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Updates Related to Key Performance Metrics and Executive Compensation

February 13, 2020

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The following is an update in which Attorney Mike Melbinger, Partner, Winston & Strawn, does the heavy lifting in reviewing ongoing interpretive releases issued by the Securities and Exchange Commission (SEC) on the topic of Key Performance Metrics in Management’s Discussion and Analysis, the Financial Condition and Results of Operations (the “MD&A”). Often, key performance metrics are part of incentive compensation plans and disclosures, which means these updates may need to be part of the executive compensation discussion.

SEC Release on Key Performance Metrics Has Implications for Compensation Professionals Too


Last month, the SEC issued an interpretive release addressing Item 303 of Reg S-K (see Rel. No. 33-10751, Key Performance Metrics (2020)). Although this guidance relates to the MD&A[i], it is, of course, also relevant to executive compensation and disclosure professionals, because key performance metrics are usually an important part of short- and long-term incentive compensation plans and disclosures. The release is relatively benign but worth reviewing for its increased scrutiny on performance metrics. The following is from the latest issue of The Corporate Counsel (subscription required):

This interpretive release joins a long line of MD&A interpretive releases, reflecting an ongoing theme that the Commission and the Staff are never quite satisfied with the quality of issuers’ attempts at drafting MD&A. In the interpretive release, the Commission provides guidance on disclosure of key performance indicators and metrics in MD&A. The Commission notes that disclosure of key performance indicators and metrics in MD&A is consistent with the requirement in Item 303(a) of Reg S-K to disclose information not specifically referenced in the item that the issuer believes is necessary to an understanding of its financial condition, changes in financial condition and results of operations, as well as the requirement of a discussion and analysis of “other statistical data” that, in the issuer’s judgment, enhances a reader’s understanding of MD&A. The Commission further notes that when proposing the current MD&A framework, the Commission indicated that “[f]or each business, there is a limited set of critical variables which presents the pulse of business.”

The interpretive release goes on to remind issuers that, when including metrics in their disclosure, “they should consider existing MD&A requirements and the need to include such further material information, if any, as may be necessary in order to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading.” The Commission notes that issuers should consider the extent to which an existing regulatory disclosure framework applies to the metrics, such as GAAP[ii] or the rules applicable to non-GAAP financial measures. In addition, the Commission indicates that issuers should consider what additional information may be necessary to an understanding of the metric presented. The Commission states that it would generally expect, based on the facts and circumstances, the following disclosures to accompany the metric: (i) a clear definition of the metric and how it is calculated; (ii) a statement indicating the reasons why the metric provides useful information to investors; and (iii) a statement indicating how management uses the metric in managing or monitoring the performance of the business. The Commission also notes that issuer should consider whether there are estimates or assumptions underlying the metric or its calculation, and “whether disclosure of such items is necessary for the metric not to be materially misleading.”

When an issuer changes the methodology used to calculate or present a metric, the Commission expects an issuer to consider the need to disclose, to the extent material: (i) the differences in the way the metric is calculated or presented compared to prior periods; (ii) the reasons for such changes; (iii) the effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported; and (iv) such other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the issuer’s performance or prospects. The Commission indicates that an issuer may need to recast prior metrics to conform to the current presentation to place the current disclosure in an appropriate context.

#keyperformancemetrics #executivecomp #fulcrumpartners

[i] The portion of a public company’s annual report known as the Management Discussion and Analysis.

[ii] Generally Accepted Accounting Principles

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through Lion Street Advisors, LLC (LSA) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI and LSF/LSA are non-affiliated entities and separate entities from OneDigital and Fulcrum Partners.

Unless otherwise noted, VAI/VSI, LSF/LSA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.

Lion Street Advisors // Lion Street Financial

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