrants,\510\ valuation assumptions may vary across
registrants,\511\ and there is no single way to uniformly measure
performance across different registrants.\512\ We expect that the
revised definition of executive compensation actually paid will
increase the comparability of this measure across registrants with
different compensation structures. In particular, for outstanding
equity awards between their grant and vesting date, the change in value
reported as part of this measure for a particular year is equal to the
change in fair value during that particular year, and therefore may be
associated with performance during the same year. This is true
regardless of the grant and vesting patterns, such that similar
economic exposure for

executives across different registrants should be reflected more
similarly than under the proposed amendments, even when the formal
structure differs.
---------------------------------------------------------------------------

    \509\ See, e.g., letters from Celanese; Hodak; Honeywell; IBC
2015; SCSGP; and Simpson Thacher.
    \510\ See, e.g., letters from Celanese; Hodak; SCSGP; and
Simpson Thacher.
    \511\ See, e.g., letters from IBC 2015 and Simpson Thacher.
    \512\ See, e.g., letters from Celanese and Honeywell.
---------------------------------------------------------------------------

    With respect to the concern about the lack of comparability of
performance measures, several commenters agreed with our view that,
despite certain concerns discussed below, TSR is the most comparable
financial performance measure available.\513\ Given that TSR is
nonetheless an imperfect measure, the inclusion of peer group TSR, net
income, and at least one Company-Selected Measure may provide useful
context for investors when comparing the disclosed performance across
registrants. Finally, with respect to the concern about varying
valuation assumptions, the disclosure of equity award valuation
assumptions when they differ materially from the disclosures of
assumptions as of the grant date may help investors to identify if a
particular registrant's approach to these assumptions appears to be an
outlier. Overall, as noted above, perfect comparability is difficult to
achieve. However, the final rules are intended to provide some basic
standardized elements that can be more easily reviewed and compared
across registrants. At the same time, they also include more tailored
elements that may better reflect registrants' individual circumstances,
such as additional registrant-specific context, significant latitude in
how registrants describe the relationships between the measures in the
prescribed table, and the option of supplemental disclosures in case,
in the registrant's view, additional detail or clarifications would be
helpful.
---------------------------------------------------------------------------

    \513\ See, e.g., letters from Davis Polk 2022; Hodak; and TIAA.
---------------------------------------------------------------------------

    The overall size of the potential benefit to investors depends on
the extent to which the required disclosure approximates or contributes
to any of the calculations and analyses that investors would choose to
perform in order to process the existing disclosures. That is, the
benefits of consistency and comparability will apply only to the extent
that investors find the prescribed measures to be useful. While the
specific extent of benefits is difficult to ascertain, commenters as
well as our observations of current analyses by or on behalf of
investors provide support that the disclosures are likely to be useful
to investors.
    For example, the new measure of executive compensation actually
paid will reflect new required computations (based on information in
existing disclosures) that may be particularly relevant in the context
of evaluating the relationship of pay with performance. These
computations may make information of interest to investors more readily
available than it is under the baseline. Commenters indicating that
investors would find the proposed measure of executive compensation
actually paid to be useful generally cited potential benefits discussed
in the Proposing Release, such as the fact that this measure would
reflect the change in value of equity awards based on performance
outcomes after they are granted,\514\ that it would focus on economic
exposure due to compensation committee intent and not executives'
personal investment decisions,\515\ that it would reflect all elements
of compensation for completeness and comparability,\516\ and that it
would eliminate noise caused by the revaluation of pension benefits
earned in prior periods.\517\ The revised definition of executive
compensation actually paid preserves all of these features, while also
mitigating concerns raised by a large number of commenters about a
likely timing mismatch between the proposed measure of pay and the
associated performance.\518\ By requiring the revaluation of equity
awards every year, the revised measure significantly improves the
degree of matching between the period to which a change in pay is
ascribed and the period of the associated performance, which should
make the measure substantially more useful for investors.\519\
---------------------------------------------------------------------------

    \514\ See, e.g., letters from CII 2015; LGIM; Pawliczek; and
TIAA.
    \515\ See, e.g., letters from AFL-CIO 2015; CII 2015; Hall;
OPERS; and Public Citizen.
    \516\ See, e.g., letters from AFL-CIO 2015; Barnard 2015;
Barnard 2022; and OPERS.
    \517\ See, e.g., letters from Hall and TIAA.
    \518\ See Section IV.C.4.iii below for more detail on these
concerns.
    \519\ See, e.g., letter from TIAA (noting that addressing the
alignment issue ``would greatly improve the clarity and value of the
disclosure for investors'').
---------------------------------------------------------------------------

