Memorandum
SEC Proposes Pay-Versus-Performance RuleMay 13, 2015

On April 29, 2015, the Securities and Exchange Commission (“SEC”) issued proposed rules to implement theDodd-Frank Act requirement that issuers disclose in any annual proxy or consent solicitation therelationship between executive compensation actually paid and the financial performance of the issuer,“taking into account any change in the value of the shares of stock and dividends of the registrant and anydistributions.”1 In the SEC’s view, this disclosure requirement 2 is “intended to provide shareholders withinformation that will help them assess a registrant’s executive compensation when they are exercising theirrights to cast advisory votes on executive compensation.” The proposed rule would require registrants to: present, in a prescribed table:o “total compensation” as disclosed in the Summary Compensation Table, presented separately for thecompany’s principal executive officer (“PEO”) and as an average for the other named executive officers(“NEOs”) listed in the Summary Compensation Table;o executive compensation “actually paid” (as calculated in accordance with the proposed rule),
presented separately for the company’s PEO and as an average for the other NEOs listed in theSummary Compensation Table;

1 Pay Versus Performance, Release No. 34-74835; File No. S7-07-15 (Apr. 29, 2015), at 4 (citing §14(i) of the Securities

Exchange Act of 1934) (hereinafter “Release”); see also Dodd-Frank Wall Street Reform and Consumer Protection Act §953(a). Commissioners Daniel Gallagher and Michael Piwowar voted against the proposal.

2 Dodd-Frank Added this requirement as Section 14(i) of the Securities Exchange Act of 1934, as amended (the“Exchange Act”).
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Memorandum – May 13, 20152o the registrant’s cumulative total shareholder return (“TSR”) over the “measurement period” 3; ando the cumulative TSR of the registrant’s peer group over the same “measurement period”; and describe the relationship between:o executive compensation actually paid and the registrant’s TSR; ando the registrant’s TSR and its peer group’s TSR.
Proposed new Item 402(v) of Regulation S-K would codify the disclosure requirement.
 Registrants Not Subject to the Disclosure. The proposed pay-versus-performance rule would not
apply to:o emerging growth companies;
o foreign private issuers; oro registered investment companies.
 Location of the Disclosure. The SEC proposes requiring the pay-versus-performance disclosure to be
included “in any proxy or information statement for which disclosure under Item 402 of Regulation S-K isrequired.” The SEC reasons that this would make pay-versus-performance information available toshareholders, “along with all other executive compensation disclosures called for by Item 402, incircumstances in which shareholder action is to be taken with regard to an election of directors orexecutive compensation.” The SEC does not propose a specific location within the proxy or information
statement for the pay-versus-performance disclosure, but “generally expect[s] registrants would disclose itwith the Item 402 executive compensation disclosure.” While the proposed disclosure would be provided
pursuant to Item 402 and would, therefore, be subject to the say-on-pay advisory vote, it would not need
to be included in registration statements or Annual Reports on Form 10-K. Accordingly, a company that
does not file a proxy or information statement (e.g., a debt filer) would not be subject to the proposed payversus-performance disclosure.
 Format and Content of the Disclosure.
o Prescribed Table. As noted above, proposed Item 402(v) would require registrants to provide atable with the following headings:

3 The proposed rule defines “measurement period” as “the period beginning at the “measurement point” established by

the market close on the last trading day before the registrant’s earliest fiscal year in the table, through and including theend of the registrant’s last completed fiscal year.” Release at 132.
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Memorandum – May 13, 20153

Pay Versus PerformanceYear(a)Average
Summary
Average
Compensation Compensation
Table Total for Actually Paid
Summary
non-PEO
to non-PEO
Peer Group
Compensation Compensation
Named
Named
Total
Total
Table Total for Actually Paid
Executive
Executive
Shareholder Shareholder
PEOto PEO
Officers
Officers
ReturnReturn(b)

(c)

(d)

(e)

(f)

(g)

