On September 27, 2023 and November 21, 2023, the Securities and Exchange Commission (SEC) issued additional Compliance & Disclosure Interpretations (CDIs) clarifying certain technical aspects of the pay versus performance (PVP) disclosure rules under Item 402(v) of Regulation S-K[1]. These CDIs are intended to supplement the CDIs covering PVP disclosure that were issued by the SEC on February 10, 2023.[2]

By way of background, covered public companies must comply with the PVP disclosure rules beginning with proxy statements or information statements filed for fiscal years ending on or after December 16, 2022 and those rules generally require disclosure of (i) a PVP table accompanied by a narrative and/or graphical explanation of the relationship between “compensation actually paid” (CAP) to the company’s named executive officers (NEOs) and the company’s financial performance, (ii) a description of the relationship between each financial performance measure and the CAP to the named executive officers, and between the total shareholder return (TSR) of the company and the TSR of the company’s peer group and (iii) a tabular list of the most important financial measures.[3]

The recent SEC guidance consists of 10 CDIs issued in September and 8 new CDIs and 2 revised CDIs issued in November. Below is a summary of the key topics addressed by the CDIs to review and consider as companies think about preparing their PVP disclosure in 2024:

  • Calculation of CAP. For purposes of calculating CAP:
    • Equity Awards Granted Prior to an Equity Restructuring. With respect to equity awards granted to the NEOs prior to a restructuring (such as a spin-off), any such awards (i) that are outstanding and unvested at the beginning of the covered fiscal year or granted to NEOs during the covered fiscal year, including awards modified in connection with any such restructuring or retained following the transaction and (ii) for which compensation cost will be recognized under FASB ASC Topic 718, should be included in calculating CAP. CDI 128D.14.
    • Equity Awards Granted Prior to an IPO. With respect to equity awards granted prior to the company’s initial public offering, the change in fair value of those awards should be determined based on the change in fair value from the end of the prior fiscal year (not based on other dates, such as the date of the initial public offering). CDI 128D.15.
    • Equity Award Vesting Based on Market Conditions. When calculating CAP, for equity awards that are subject to market conditions under FASB ASC Topic 718, the effect of the market conditions should be included in determining the fair value of those equity awards. In addition, market conditions need to be considered in determining whether the vesting conditions of the equity award have been met. In other words, until the market condition is satisfied, CAP must include any change in fair value of awards subject to market conditions. CDI 128D.16.
    • Potential for Future Vesting of Equity Awards. Equity awards that failed to satisfy certain vesting conditions (i.e. because the performance conditions or market conditions were not met) but remain outstanding and eligible to vest in future years should not be treated as forfeited when calculating CAP. CDI 128D.17.
    • Equity Award Vesting Based on Retirement. The September version of this CDI generally provided that, when calculating CAP, if an equity award provides for accelerated vesting upon the holder becoming retirement eligible, then the award should be reported as vested as of the date the holder becomes retirement eligible, unless the award has additional substantive vesting conditions, such as a market condition, in which case those other conditions must also be considered in determining when an award has vested. The November version of this CDI sought to clarify this point by providing that if retirement eligibility is not the sole vesting condition, then other substantive conditions must also be considered in determining when an award has vested, including, without limitation, a condition that results in vesting upon the earlier of the holder’s actual retirement or the satisfaction of the requisite service period. In other words, the CDI seems to suggest that if the award holder has to actually retire in order to vest in the award (as is typical), then the award should not be reported as vested for CAP purposes before retirement occurs. However, the CDI still leaves unanswered questions – for example, if an award provides for continued vesting following retirement, query whether the award should be reported as vested for CAP purposes on the date of the holder’s retirement or on the scheduled post-retirement vesting dates. C&DI 128D.18.
    • Certification of Performance Vesting Condition. Some performance-based equity awards provide for vesting as of the end of the fiscal year in which the performance-based vesting condition is achieved, while other awards provide for vesting as of the date on which the company’s board of directors or compensation committee certifies the achievement of the performance goals which may occur after fiscal year-end. Companies should review the provisions of their performance-based equity awards to determine whether any provision requiring board or committee certification of the achievement of performance goals would be considered an additional substantive vesting condition, such as requiring participants to remain employed through the date of certification in order to vest, in which case the awards are not vested for CAP purposes until such certification occurs. C&DI 128D.19.
    • Valuation Methodologies. When determining Compensation Actually Paid, the fair value of stock and option awards must be calculated in a manner consistent with the methodology used to compute fair value of share-based payments under FASB ASC Topic 718. A company may use a valuation technique that differs from the one used to determine grant date fair value of awards as reflected in the company’s financial statements, so long as the valuation technique would be permitted under FASB ASC Topic 718 and, if the change in valuation technique materially differs from the valuation technique used to determine grant date fair value in the company’s financial statements, then the company should disclose the change in valuation technique and the reason for the change. C&DI 128D.20 and 128D.21.
    • Dividend Equivalents. Some stock awards entitle the holder to receive dividends or dividend equivalents paid on the underlying shares prior to the vesting date. If the dollar value of dividends or dividend equivalents paid is not reflected in the fair value of such awards, they should be included in the calculation of CAP. C&DI 128D.23
  • Non-GAAP Financial Measures. The SEC updated a CDI that addresses the disclosure of non-GAAP financial measures presented in the Compensation Discussion & Analysis (CD&A) or any other part of the proxy statement, such as to explain how pay is structured or implemented to reflect the performance of the company or NEO or to justify certain levels or amounts of pay. If non-GAAP financial measures are included as a Company-Selected Measure or additional financial measures to be disclosed for PVP purposes, then a formal reconciliation of non-GAAP to GAAP financial measures is not required under Regulation G or Item 10(e) of Regulation S-K, but disclosure must be provided as to how the financial measure is calculated from the company’s audited financial statements pursuant to Instruction 5 to Item 402(b). CDI 118.08.