    The revised measure is also very similar to the concept of
realizable pay, discussed above. A number of commenters indicated that
a realizable pay measure would be particularly appropriate for
evaluating the alignment of pay and performance.\520\ While definitions
of realizable pay vary,\521\ they reflect, like executive compensation
actually paid, an attempt to measure the change in value of an
executive's pay package--including outstanding awards that have not yet
been realized--after the grant date, as performance outcomes are
experienced. We believe that the increasing consideration of realizable
pay (as computed by third parties) by investors when evaluating pay and
performance alignment \522\ is evidence that a measure with similar
features,\523\ such as the adopted measure of executive compensation
actually paid, is likely to be useful to investors in this
context.\524\
---------------------------------------------------------------------------

    \520\ See, e.g., letters from CEC 2015; Pearl; PG 2015; PG 2022;
and SCSGP (citing the conclusions of a broader working group led by
the Conference Board). Others recommended the adopted approach or
other variations similar to realizable pay. See letters from CAP;
Farient; Hodak; Infinite; TCA 2015; and TCA 2022.
    \521\ Realizable pay generally reflects the end-of-period value
of outstanding equity awards as well as the value of any cash and
equity awards realized during the period, with a focus on equity
awards that were granted within a particular horizon. Differences
across definitions include whether outstanding options are valued at
fair value or intrinsic (``in-the-money'') value, and whether the
value of performance- or time-based awards is recognized when
earned, when vested, or at the end of the period. See, e.g., ISS
Realizable Pay Article.
    \522\ See supra note 454.
    \523\ Differences between realizable pay measures and the
adopted definition of executive compensation actually paid and
associated costs and benefits for this purpose are discussed in more
detail in Section IV.C.4.iii below.
    \524\ To the extent that some investors may be interested in
considering the relationship of performance with a measure of pay
that reflects the grant date value of equity awards, they would be
able to refer to the Summary Compensation Table measure of total
compensation required alongside executive compensation actually paid
in the tabular disclosure. As discussed above, some of the existing
pay-for-performance analyses by, or on behalf of, investors use such
a measure, though most of the analyses that we observe also
supplement this with a realizable pay measure. See supra notes 446
and 448.
---------------------------------------------------------------------------

    Although investors could estimate executive compensation actually
paid using existing disclosures, and may already be making similar
estimates on their own or relying on third party estimates of related
measures, they may benefit from these computations becoming readily
available in the prescribed compensation measure. The newly disclosed
computations could reduce duplicative analytical effort by replacing or
validating related investor or third party estimates. In addition, some
investors or third parties hired by investors may be interested in
leveraging the disclosures to more easily compute slightly different
pay measures, whether these are the measures they currently use under
the baseline or refined versions of these measures that are more
feasible to construct due to the availability of the new disclosures,
or in using parts of the required computations for other purposes.\525\
In such cases they are

likely to benefit from the required footnote disclosure of the
adjustments made to compute executive compensation actually paid and
the disclosure of equity valuation assumptions, if materially different
from the grant date assumptions. Also, requiring that the disclosure be
provided in a structured data language may benefit investors interested
in extracting and analyzing some or all of the data in the disclosure
across a large number of filings.
---------------------------------------------------------------------------

    \525\ See, e.g., letters from CII 2015 (stating that
``[s]ophisticated investors will make different adjustments to the
compensation information. . . they are given''); and As You Sow 2015
(expressing interest in a cumulative measure of executive
compensation actually paid, which we note could be constructed from
the annual measures that will be disclosed).
---------------------------------------------------------------------------