With regard to executive compensation actually paid, disclosed in columns (c) and (e), the proposed
rule would require “footnote disclosure for both principal executive officer compensation and average
NEO compensation of each amount deducted from, and added to the total compensation amount asprovided in the Summary Compensation Table.” According to the SEC, requiring the disclosure of
Summary Compensation Table totals in columns (b) and (d) in addition to executive compensation
actually paid “would facilitate comparisons of the two measures of a registrant’s executive
compensation to the registrant’s performance.” The proposed rule would require the disclosure in each column, including any footnote disclosure,
to be provided in interactive data format using eXtensible Business Reporting Language(“XBRL”). “The interactive data would have to be provided as an exhibit to the definitive proxy orinformation statement filed with the Commission, in addition to appearing with and in the sameformat as the rest of the disclosure provided pursuant to proposed Item 402(v) of Regulation S-K(e.g., in ASCII or HTML).”o Disclosure of Relationship Between Executive Compensation and Issuer’s Performance.
In addition to providing the required table, registrants would need to use the values included in thetable to describe: the relationship between the executive compensation actually paid and the registrant’s TSR; and the relationship between the TSR of the registrant and that of its peer group.
Under proposed Item 402(v), this disclosure “could be described as a narrative, graphically, or acombination of the two” and would also be required to be provided in XBRL format.
 Executives Covered by the Disclosure. Proposed Item 402(v) disclosure would be required for“named executive officers” as defined in Item 402(a)(3) of Regulation S-K, except that smaller reporting
companies would use their “named executive officers” required to be disclosed under Item 402(m). Thedisclosure would not include the issuer’s broader group of executive officers. The SEC reasons that the“named executive officers” are the executive officers for whom compensation disclosure is currently
required in the Summary Compensation Table and the SEC’s other executive compensation disclosure
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Memorandum – May 13, 20154requirements. The SEC also proposes “that, for each year, the compensation information be presented
separately for the principal executive officer and as an average for the remaining NEOs identified in theSummary Compensation Table.” For any year in which more than one person served as the PEO of theregistrant, the proposed rule would require the disclosure regarding those persons to be aggregated, since
this would reflect the total amount the company had paid that year for the services of a PEO.
 Definition and Calculation of “Executive Compensation Actually Paid”. The SEC believes thatthe Dodd-Frank Act’s use of the term “actually paid” signifies Congress’ intention to refer to “an amountdistinct from the total compensation as reported under Item 402.” Accordingly, the SEC proposes that forpurposes of proposed Item 402(v), “executive compensation actually paid” would be “total compensation
as reported in the Summary Compensation Table, modified to adjust the amounts included for pension
benefits and equity awards.”o Equity Awards. Under the proposed rule, equity awards would “be considered actually paid on thedate of vesting and valued at fair value on that date, rather than fair value on the date of grant asrequired in the Summary Compensation Table.” Accordingly, for purposes of proposed Item 402(v),for each applicable year the registrant would subtract the grant date fair values of the equity awards
from the amounts reported in the Summary Compensation Table, and would add in their place the fairvalues of the equity awards at the vesting date. While the proposed rule does not specify a particularvaluation method to be used, “[a]s proposed, a registrant would be required to disclose vesting datevaluation assumptions if they are materially different from those disclosed in its financial statements
as of the grant date.”
oActuarial Pension Value. Under the proposed rule, for each applicable year changes in actuarial
present value of all defined benefit and pension plans would be deducted from the Summary
Compensation Table total. However, “the actuarially determined service cost for services rendered by
the executive during the applicable year [would] be added back.” According to the SEC, the resulting
amount “may be viewed to approximate the value that would be set aside currently by the registrant tofund the pension benefits payable upon retirement for the service provided during the applicable year.”oEarnings on Non-Qualified Deferred Compensation. As with the current disclosure
requirements of the Summary Compensation Table, “the compensation calculation under proposed
Item 402(v) would include above-market or preferential earnings on deferred compensation that is not
tax-qualified because these amounts represent compensation accrued during the relevant year.”

The proposed rule would allow registrants to supplement the mandated disclosure “by providing payversus-performance disclosure based on a measure of ‘realized pay,’ ‘realizable pay,’ or other appropriate
measure if they believe it provides useful information about the relationship between compensation andregistrant performance, provided that the supplemental disclosure is not misleading and not presented
more prominently than the required disclosure.”

