PwC’s Governance Insights Center | March 2023

Pay versus performance disclosure and

the board’s role: what you need to know
In an effort to improve transparency, the SEC finalized a
rule in the fall of 2022 requiring disclosure of executive Navigating total
compensation paid compared to company financial
performance, or pay versus performance (PVP). A rule on shareholder return
this topic was prescribed by the Dodd-Frank Act signed into
law in 2010. Transparency and comparability were
key focus areas for the SEC. To that end,
The new PVP disclosure is required in 2023 proxies of most the rule stipulates that TSR should be
public companies1 and requires three main disclosure calculated in a manner that is consistent
elements: (1) a pay versus performance table, (2) a with the current stock performance graph
narrative or graphical representation tying total shareholder in Item 201(e) of Regulation S-K. And,
return (TSR) and company financial metrics to executive the peer group should either be the same
pay and (3) a tabular list of the most important metrics used industry index used in the stock
for determining executive pay. performance graph or, alternatively,
market-cap-weighted TSR from the
Over time, we expect that the new disclosure will evolve, company’s compensation peer group.
much as the Compensation Discussion and Analysis The downside of using the company’s
(CD&A) has since it was introduced in 2006. However, this compensation peer group is that
year the board’s focus will be on complying with the new changes from the prior year must be
disclosure rules and managing market perceptions, disclosed in a footnote, and the company
especially because the rules introduce a new value, must report the TSR of both groups, so
“compensation actually paid” (CAP), that compensation an index is likely the easier option.
committees did not necessarily contemplate when making
the decisions that are reflected in the new disclosure.

The level of effort needed by companies to assemble the first PVP disclosure, which generally includes fiscal
years 2020 to 2022, will vary depending on the design of the executive compensation program, but will not
be insignificant. Determining compensation actually paid for the CEO and named executive officers requires
recalculating equity award fair values at vesting dates and at the end of each year, in addition to the fair
value at grant date already calculated for the Summary Compensation Table (SCT). Additionally, service
costs for pension benefits and changes in deferred compensation need to be calculated and added to CAP.
Finally, all of these values need to be disclosed so investors and those reading the proxy can reconcile CAP
and SCT amounts.

Implementation of the new PVP rules is going to take meaningful effort and management needs to move with
purpose: first, assemble a multidisciplinary internal team; second, engage with outside advisers; and third,
get the calculations started.

1 The
PVP rules do not apply to emerging growth companies, registered investment companies or foreign private issuers. Smaller reporting
companies have scaled back disclosures.

Pay versus performance disclosure and the board’s role: what you need to know | 2
Preparing the first PVP disclosure
Management has the responsibility to assemble the first PVP disclosure for inclusion in the 2023 proxy
statement. The level of difficulty will vary, largely based on the complexity of the executive compensation
program. A multidisciplinary team including the finance, human resources and legal departments need to
collaborate to address all elements of the disclosure. Directors will be held accountable for the disclosure by
shareholders, either through “say on pay” votes or voting on the directors themselves. Here are a few
questions directors should ask.

Questions compensation committees should ask management now

Multi-disciplinary team: Has management established a project team that includes representatives
from the finance, human resources and legal groups? There are both nuances and historical
knowledge that a multi-disciplinary team brings to the table.
Outside advisors: Has management sought advice from independent third parties, such as legal
counsel, valuation and executive compensation consultants? Third parties working with multiple
companies on the details bring a helpful perspective to management. A related question might be:
Were there areas of disagreement among advisors?
Consider transparency: Is management concerned with increased visibility into executive
compensation design, past decisions or other factors that may be more visible in the PVP disclosure?
The board may learn that management is concerned with decisions that are highlighted in the PVP
disclosure, such as mega grants connected to retention, promotion or new-hire awards for which
grant date values have plummeted due to company stock price declines.
Past mistakes: Has management uncovered any mistakes (material or immaterial) in past filings?
Compiling historical data may unearth a problem that was previously unknown. Corrections on a
proxy may not carry the weight of a Form 10-K restatement, but management should let the board
know if there was a previous mistake and the intended corrective action.
PVP positioning within proxy: Does management have a perspective on where they want to put the
disclosure in the proxy? Early indications are that many companies will put the PVP disclosure behind
the SCT. Management may have a perspective on why the company has selected that position
versus inclusion in the CD&A. A progressive approach may be to position the PVP disclosure behind
the SCT and also summarize PVP in the CD&A to improve and highlight the discussion of pay-for-
performance alignment.
Change in TSR peer group or index: Does management suggest changing the peer group or
selected index used to calculate relative TSR for equity awards? It’s quite possible that perspectives
may change on the peer group or index used to calculate relative TSR after going through the PVP
calculation process. Unfortunately, if the peer group or industry/business index group used to
determine TSR changes between years (such as dropping a peer group company that merged with
another peer group company), the company must provide an explanation for the change and provide
a side-by-side comparison of TSR for the two sets over the applicable measurement period.
Additionally, using the same industry index to calculate relative TSR as is used in the Form 10-K
stock price chart may simplify the calculation process..
Change in executive compensation program design: Does management suggest changing any
elements of the executive compensation plan design? It’s possible that after the PVP process is
completed, management may feel differently about performance metrics selected (e.g., for better
correlation with P&L and TSR performance) or vesting frequency (e.g., because monthly and
quarterly vesting requires more valuation points for the compensation actually paid table).

Pay versus performance disclosure and the board’s role: what you need to know | 3
Final take
Reviewing with a critical eye

While the compensation committee has an obligation to review the

CD&A, it is also prudent to consider other elements of the proxy,
including the new PVP disclosure, even if it is not embedded within the
CD&A, for consistency.

Shareholder communication

Fundamentally, the proxy, and the CD&A more specifically, are

shareholder communication vehicles. Take the opportunity, if possible,
to discuss the draft PVP disclosure with institutional shareholders and
proxy advisory firms. Since this is the first proxy filing that includes the
PVP disclosure, seek and consider feedback from shareholders.
Additionally, be consistent within the proxy on key business measures,
especially when linking performance to compensation. Ask management
to review all investor-related communications compared to the CD&A
and PVP disclosure to avoid gaps in how financial and nonfinancial
metrics are linked to compensation and performance.

Transparency

Given the retrospective basis of the PVP disclosure and market share
price changes, it is unlikely that the disclosure will completely align with
how companies actually measure performance and determine executive
compensation. Regardless, shareholder perception is important, and the
SEC is trying to bring greater transparency to the executive pay and
performance process. Therefore, keep in mind that the compensation
committee’s past and future decisions on executive pay will likely garner
shareholder attention.

For more information

Chris Hamilton Maria Castañón Moats

Principal, Workforce Transformation Leader, Governance Insights Center
chris.hamilton@pwc.com maria.castanon.moats@pwc.com

Eric Schulze Matt DiGuiseppe

Senior Manager, Managing Director, Governance
Workforce Transformation Insights Center
eric.schulze@pwc.com matt.diguiseppe@pwc.com

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