  • Confidential Information. In connection with performance-based equity awards shown in the PVP table, Item 402(v)(4) requires disclosure in a footnote to the table of any material differences in the assumptions made in the valuation of equity awards from those disclosed as of the grant date of such equity awards, noting that in each case, the valuation is based on the probable outcome of the performance conditions. However, if such disclosure regarding the probable outcome of in-flight performance awards involves confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm for the company, then the company may omit such disclosure in reliance on the confidentiality protections of Instruction 4 to Item 402(b) of Regulation S-K. In such instances, the company must provide as much information responsive to the Item 402(v)(4) requirement as possible without disclosing the confidential information, such as a range of outcomes or a discussion of how a performance condition impacted the fair value. In addition, consistent with Instruction 4 to Item 402(b), the company should also discuss how the material difference in the assumption affects how difficult it will be for the executive or how likely it will be for the company to achieve undisclosed target levels or other factors. CDI 128D.22.
  • Peer Group TSR:
    • Published Industry or Line-of-Business Indexes. When identifying a TSR peer group in the PVP table, the company must use the same index or issuers that the company used for the stock performance graph under Item 201(e)(1)(ii) of Regulation S-K or the peer group as shown in the CD&A. If a company uses more than one “published industry or line-of-business” index for purposes of Item 201(e)(1)(ii), then the company should choose which index to use for purposes of its PVP disclosure and include a footnote disclosing the index chosen. If the company chooses to use a different published industry or line-of-business index from that used for the immediately preceding fiscal year, then the company must explain, in a footnote, the reason(s) for this change and compare the company’s cumulative total return with that of both the newly selected peer group and the peer group used in the immediately preceding fiscal year. CDI 128D.24.
    • Peer Group Changes. Where, in each of 2020 and 2021, a company provided the same list of companies as a peer group in its CD&A under Item 402(b) but provided a different list of companies in its CD&A for 2022, then, with respect to a company providing initial PVP disclosure in its 2023 proxy statement for three years (and using its CD&A peer group for such purpose), the company should present the peer group TSR for each year in the PVP table using the peer group disclosed in its CD&A for such year. The amended version of this CDI in November clarifies that, in the 2024 proxy statement, if the company uses the same peer group for 2023 as it used for 2022, then the company should present its peer group TSR for each of the years in the table using the 2023 peer group. If the company changes the peer group in subsequent years, then the company must provide disclosure of the change in accordance with Item 402(v)(2)(iv). CDI 128D.07.
    • No Broad-Based Equity Index. A broad-based equity index may not be used as a peer group for purposes of a company’s PVP disclosure. CDI 128D.25.
    • Market Capitalization-Based Weighting Requirement. Under Item 402(v)(2)(iv), if the company’s peer group is not a published industry or line-of-business index, the identity of the issuers composing the peer group must be disclosed in a footnote. The returns of each component issuer of the group must be weighted according to the respective issuers’ stock market capitalization at the beginning of each period for which a return is indicated. This market capitalization-based weighting requirement is applicable only if the company is not using a published industry or line-of-business index pursuant to Item 201(e)(1)(ii) (i.e. the stock performance graph). CDI 128D.26.
    • Other Peer Group Changes. If a company that uses a peer group other than a published industry or line-of-business index as its peer group under Item 402(v)(2)(iv) adds or removes any of the companies in such peer group, then the company must add footnote disclosure describing the change(s) and comparing its cumulative TSR with that of both the updated peer group and the peer group used in the immediately preceding fiscal year. However this comparison is not required if (1) an entity is omitted solely because it is no longer in the line of business or industry, or (2) the changes in the composition of the index/peer group are the result of the application of pre-established objective criteria. In these two cases, a specific description of, and the bases for, the change must be disclosed, including the names of the companies deleted from the new index/peer group. CDI 128D.27.
  • Loss of Status as SRC or EGC:
    • Loss of Status as SRC. Smaller reporting companies (SRCs) are generally subject to scaled-back PVP disclosure requirements. If a company that is a SRC with a December 31 fiscal year end provided scaled PVP disclosure covering fiscal years 2021 and 2022 in its proxy statement filed in April 2023 and subsequently loses its SRC status as of January 1, 2024, then the SEC will not object to the company continuing to include such scaled PVP disclosure for the proxy statement filed in 2024 (with the PVP disclosure covering fiscal years 2021, 2022 and 2023). Thereafter, unless the company regains SRC status in subsequent years, any other proxy or information statement with PVP disclosure filed after January 1, 2024 must include non-scaled PVP disclosure. Also, the SEC will not object if the company does not add disclosure for a year prior to the years included in the first filing in which the company provided PVP disclosure. A company generally is not required to revise the disclosure for prior years (in this example, 2021, 2022, and 2023) to conform to non-SRC status in such filings. However, because peer group TSR is calculated on a cumulative basis, the company should include peer group TSR for each year included in the PVP table, measured from the market close on the last trading day before the company’s earliest fiscal year in the PVP table. In addition, the company should include its numerically quantifiable performance under the Company-Selected Measure for each fiscal year in the PVP table. CDI 128D.28.
    • Loss of Status as EGC. Emerging growth companies (EGCs) are exempt from all PVP disclosure requirements. When a company loses its EGC status, it is required to provide PVP disclosure in any proxy or information statement filed after the loss of EGC status. The SEC noted that it may apply the transitional relief in Instruction 1 to Item 402(v), which generally permits a company to provide the requisite PVP disclosure for three years, instead of five years, in the first filing in which the company provides such disclosure, and may provide disclosure for an additional year in each of the two subsequent annual filings in which such disclosure is required. CDI 128D.29.
  • Multiple CFOs. If two or more individuals served as the company’s chief financial officer (CFO) during a single covered fiscal year and were included as NEOs in the Summary Compensation Table, then, for purposes of calculating average compensation amounts for the NEOs (other than the principal executive officer) in the PVP table, each NEO must be included individually in such calculation. The SEC noted that companies should consider including additional disclosure regarding the impact of the inclusion of two or more CFOs on the calculation in order to provide clarity to investors. C&DI 128D.30