    With respect to the performance information required in the new
disclosures, as discussed above, there are challenges associated with
measuring an executive's contribution to registrant performance that
may lead to concerns with any performance measure. Commenters expressed
a number of concerns with the use of TSR in particular in evaluating
executive performance, such as its sensitivity to external factors
outside of the control of executives,\526\ a possible emphasis on
short-term performance,\527\ and the possibility of strategies that
could artificially inflate TSR.\528\ However, we are not aware of, and
commenters did not identify, any standard, singular measure that would
be a uniformly better alternative, and some commenters noted that TSR
would be a useful measure. In particular, commenters that indicated
that investors would find TSR to be useful noted that it is the
ultimate measure of corporate success and shareholder value creation
\529\ and it is widely comparable across registrants.\530\ We agree
with these commenters that, despite its limitations, TSR is likely to
be a useful measure in this context, particularly because it
incorporates information about a variety of facets of registrant
performance, including market expectations of the future impact of
current executive actions, and it is responsible for a significant
amount of the variation in compensation outcomes experienced by
executives. Specifically, academic studies indicate that changes in the
value of equity awards after the grant date, with the movement of stock
prices, are the primary channel though which pay is linked to
registrant performance.\531\ TSR is mechanically a significant
determinant of executive pay outcomes, as it is the most commonly used
metric in long-term incentive plans, and, more importantly, a majority
of CEO compensation is awarded in the form of equity awards, whose
value is closely tied to stock prices even when TSR is not explicitly
used as a performance metric.\532\ Current market practices provide
further evidence that TSR is likely to be useful to investors in this
context: every investor and third-party analysis of pay-for-performance
that we have observed incorporates TSR as a primary performance
measure.\533\
---------------------------------------------------------------------------

    \526\ See, e.g., letters from AFL-CIO 2015; Aspen; CalPERS 2015;
CEC 2015; Celanese; Dimensional; FSR; Hay; IBC 2015; IBC 2022;
McGuireWoods; Mercer; NACCO; NIRI 2015; NIRI 2022; PDI; Pearl;
Samuelson; and SBA-FL.
    \527\ See, e.g., letters from AFREF; ASA; Blackrock; BRT 2015;
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.
    \528\ See, e.g., letters from Better Markets; Hodak; IBC 2022;
McGuireWoods; NACCO; Pearl; and PDI.
    \529\ See, e.g., letters from AFL-CIO 2015; CII 2015; Farient;
Hermes; Hodak; and OPERS.
    \530\ See, e.g., letters from Barnard 2015; Barnard 2022; CII
2015; Davis Polk 2022; Hodak; and TIAA.
    \531\ See, e.g., Edmans et al. 2017 Survey Paper (presenting
evidence that ``the vast majority of executive incentives stem from
revaluations of stock and option holdings, rather than changes in
annual pay''); and Murphy 2013 Study (stating that studies show that
virtually all of the sensitivity of pay to corporate performance for
the typical CEO is attributable to the direct link between stock
price performance and the CEO's portfolio of stock and options). See
also letter from Hodak (stating that, for the average company,
``upwards of 80 percent of the real variation in the value of pay
would derive from unvested equity'').
    \532\ See Section IV.B.3 above. One commenter stated that the
Proposing Release did not provide ``any compelling evidence that
[TSR] is a metric commonly used by companies to measure performance
or in setting compensation.'' See letter from CCMC 2015. Section
IV.B.3 above provides more detail on the significant use of TSR as a
performance metric as well as the heavy reliance on equity awards,
whose value is closely tied to TSR, in compensating executives.
However, as discussed in this section, there is also other evidence
