By: Editorial Staff, Date: May 1st, 2023
Over the past few months, the Securities and Exchange Commission (SEC) has released a series of new rules that affect executive compensation and compel board compensation committees to take immediate steps.
Keep on reading to discover the key updates on executive compensation disclosures by the SEC.
SEC’s Role in Regulating Executive Compensation
The Securities and Exchange Commission (SEC) plays a crucial role in regulating executive compensation and ensuring that publicly traded companies provide transparency and accountability in their compensation practices.
The SEC requires publicly traded companies to disclose information about their executive compensation plans, including details about salaries, bonuses, stock options, and other forms of compensation. This information must be included in the company’s annual proxy statement, which is filed with the SEC and sent to shareholders.
The SEC also has the power to review and approve or disapprove executive compensation plans for certain types of companies, such as those seeking to go public or undergoing significant changes in ownership or management. The SEC can require changes to these plans if they are deemed excessive or not in the company’s and its shareholders’ best interests.
Key Changes to Executive Compensation Disclosures
Last year, the SEC adopted three new rules that significantly expand the disclosure obligations of public companies.
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- Pay Versus Performance Disclosure Rules
On August 25th, 2022, the U.S. Securities and Exchange Commission (SEC) enacted a new rule, Item 402(v) of Regulation S-K, that mandates public companies to disclose the relationship between the compensation paid to the company’s executive officers and the company’s performance.
The new “Pay versus Performance” (PVP) disclosure requirements must be adhered to by companies that are not exempted from the rule. The new disclosures mandate additional reporting in annual proxy and information statements, where Item 402 is usually required.
- Final Clawback Rule
Adopting the “clawback rule” by the SEC complies with the Dodd-Frank Act, which requires that public companies create and implement protocols to recoup excessive incentive compensation from executive officers if said amounts were derived from significant misstatements in financial statements.
- Insider Trading Rules
The Securities and Exchange Commission (the “Commission”) made changes to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) on December 14, 2022. This rule offers defenses for trading that are based on significant undisclosed information in insider trading cases.
Additionally, the SEC added new disclosure requirements to Regulation S-K and revised Rule 16a-3, Forms 4 and 5.
The new reporting rules carry significant additional complexity and compliance challenges for companies. Once adopted, the regulations could impact how U.S. companies manage compensation for their C-level executives.
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