On April 29, 2015, the Securities and Exchange Commission (SEC) proposed rules that would require public companies to disclose the relationship between executive compensation and the company’s financial performance. The rules would apply to public companies other than emerging growth companies, foreign private issuers, and registered investment companies, and the disclosure would be required in proxy statements or information statements in which disclosure of executive compensation currently must be included under Item 402 of Regulation S-K.

The rules were proposed in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act mandate that the SEC adopt rules requiring companies to disclose the relationship between their performance and executive compensation.

Summary of the Proposed Rules

The disclosure required under the proposed rules would consist of two elements: (1) a table covering the five most recently completed fiscal years (three years in the case of smaller reporting companies) that will include specified information, as explained below, and (2) a clear description, using the information in the table, of the relationship between executive compensation “actually” paid and the company’s cumulative total shareholder return (TSR).

The New Table

The new table would use the following format, covering the five most recently completed fiscal years (three years in the case of smaller reporting companies):

Pay Versus Performance

Summary Compensation Table Compensation. The summary compensation table total compensation column for the principal executive officer would be based on the same column in the existing summary compensation table. For the other named executive officers (NEOs), the column would be the average of the values in the summary compensation table.

Compensation Actually Paid. The “Compensation Actually Paid” column would be modified from summary compensation table total compensation as follows:

• The grant date fair value of equity awards would be removed, and the fair value of equity awards that vested during the relevant year would be added. Fair value for this purpose will be determined under the applicable accounting standards. If any previously vested equity awards have been materially modified, any incremental fair value resulting from the modification must be added as well.

• The change in pension value would be removed, and only the “service cost” of defined benefit and actuarial pension plans for the year will be added back. This is intended to exclude the effects of changes in interest rates, the executive’s age, and other actuarial inputs and assumptions regarding benefits accrued in previous years. Smaller reporting companies are not currently required to provide the change in pension value in the summary compensation table and would not be required to include any change in pension value in this table.

• If more than one individual served as principal executive officer during the year, Compensation Actually Paid would be the aggregate of the compensation of all such individuals. In the case of a principal executive officer who receives severance or other termination-related benefits, or a new principal executive officer who receives a signing bonus, this aggregation approach may result in a large spike in principal executive officer compensation as compared to earlier and later years that is not related to the company’s performance.

Total Shareholder Return. The company’s TSR would need to be calculated on a basis similar to that used to calculate the performance graph required in the annual report under Item 201(e) of Regulation S-K. The peer group TSR would need to be calculated using either the peer group used for the performance graph or, at the company’s election, its peer group as disclosed in the Compensation Discussion and Analysis section, if it has such a peer group. Smaller reporting companies would not be required to present a peer group TSR.

XBRL Formatting Required. Each amount in the table would need to be electronically formatted and tagged using eXtensible Business Reporting Language (XBRL). Currently, no other proxy statement disclosures are required to be formatted for XBRL.

Additional Description

In addition to the table described above, the proposed rules would require a “clear description,” using the information in the table, of the relationship between executive compensation actually paid and the company’s cumulative TSR for each of the last five years (three in the case of smaller reporting companies). For companies other than smaller reporting companies, the description would also need to include a comparison of the cumulative TSR of the company and the TSR of its peer group over the same period.

The proposed rules would not mandate that the description use any specific format, but the proposing release suggests that it could be presented in narrative, a graphic, or a combination of the two. The release also indicates that the presentation should be consistent with plain English principles.

The description would need to be block formatted for XBRL.

Neither the table nor the additional description would be incorporated by reference into any securities filings of the company unless the company specifically incorporated them.

Timing of Rules and Transition Relief

The comment period for the proposed rules will run for 60 days after the rules are published in the Federal Register.

The SEC has not indicated the expected timing of final rules. In particular, it has not yet ruled out the potential for final rules to be adopted in time for the disclosure to be required in 2016 proxy statements, so that remains a possibility.

The rules would provide for transition relief under which companies other than smaller reporting companies could initially provide disclosure for only three years, adding an additional year over the next two years until the full five years of disclosure is provided. For smaller reporting companies, only two years of disclosure would need to be included in the first year, followed by three years of disclosure in the second year. Smaller reporting companies also would not be required to comply with the XBRL tagging requirement until the third year.

New reporting companies would initially be required to provide only one year of disclosure and would add an additional year of disclosure each year until reaching the full five years of disclosure.

Recommended Actions for Publicly Traded Companies

• Consider providing comments on the proposed rules, particularly with respect to the scope of the rules, the format of the table and anticipated costs of compliance if the rules are adopted. The comment period for the proposed rules will run for 60 days after the rules are published in the Federal Register.

• Begin to evaluate what the tabular disclosure will look like for your current NEOs in light of your TSR and consider which peer group — the group used for your performance graph or the group used to benchmark compensation, if different — would be more appropriate for this disclosure.

• Consider potential formats for providing a description of the relationship of compensation and performance — whether a graph or narrative — and how the description might relate to any pay for performance disclosure you are currently providing in the proxy statement.