that TSR may be an appropriate measure for this purpose.
    \533\ See supra note 451.
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    However, even if TSR, despite the limitations noted above, is a
particularly useful measure for the purpose of evaluating the relation
of pay with registrant performance, it may not provide a complete
picture of registrant performance. Further, relying solely on TSR to
evaluate registrant and executive performance may even be misleading in
certain situations, such as when expected outperformance is already
reflected in the starting stock price,\534\ when a stock is thinly
traded,\535\ or when market dynamics cause stock returns to become
particularly disconnected from fundamental performance.\536\ The
required disclosure of additional financial performance measures may
help to address these concerns by broadening the picture of registrant
performance presented in the disclosure, providing additional detail
and context that could enhance the usefulness of the disclosure by
certain registrants or for certain investors.
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    \534\ See, e.g., letters from Aspen and SCSGP.
    \535\ See, e.g., letters from Hyster-Yale and NACCO.
    \536\ See, e.g., letters from McGuireWoods and SCG (citing the
recent ``meme stocks'' phenomenon as an example of massive
fluctuations in stock price which have little to do with fundamental
performance).
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    For example, several investors commented that the inclusion of TSR
of a peer group would enhance the comparability of TSR,\537\ perhaps by
providing a benchmark for some of the market- or industry-wide factors
that may affect performance at each registrant. Some commenters
indicated that the required inclusion of a Company-Selected Measure and
net income would provide a more complete picture of registrant
performance.\538\ More specifically, commenters stated that a Company-
Selected Measure would provide insight into the registrant's
perspective \539\ and a facet of performance that is directly relevant
for understanding compensation,\540\ and that net income would provide
a more objective accounting benchmark that is not affected by items
like non-GAAP adjustments \541\ and stock buybacks.\542\ Similarly,
some commenters indicated that including a list of the most important
performance measures used by the registrant to link compensation
actually paid to company performance would provide useful context or a
more complete view of pay-for-performance programs,\543\ and may
therefore help address concerns that the pay-versus-performance
disclosure could otherwise ``mislead'' investors.\544\ Finally, to the
extent registrants include additional supplemental measures of
performance, commenters indicated they generally expect investors to
benefit from an even more complete picture of performance.\545\
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    \537\ See, e.g., letters from OPERS and TIAA.
    \538\ See, e.g., with respect to the Company-Selected Measure,
letters from Better Markets; CII 2022; and Dimensional; and with
respect to net income, letters from CII 2022 and Teamsters.
    \539\ See, e.g., letter from AFL-CIO 2022.
    \540\ See, e.g., letters from CalPERS 2022; CalSTRS; and
Infinite.
    \541\ See, e.g., letters from As You Sow 2022 and Teamsters.
    \542\ See, e.g., letters from Better Markets and CalSTRS.
    \543\ See, e.g., letters from AFREF; Better Markets; and CII
2022.
    \544\ See, e.g., letters from AFREF and CII 2022.
    \545\ See, e.g., letters from AFL-CIO 2022; CalPERS 2015; CFA;
CII 2022; and Hay.
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    As discussed in the Baseline section above, all of the required
performance information is generally already available in existing
disclosures in annual reports or the CD&A of proxy statements. However,
including this performance information in the pay-versus-performance
disclosure may be useful to investors to the extent it limits the time
they need to spend referring to other disclosures \546\ in order to
interpret

