Demonstrating Alignment of CEO Pay and Performance

Realizable pay (“RP”) is composed of cash compensation paid (e.g., salary, actual bonus awards and payouts of cash-based long-term incentives) and the value of equity awards using the stock price at the end of the assessment period. RP assesses outcome-based compensation and has long been the “gold standard” for demonstrating shareholder aligned pay for performance. RP incorporates stock price performance, which is critical because the majority of executive pay opportunity is equity-based compensation. However, such analyses have generally not been extensively used and, if performed, are not typically disclosed in the proxy. This all changed with the SEC’s finalization of the Pay Versus Performance (PVP) rules, which were mandated under The Dodd-Frank Wall Street Reform and Consumer Protection Act. The PVP rules became effective for companies with fiscal years ending on or after December 16, 2022; after a 2-year phase-in period, companies are now required to compare the compensation actually paid (CAP) to the CEO and the average of the other NEOs to the company’s total shareholder return (TSR) and other financial measures over a 5-year period (3 years for Smaller Reporting Companies).