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Memorandum – May 13, 20155

 Measure of Registrants’ Financial Performance. Under the proposed rule, registrants would beobligated to use TSR as the measure of their financial performance for purposes of pay-versusperformance disclosure. The SEC believes that using this “consistently calculated measure” would“increase the comparability of pay-versus-performance disclosure across registrants,” provide anobjectively determinable measure based on the registrant’s share price, and reduce the burden placed onregistrants as a result of the disclosure given that TSR is a measure that they are already required todetermine and disclose. The proposed rule would allow registrants to include supplemental measures offinancial performance in their disclosures “so long as any additional disclosure is clearly identified, notmisleading and not presented with greater prominence than the required disclosure.” With regard tocalculating peer group TSR, the proposed rule requires that the returns of each issuer in the group beweighted in accordance with its respective market capitalization “at the beginning of each period for which
a return is indicated.” Determination of Peer Group. For purposes of disclosing peer group TSR, registrants can either use:o the peer group they use for purposes of Item 201(e) of Regulation S-K; oro a peer group they use in the Compensation Discussion and Analysis (“CD&A”) for purposes ofdisclosing their compensation benchmarking practices.
Under the proposed rule, “[i]f the peer group is not a published industry or line-of-business index, theregistrant would be required to disclose the identity of the issuers”; issuers would, however, be permitted
to comply with this requirement through incorporation by reference to earlier filings that contain thisinformation.
 Time Period Covered by the Disclosure. Under the proposed rule, registrants would be required toprovide pay-versus-performance disclosure for the five most recently completed fiscal years, except that
smaller reporting companies could use only the three most recently completed fiscal years.
o Transition Period. In the first proxy or information statement filed after the rule becomes effective,registrants would be required to provide the proposed Item 402(v) disclosure for three fiscal years (ortwo years for smaller reporting companies); they would then be required to “provide disclosure for anadditional year in each of the two subsequent annual proxy filings where disclosure is required.” In
addition, under the proposed rule, a company need only provide pay-versus-performance disclosurefor years that it was a reporting company pursuant to Section 13(a) or Section 15(d) of the ExchangeAct. Accordingly, a newly-reporting registrant would be required to provide the disclosure for only themost recently completed fiscal year in any applicable filing in its first year as a reporting company, andwould be required to provide the disclosure for the two most recently completed fiscal years in any
applicable filing in its second year as a reporting company.
 Smaller Reporting Companies. In addition to being required to provide Item 402(v) disclosure only
for the three most recently completed fiscal years, smaller reporting companies:
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Memorandum – May 13, 2015

6o would not need to “disclose amounts related to pensions for purposes of disclosing executive
compensation actually paid because they are subject to scaled compensation disclosure that does notinclude pension plans”;
o would not be required to provide a peer group TSR; ando would not need to provide pay-versus-performance disclosure in XBRL format until the third filing inwhich it provides such disclosure

Takeaways from the Proposed Rule
 Prepare Draft Disclosure. Companies should consider drafting a mock-up of their pay-versusperformance disclosure. Since the proposed rule would allow issuers flexibility in deciding which peergroup they want to use for purposes of the rule, issuers may want to prepare separate draft disclosuresusing the peer group included in their CD&A and the same index or issuers they use for purposes of Item
201(e) of Regulation S-K.
 Review Peer Group. This is a good time for registrants to review their peer group. In light of theproposed rule, as part of this review, companies should take into account the market capitalizations of thecompanies in their peer group.
 Revise Timeline. Registrants should be mindful that they may need to build in extra time in theirtimelines to allow for formatting the disclosure using XBRL.
 Update Compensation Committee. Consider updating the compensation committee on the proposedrule. The compensation committee may request that management begin to engage in dialogue with thecompany’s compensation consultants regarding what additional information they plan to present to thecommittee as a result of the pay-versus-performance disclosure requirement, as well as the format andcontent of the company’s proxy disclosure management should consider.
The SEC set a 60-day period for public comment on its proposed rule. Issuers will be required to include
pay-versus-performance disclosure in the first proxy or information statement they file after the final rule
becomes effective. Although it is unknown when the rule will be finalized, it is possible that disclosure will
be required for the 2016 proxy season.

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Memorandum – May 13, 20157

If you have any questions or would like additional information, please do not hesitate to contact Yafit Cohn
at +1-212-455-3815 or yafit.cohn@stblaw.com, any other member of the Firm’s Public Company Advisory
Practice or any of the following members of the firm’s Executive Compensation and Employee Benefits
Practice:

NEW YORK CITYPALO ALTO

Greg Grogan+1-212-455-2477
ggrogan@stblaw.com

Tristan M. Brown+1-650-251-5140
tbrown@stblaw.com

Larry Moss
+1-212-455-2280
larry.moss@stblaw.com
Brian D. Robbins+1-212-455-3090
brobbins@stblaw.com
David Rubinsky+1-212-455-2493
drubinsky@stblaw.com

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Memorandum – November 21, 2014

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