Staff at the Securities and Exchange Commission’s Division of Corporation Finance (CorpFin) have already received implementation requests regarding the commission’s so-called pay-for-performance rule, which was enacted a while ago. less than three months.
As staff respond to individual inquiries, CorpFin is also considering the scope and form of responses to frequently asked questions.
“There is a requirement related to equity awards and pensions in the rule that, for example, the rule requires measurement of equity awards at fair value using as CSA 718 U.S. GAAP equity guidance to value equity awards on an annual basis, which we don’t traditionally do frequently under GAAP,” said Lindsay McCord, CorpFin’s chief accountant, during the Corporate Financial Reporting Insights conference organized by Financial Executives International in New York. on November 7, 2022.
“So we’ve received a lot of implementation questions related to this aspect from the financial reporting community,” McCord added. “We’re trying…to look at some of these questions now with all the other implementation questions we’ve received and trying to figure out…how can we get back to the public about this because…the purpose of that rule was to disclose information about the relationship between the executive compensation actually paid by the registrant and its financial performance.
The rules are described in version no. 34-95607, Pay for performance. The statement was released in August and went into effect on October 11. And because companies must begin complying with disclosures for fiscal years ending on or after December 16, 2022, staff have received many questions about how to apply. the rules.
The rules were imposed by section 953(a) of the Dodd-Frank Act. Second. 953(a) of PL111-203
The Financial Reform Act requires companies to disclose figures that show the relationship between executive compensation and the company’s financial performance.
The SEC’s final rules require companies to include in proxy or disclosure statements a summary table of compensation for the chief executive officer (PEO) and, on average, other named executives (NEO). This will require total compensation and a measure that reflects “executive compensation actually paid,” as McCord said in his remarks.
Companies must provide financial performance measures that show total shareholder return (TSR); industry RST; the company’s net income; and a financial measure chosen by the company. This last requirement — which the SEC calls a company-selected measure — would be specific to that company and would represent the most important financial performance measure it uses to tie the compensation actually paid to the company’s named executives. company to company performance for the most recent fiscal year. year.
For pensions, the SEC requires companies to include the value of plan changes in the calculation of compensation actually paid. With respect to equity awards, the SEC requires companies to use fair value as a measure of the amount of an award.
This is “consistent with accounting in the financial statements, [but] we are adjusting the date on which the award is valued in response to feedback, so that the first disclosure of fair value is made in the year of the award and changes in the value of the award are reported d year to year until the award vests,” the SEC said in the statement. “We believe this approach will better align the timing of disclosure and valuation with when the award is actually ‘earned’ by the executive, resulting in disclosure that more clearly shows the relationship between executive compensation and declarant performance.”
McCord said the words “actually paid” when referring to stock-based compensation or pensions are tricky and involve some interpretation to determine how and when the calculation should take place.
“So the staff spent a lot of time with the agency’s accountants discussing it, and you’ll see in the release if anyone wants to pick it up for fun and read it,” she said.
Non-GAAP Measure and Pay for Performance
During the conference, she was asked about the requirement of the measure chosen by the company and whether there could be any problems with the use of non-GAAP measures when companies perform their compensation analysis. in relation to performance. Corporate reporting of misleading non-GAAP numbers is an ongoing problem for CorpFin.
CorpFin’s chief accountant responded that some companies may well use a non-GAAP measure as the most important metric to show pay-versus-performance figures.
“But that’s also why the rule says we require net income to be disclosed. And that’s GAAP financial statement net income,” McCord explained.
“When you kind of look at the big picture information on executive compensation and what companies are doing, most companies have some kind of earnings measure that they tie executive compensation to, but we didn’t want to impose a non-GAAP measure that not everyone will calculate…like operating margin. Many companies do not have an operating margin based on their financial statements. But everybody has income because it’s prescribed by Regulation SX, or it’s prescribed by IFRS,” she said. “And so, we were trying to be thoughtful and say, ‘Let’s make sure we have a profit metric in place as a mandatory requirement. Let’s make sure it’s something that every preparer can easily extract from their financial statements, instead of it being something that we then have an implementation question: “how do I calculate this profit margin?”
This article originally appeared in the November 17, 2022 edition of Accounting & Compliance Alertavailable on Checkpoint.
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