Disclosing PvP Relationships, Part 3: Decision Criteria

Item 402(v)(5) of the SEC’s pay vs. performance (PvP) rule requires companies to provide a “clear description” of the relationship between compensation actually paid (CAP) and certain other metrics. These relationships must be delineated for the principal executive officer (PEO) and the cohort of non-PEO named executive officers (NEOs). The rule also requires a clear description of the relationship between the company’s total shareholder return (TSR) and a peer TSR metric. (Smaller reporting companies benefit from some exemptions.)

 This is the third of a three-part series on how to approach Item 402(v)(5) relationship disclosures. You can find Part 1 here and Part 2 here.  


In Part 1 of our series, we introduce some of the types of PvP relationships we’ve seen in practice. In Part 2, we walk through six different disclosure strategies. This brings us to our final discussion, in which we turn to decision-making considerations.

As we’ve noted, there isn’t a bright line as to what constitutes a clear description and therefore meets the disclosure threshold under the SEC rule. You’ll need to weigh the pros and cons of different approaches against the rule’s constraints and your unique proxy disclosure priorities and risks. Research and experience tell us that the right approach for your company will boil down to six key criteria.

Criteria 1: Nature of PvP Relationships

The starting point for deciding how to disclose your PvP relationships is an acute understanding of what those relationships entail. Although Part 1 outlines six PvP relationship types using actual examples of CAP-to-TSR relationships, each of the three performance variables can exhibit a different type of relationship. In fact, more often than not we see inconsistent relationships across TSR, the company-selected measure (CSM), and net income.

In general, the more scattered, inconsistent, or inherently problematic the relationships, the more you may wish to leverage some (or a lot of) narrative commentary for perspective as to what’s taking place in the PvP relationships.

Criteria 2: Disclosure Compliance

Does your disclosure approach satisfy the SEC’s mandate for a clear description? In the absence of a proper yardstick, here are the three most useful references we’ve seen in the final rule, along with our interpretation.

1. Reference: “The required relationship disclosure could include, for example, a graph providing executive compensation actually paid and change in the financial performance measure(s) (TSR, net income, or Company-Selected Measure) on parallel axes and plotting compensation and such measure(s) over the required time period.” (page 27)

Our interpretation: A dual axis graph, such as the one shown under Archetype 1 in our second article, on its own meets the disclosure threshold and shouldn’t require any additional content.

2. Reference: “The required relationship disclosure could include narrative or tabular disclosure showing the percentage change over each year of the required time period in both executive compensation actually paid and the financial performance measure(s) together with a brief discussion of how those changes are related.” (page 27)

Our interpretation: A percentage changes table (Archetype 2 in our second article) would most likely not meet the disclosure threshold unless accompanied by some narrative commentary. But the SEC’s language muddies the water. By its very construction, we think a percentage changes table makes it evident how the changes are related.

3. Reference: “We believe applying the Plain English principles to the pay versus-performance disclosure will facilitate investors’ understanding and decision-making with respect to the pay-versus-performance disclosure.” (page 106)

Our interpretation: The SEC’s plain-English principles should be considered when crafting any disclosure. These are discussed in the SEC’s Plain English Handbook from 1998. For PvP relationship disclosures, we suggest avoiding disclosures that rely on overly dense text, excessively qualitative language, generic platitudes, and non-falsifiable statements.

We think some companies will adopt Archetypes 3 and 4, but it’s possible these could be viewed as falling short of the disclosure threshold. Archetype 3, the textual table, is duplicative of the core PvP table, which could be construed as violating a plain-English principle. Archetype 4, the analysis approach, could be problematic if its implementation involves too many imprecise platitudes.

Archetype 5 and Archetype 6 check the compliance box by leveraging graphs, therefore providing flexibility as to how much or little incremental narrative commentary is provided. We find this to be quite attractive.

Although we highlight six approaches in Part 2, there are limitless variations on each one. So while it’s helpful to use an archetype, don’t let any of them limit your imagination.

Criteria 3: Disclosure Relevance

One of the most important questions facing the capital markets is how the role of the proxy is evolving. Of course, it covers the election of directors, ratification of auditors, the non-binding referendum on executive compensation (say-on-pay), and other proposals submitted to shareholders. But it’s relevance to the capital markets and influence on investment decision-making is clearly evolving in ways not expected even a decade ago. The broader expansion of non-financial reporting, which includes growth in proxy content as well as ESG-related content in other company materials, is being leveraged by a wider constituency of stakeholders than ever before.

That’s the macro question. The micro question is what role, specifically, the PvP disclosure will have within the proxy: will anyone care, and if so, who? We think that for larger companies and lower-performing companies, this disclosure will gain attention. Here are the constituencies to consider:

  • Media focus on headlines and seemingly broken PvP relationships
  • Activist investors turn data into a lightning rod to galvanize support
  • Retail investors pull PvP into any broader shareholder litigation suit
  • Institutional investors use PvP disclosures to expand their voting policies
  • Proxy advisors assess whether to pull PvP into their guidelines and methodologies
  • Federal policymakers consider PvP information if awarding subsidies or tax relief
  • The SEC assesses the compliance and overall quality of disclosure

For most companies, and especially those with reasonably normal disclosures, we don’t expect any of these constituencies to spend a lot of energy on the PvP disclosure. But the right situation could turn the PvP disclosure into a weapon. That’s what makes a measured decision-making process important.

