Thu, Mar 9, 2023
The SEC recently issued a rule aimed at providing more insight into the relationship between executive compensation and a company’s performance. As a part of the new “Pay vs. Performance” (PvP) disclosure requirements, SEC registrants (with the exception of foreign private issuers, emerging growth companies and registered investment companies other than business development companies) must compute the year-to-year change in the fair value of equity awards, which is used to derive the “compensation actually paid” to executives, as defined by the rule. The disclosure requirements apply to proxy statements and begin for fiscal years ending on or after December 16, 2022 (i.e., 2023 proxy season). Newly public companies in the scope of the rule are only to provide disclosures for the years they are considered a reporting entity.
Prior to the new SEC rule, awards subject to equity accounting only needed to be valued as of the grant date for U.S. Generally Accepted Accounting Principles (GAAP) purposes (unless the award is modified). The new SEC disclosure requirements necessitate the fair value measurement of equity grants for executives on an annual basis until vesting occurs (or forfeiture), generally using the same methodology and assumptions as under U.S.GAAP.
Disclosures need to be made individually for the principal executive officer (PEO) and as an average for named executive officers (NEOs).
The transition allows companies to provide the disclosure for three years (instead of five) in the first applicable filing and include an additional year in the next two annual filings. Smaller reporting companies (SRCs) may provide two years of data (instead of three) in the first applicable filing and add a year in the subsequent filing.
Post-grant date re-valuations are considerably more complex than grant date valuations, with certain aspects outlined below:
In conclusion, the PvP disclosures require re-valuation of historical equity grants as of multiple dates in time for the 2023 proxy season. Post-grant valuations carry significant additional complexity. We recommend a collaborative approach with valuation specialists early in the process to allow sufficient time for discussions, research and modeling to meet the disclosure requirements on a timely basis.
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