On August 25, 2022, the SEC adopted the pay-versus-performance disclosure requirements that the SEC was directed to promulgate by the Dodd-Frank Act.17 Reporting Companies (other than emerging growth companies (“EGCs”)),18 registered investment companies or foreign private issuers, which are all exempt from the rule, are required to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure. The pay-versus-performance table must include, for the principal executive officer (“PEO”) and, as an average, for the company’s other NEOs, the Summary Compensation Table measure of total compensation and a measure reflecting “executive compensation actually paid,” as specified by the rule. The financial performance measures to be presented in the table are: ■ cumulative TSR for the company; ■ TSR for the company’s self-selected peer group; ■ the company’s net income; and ■ a financial performance measure chosen by the company and specific to the company that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company’s NEOs to company performance for the most recently completed fiscal year. Item 402(v) also requires disclosure of a list of three to seven financial performance measures that the company determines are its most important measures. Companies are permitted, but not required, to include non-financial measures in the list if they considered such measures to be among their three to seven “most important” measures. Calculate “compensation actually paid,” which may require new fair value estimates with third-party appraisers. ■ Determine the appropriate peer group to use for TSR—most REITS are expected to use a published industry index from the 10-K for simplicity purposes. ■ Carefully consider the most appropriate “Company-Selected Measure” for the table— most REITs [expect to] use a per-share earnings metric like FFO, AFFO, Core FFO, etc. The pay-versus-performance rules apply to all reporting companies, except foreign private issuers, registered investment companies, and EGCs. Smaller reporting companies are required to provide disclosure under Item 402(v) of Regulation S-K, but the disclosure is scaled for those companies, consistent with the existing scaled executive compensation disclosure requirements applicable to smaller reporting companies.19 Specifically, smaller reporting companies would: ■ only be required to present three, instead of five, fiscal years of disclosure under new Item 402(v) of Regulation S-K; ■ not be required to disclose amounts related to pensions for purposes of disclosing executive compensation actually paid; ■ not be required to present peer group TSR; ■ be permitted to provide two years of data, instead of three, in the first applicable filing after the rules became effective; ■ be required to provide disclosure in the prescribed table in Inline XBRL format beginning in the third filing in which the smaller reporting company provides pay-versus-performance disclosure; and ■ determine the three to seven additional performance measures for the tabular disclosure—REITs are expected to generally use three to five key metrics that are used within the short-term and long-term incentive plans. 17 See Release No. 34-95607, Pay-Versus-Performance (Aug. 25, 2022), available at https://www.sec.gov/rules/final/2022/34-95607.pdf. 18 A company qualifies as an EGC if it had total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. A company continues to be an EGC for the first five fiscal years after it completes an IPO, unless one of the following occurs: ■ its total annual gross revenues are $1.235 billion or more; ■ it has issued more than $1 billion in non-convertible debt in the past three years; or ■ it becomes a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act. 19 A company qualifies as a “smaller reporting company” if: ■ it has public float of less than $250 million or ■ it has less than $100 million in annual revenues and ■ no public float or public float of less than $700 million Pay-Versus-Performance PRACTICE POINT: Pay-for-performance disclosure requires a fair amount of preparation. Key items that need to be addressed include: 47 | 2024 Guide to REIT Executive Compensation
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