PvP isn’t like CEO pay ratio. CEO pay ratio disclosures added little to the conversation because CEO pay is already known and organizational pay ranges are inferable via public information sources. PvP aims to help users of the proxy assess whether the organization’s pay-for-performance compensation philosophy is actually working—a much bolder proposition. The theoretical construct underlying PvP may or may not answer that question. But the disclosure has broader applications than CEO pay ratio.

Most of the companies we’ve worked with don’t consider PvP particularly meaningful to their shareholders. For them, PvP is purely a compliance exercise. But some of our clients have taken different views and many compensation committees are reluctant to dismiss PvP as mere busywork.

Two clients, for example, receive significant federal government subsidies because they operate in industries the government has chosen to protect for national security reasons. They want to go beyond minimalism. They assume federal policymakers will reference their disclosure, so they’re unwilling to leave any interpretations to chance.

Another client, navigating an activist situation, likewise wants to avoid disclosures that could be misconstrued or interpreted in the most adverse way possible. They’re using Archetype 5 to proactively frame the issue.

In summary, a minimalist approach may be suitable for much of the market, especially in this first year of disclosure. But be sure to think about your specific PvP relationships as your constituencies would.

Criteria 4: Broader Proxy Style

HOAs exist to make sure that all the houses on the block conform to a particular style and maintenance goal for the neighborhood. The idea is that no single house should stick out. The same goes for a document like the proxy that has an entire collection of disparate disclosure content.

If other parts of the proxy follow a minimalist approach, this may nudge companies to have their PvP disclosure do likewise. If other key components of the proxy involve more expansive disclosure, then this should be taken into consideration when drafting the PvP disclosure.

Nonetheless, any time a disclosure is in its first year of adoption, there are good reasons to take a walk-before-run approach until it’s clear what the market practices will be. Therefore, consider how the PvP disclosure will look compared with the rest of the proxy, but don’t feel compelled to bring the PvP into full symmetry given the overall novelty and lack of market data.

Criteria 5: Pay-for-Performance Proof Strategy

As we noted earlier, some stakeholders will use the PvP disclosure to determine how effectively the organization’s pay for performance compensation philosophy holds up in practice. This is, and has been, a foundational shareholder question behind say-on-pay decisions and governance in general. Somewhere in the proxy, evidence of a robust pay for performance program is needed.

The required PvP disclosure could be the place where that proof is given. Since the advent of say-on-pay, if not earlier, companies have been trying to prove that they pay for performance. They’ve used analysis, as well as supplemental disclosures of realized or realizable pay that take the form of narrative commentary, graphs, and more.

Now there’s PvP, which is supposed to aid in this effort. But PvP also has no shortage of critics. The arguments as to why the theoretical construct underlying PvP is flawed are numerous. Some argue the only true measure is realized pay. Others argue that as an amalgamation of both realizable and realized pay, PvP obfuscates any ability to pinpoint drivers and root causes. Criticisms aside, the PvP disclosure will expand and institutionalize the question of whether executive compensation plans really do pay for performance.

Some companies may decide to shift all their efforts into proving the pay for performance relationship in their PvP disclosure. This would avoid addressing the issue piecemeal in different parts of the proxy, which could be confusing or potentially even misleading. Other companies may draw a hard line and do the bare minimum in their PvP disclosures while going all in on proving robust pay for performance in the CD&A.

In any event, we expect to see more energy from outside constituencies on the pay for performance relationship. Whether it happens in the PvP disclosure or not, somewhere and somehow, the proxy will need to offer more proof that the company pays for performance.

Criteria 6: Intertemporal Consistency

If you’ve dabbled with supplemental realizable or realized pay disclosures in the past, you know that what looks good one year may tell a very different story a few years down the road. Why? Pay and performance variables are complex and don’t move in tidy ways.

When selecting the optimal disclosure in the current year, give thought to how sustainable that type of disclosure could be under a different fact pattern and whether sustainability and consistency in style are priorities. An overly detailed and nuanced disclosure might be perfect for today’s fact pattern but break down if circumstances change.

On the other hand, relationship disclosures don’t have to follow the same style and form every year. Indeed, if there are truly unique events taking place, such as a one-time mega grant or organizational transformation initiative, it would be reasonable to expand or alter the method for providing the relationship disclosure.

Therefore, be sure to consider how sustainable a particular type of relationship disclosure is, and prepare to pivot when circumstances merit something different.


Up until now, PvP relationship disclosures have taken a back seat as companies focus on building the core PvP table required by Item 402(v)(1). But whereas the table is mostly prescriptive, save the choice of CSM, the relationship disclosure affords considerable flexibility. There’s flexibility in form (graph, narrative, or a combination), style (structure along with “look and feel”), density (content volume), and message (a clear description with or without some analysis).

Some companies will have good reason to adopt a more customized approach during this first year of adoption. This may include larger companies with more complex shareholder dynamics, companies with counterintuitive PvP relationships, and companies facing activist pressure or other complex shareholder dynamics.

In this article series, we covered some of the more common PvP relationship types, different disclosure archetypes, and decision-making criteria for selecting an approach. Disclosure strategy isn’t a coin-flip decision. It should link to the nature of your own PvP relationships, your broader strategy toward proxy disclosure, and the uniqueness of this being the first year of adoption. Using an analytical process, you will arrive at a disclosure strategy that best fits your circumstances and objectives.

We hope these articles have been useful and invite you to reach out with any questions.