the pay-versus-performance disclosure, or prevents some investors from
overlooking important context about the broader performance or pay-for-
performance programs of a registrant. The required description, in
graphical or narrative form, of the relationship between pay and the
performance measures in the prescribed table is not anticipated to
provide significant additional information beyond the contents of the
table, but if it presents this information effectively, it may help
investors to more easily interpret the disclosure.
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    \546\ See, e.g., letters from AFL-CIO 2022 (stating that
shareholders must currently ``comb through the narrative disclosure
provided in the Compensation Discussion and Analysis and then
separately match up the company's actual performance from financial
statements''); and As You Sow 2015 (stating that they focus
primarily on proxy statements from March to May, and would therefore
support moving the Item 201(e) of Regulation S-K graph, which
includes TSR and the TSR of a peer group, to the proxy statement
from the annual report).
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    If the required disclosure is useful to investors, the benefits are
likely to vary across investors of different types. For example, it may
be particularly beneficial to those investors who do not have access to
third-party analyses, have fewer analytical resources, or are less
adept at interpreting current disclosures on their own.\547\ That said,
some such investors may limit their proxy statement review to items
like a voluntarily-provided proxy summary section regardless of the
existence of the new disclosure, in which case they are unlikely to
benefit.\548\ Among investors with more resources or sophistication,
some may benefit by being able to more quickly review proxy statements
to determine which to investigate in more detail,\549\ and some may
reduce their analytical burdens by relying on information from the new
disclosure to replace, to validate, or to more easily construct the
inputs for their existing analyses. To the extent third parties are
able to similarly leverage information provided in the new disclosures
in constructing their own quantitative analyses, they may pass on some
of these benefits in the form of a lower cost or a more useful analysis
to subscribing investors. On the other hand, some investors or the
third parties they subscribe to may continue to independently construct
their own analyses without using any elements of the new disclosure;
these investors are unlikely to benefit from the disclosure.\550\ For
all of the investors that would benefit from the disclosures, they are
likely to benefit the most in the case of (i) registrants with
particularly complex compensation plans, and where the alignment of pay
and performance may therefore be difficult to assess, and (ii)
registrants that do not already provide useful pay-versus-performance
disclosure on a voluntary basis.
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    \547\ See, e.g., letters from OPERS and Teamsters.
    \548\ See, e.g., letters from Axcelis and NIRI. See also Abt
SRBI, Mandatory Disclosure Documents Telephone Survey, Commissioned
by SEC's Office of Investor Education and Advocacy (July 30, 2008),
available at https://www.sec.gov/pdf/disclosuredocs.pdf, at 38
(presenting survey evidence that, among individual investors that
read proxy statements, 43% reported spending less than 10 minutes
reading proxy statements).
    \549\ See supra note 505.
    \550\ See, e.g., letters from Axcelis; IBC 2015; and SCG.
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    Overall, the direct benefits of the final rules hinge on the new
disclosures being relatively easy to review and including the
information investors are most interested in when evaluating the
relation of pay with performance. Therefore, if the included measures
are significantly different from those investors would collect or
construct on their own in order to evaluate executive compensation, or
if the disclosure is too long or complicated to review quickly,
benefits to investors could be limited. Some commenters expressed such
concerns, indicating that the proposed disclosures would be of minimal
or no benefit to investors.\551\ However, as discussed above, there is
evidence that the revised measure of executive compensation actually
paid and TSR are similar to measures currently used by many investors
in quantitative analyses of pay and performance alignment, which
suggests that these elements of the new disclosure are likely to be at
least somewhat useful to investors. It is less clear to what extent the
overall effect of the additional required performance measures will be
to enhance the utility of the new disclosures to investors, recognizing
that the usefulness of these components may be reduced by their
contribution to the overall length and complexity of the
disclosures,\552\ which may make it difficult to quickly interpret the
basic elements of the disclosures. Any supplemental explanations
registrants include may further increase the length and complexity of
the new disclosures.\553\ That said, the tabular disclosure of the
underlying data will provide a degree of consistency and comparability,
which can aid investors in quickly processing the information.
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    \551\ See, e.g., letters from BRT 2015; CAP; Celanese; FedEx
2015; NAM 2015; and Pearl.
    \552\ See, e.g., letters from CEC 2015; McGuireWoods; Meridian;
and TCA 2022.
    \553\ See, e.g., letters from Aon HCS; Aspen; CEC 2022;
Celanese; Coalition; Exxon; Hyster-Yale; IBC 2022; NACCO; NAM 2015;
NIRI 2015; NIRI 2022; and PNC.
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    The final rules could also have indirect benefits if the required
disclosures lead to more optimal compensation policies, perhaps as a
result of increased attention on the level or structure of NEO
compensation and/or registrant performance. Specifically, if, by virtue
of the disclosure, NEOs become less likely to demand, or boards become
less likely to approve, a compensation level or structure that is not
optimal (in that, as discussed above, it does not maximize long-term
shareholder value),\554\ then benefits will arise to investors and
registrants. The resulting pay packages may represent either a benefit
or a cost to the NEOs depending on whether or not the more optimal
compensation structure, including the level of compensation as well as
the risk exposure, is preferred by the executives. The final rules
could also indirectly benefit investors and registrants in the form of
more optimal board composition, if, by virtue of the disclosure,
shareholders make more informed voting decisions.
---------------------------------------------------------------------------