While most companies will be approaching their second year of PVP disclosure in 2024, it’s not too early for companies to start planning for how they will approach the disclosure this year and, in doing so, companies should consider this additional guidance. We will keep you posted on any updates in the event that further PVP guidance is issued by the SEC. For additional inquiries, please contact a member of our Compensation practice or the Baker attorney with whom you regularly consult.

[1] For the text of the current CDIs, see https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp, CDI 128D.01 – 128D.30.

[2] For a summary of the CDIs regarding PVP that were issued on February 10, 2023, please refer to our blog at: https://www.thecompensationconnection.com/2023/03/06/sec-issues-guidance-on-pay-versus-performance-disclosure-rules/.

[3] For a summary of the PVP disclosure rules, please refer to our alert at: https://insightplus.bakermckenzie.com/bm/employment-compensation/united-states-sec-pay-versus-performance-rule-imposes-significant-new-disclosure-requirements-beginning-2023/.


Thomas Asmar has almost two decades of experience advising public and private companies, as well as private equity funds, on all employee benefits and compensation issues arising out of mergers, acquisitions, IPOs, financings and other corporate transactions. Thomas counsels companies in a variety of industries on the design and implementation of compensation arrangements, including employment agreements, equity compensation plans, incentive compensation, deferred compensation, severance agreements and change-in-control arrangements.