    \554\ It is important to note that, as mentioned above, a closer
link between executive pay and stock performance than the current
status of compensation could be either beneficial or detrimental to
shareholder value creation.
---------------------------------------------------------------------------

    The likelihood of such indirect effects is difficult to estimate
because the ideal pay-versus-performance analysis, as well as the
optimal pay structure, is uncertain and may vary by company, and
because reactions to the repackaging of information are difficult to
predict. As discussed above, the disclosure is intended to facilitate
investors' consideration of the alignment between pay and performance
when making related voting decisions. Several commenters indicated that
they anticipated that the proposed amendments would therefore result in
improvements in compensation and/or corporate governance.\555\ However,
because the final rules do not require the disclosure of significant
new underlying informational content, and given the high level of
existing attention to pay practices--including increased engagement on
these matters with institutional investors, and the sophisticated
methods and processes that many investors and third parties have
developed for evaluating pay--we believe that it is unlikely that the
final rules will play a significant role in encouraging more optimal
pay packages or corporate governance. We therefore believe that the
final rules are likely to

have no material beneficial effects on competition or capital
formation.
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    \555\ See, e.g., letters from Better Markets and Sacred Heart.
---------------------------------------------------------------------------

    Lastly, we note that the required pay-versus-performance disclosure
will provide some incremental information relative to the underlying
informational content already available to the public in other formats,
but that the extent of this information is limited. For example, the
valuation of equity awards such as options and performance-contingent
stock involve certain assumptions and expectations, and registrants are
not currently required to disclose valuation assumptions for most \556\
such awards on dates other than the grant date. Vesting-date values
currently are provided for stock awards in the Stock Vested and Options
Exercised Table, but the applicable fair values at times before these
dates, other than the grant date, and for options at all dates other
than the grant date, are not separately presented by registrants. That
said, for some awards, additional assumptions are not required to
compute their fair values at these other dates. Specifically, for stock
awards, such as restricted stock, that only have service-based
conditions, the fair value would generally simply equal the stock price
at the time. For stock with performance-based conditions other than
market conditions, determining the fair value would involve a
reassessment of the probable outcome with respect to the performance
metrics involved, but registrants are also required to reassess these
probable outcomes each period for the purpose of financial statement
reporting, and associated footnotes should provide insight into the
registrant's evaluation to the extent the changes in estimates are
material.
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    \556\ A minority of option-like awards may be classified as
liability awards under FASB ASC Topic 718, because of, e.g., certain
cash settlement features or conditions or other features that are
indexed to conditions other than a market, performance, or service
condition. In such cases, the entity is required to revalue the
award at fair value each period and to adjust its cumulative cost in
the financial statements, and the associated valuation assumptions
would generally be available in financial statement footnote
disclosures.
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    Computing the fair value of other awards, such as options and stock
with market-based conditions, after the grant date would likely require
new assumptions. Using existing disclosures, investors can themselves
make estimates of the fair values of options and stock with market-
based conditions at dates beyond the grant date based on the disclosed
terms of these awards, and by using publicly available data to make
reasonable valuation assumptions.\557\ In contrast, a fair value
estimate provided directly by the registrant would reflect its
discretion in choosing a valuation methodology and estimating the
inputs required, such as the expected option life and the expected
volatility of the stock.\558\ The grant-date valuations provided by
registrants already demonstrate, to some extent, how the registrants
choose to apply their discretion in the valuation process.\559\ It is
unclear to what extent investors would find information about what
valuation assumptions registrants would apply at later dates, which
would similarly reflect registrant discretion, to represent meaningful
new information beyond what is available in existing disclosures
(though investors may find the computations useful regardless of
whether they reflect meaningful new information).
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    \557\ Such data might include financial statement footnote
disclosures relating to significant assumptions made by the
registrant in arriving at disclosed grant-date valuations and
information regarding the past exercise behavior at the registrant
or a broader group of firms, as well as market information on bond
and dividend yields and stock price volatilities.
    \558\ While FASB ASC Topic 718 requires that the assumptions
used shall not represent the biases of a particular party, there
will generally be a range of assumptions that could be considered to
be reasonable, and so the choice of particular assumptions will
reflect registrant discretion.
    \559\ An academic study of executive compensation among firms in
the S&P 1500 from 1996 to 2001 found that the grant-date valuations
of option awards by these registrants were, on average, understated.
However, because this paper uses data from 1996 to 2001, it might
not accurately reflect current practices. See David Aboody, Mary E.
Barth & Ron Kasznik, Do Firms Understate Stock-Based Compensation
Expense Disclosed under SFAS 123? 11 Rev. Acc. Stud., No. 4, 429
(2006). Notably, when evaluating executive compensation, two major
proxy advisory firms use their own, standardized set of
methodologies and assumptions to value option grants rather than
relying on each registrant's estimate of grant-date value. See Glass
Lewis Methodology and ISS Methodology.
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    With respect to pensions, while aggregate service costs are
reported in financial statement disclosures, and pension plan terms and
assumptions are disclosed in detail, registrants are not currently
required to separately report the service cost, or prior service cost
due to any plan amendments or initiations, that is associated with each
individual NEO, so the disclosure of these costs may reveal marginal
new information about actuarial assumptions specific to the estimation
of service costs for these individuals, such as any embedded
assumptions about future compensation levels.
    Additional potential sources of new information for investors
include the Company-Selected Measure and the Tabular List. As discussed
above, if registrants do not already disclose the historical outcomes
for their Company-Selected Measure over the past five years, the
disclosure may provide new information to the extent that any required