Public Companies Must Adapt to New Executive Compensation Disclosure Rules

As the 2025 reporting season nears, public companies must adapt to new SEC rules on disclosing executive compensation tied to stock options and SARs.

As the 2025 reporting period draws near, public companies should take note of the updated rules governing disclosures about executive compensation.

The Securities and Exchange Commission (SEC) introduced these new regulations on December 14, 2022, which provide guidelines for the disclosure of stock options and stock appreciation rights (SARs) under Item 402(x) of Regulation S-K. Companies that conclude their fiscal year on December 31, 2024, must adhere to these regulations in their next annual report on Form 10-K or, if applicable, in the proxy statement for their annual meeting, both of which are filed in 2025.

Key Compliance Details

To streamline the process, General Instruction G(3) of Form 10-K allows public companies to include the necessary disclosures from Part III — including the Item 402(x) information — by referencing their definitive proxy statement filed in accordance with Regulation 14A.

This rule applies to meetings for electing directors, as long as the proxy statement is filed within 120 days after the end of the fiscal year.

For the upcoming reporting cycle in 2025, that deadline falls on April 30.

If any company does not meet this filing deadline, it must incorporate the Item 402(x) disclosures directly into Form 10-K or submit an amendment during the same 120-day window.

What Item 402(x) Covers

Item 402(x) requires companies to provide both narrative and tabular disclosures about their practices and policies for granting stock options and SARs.

This obligation is particularly pertinent when such awards coincide closely with the disclosure of material nonpublic information (MNPI).

The phrase “close in time” refers to a specific period that starts four business days before and extends one business day after the filing of a Form 10-Q, Form 10-K, or Form 8-K, which reveals MNPI.

The intent behind these requirements is to enhance transparency and address potential issues related to insider trading or timing discrepancies regarding stock option or SAR grants that could influence stock prices.

Understanding Narrative Requirements

Public companies must detail their policies related to the timing of stock option and SAR grants in a narrative format, even if no awards were made during the specified Covered Period.

It is noteworthy that full-value awards, such as restricted stock or restricted stock units, are not subject to this requirement.

The narrative must explore several essential points:

  • The process the board of directors follows in deciding when to issue awards and whether they adhere to a predetermined schedule.
  • Consideration of MNPI by the board when determining the timing and terms of these awards.
  • Any circumstances where the company may have strategically timed the disclosure of MNPI to affect executive compensation values.

If a public company has awarded stock options or SARs to named executive officers during the previous fiscal year’s Covered Period, it must present specific details in tabular form for each executive award.

This table should include:

  • The executive officer’s name,
  • The grant date of the award,
  • The number of securities associated with the award,
  • The exercise price per share,
  • The fair value of the award on the date it was granted,
  • The percentage change in the market price of the underlying securities from the last trading day before to the first trading day after the PNMI disclosure.

All information related to Item 402(x), whether narrative or tabular, must be submitted in Inline XBRL format in accordance with recently implemented regulations.

Public issuers should prioritize the development of formal practices, policies, or guidelines for equity grants that align with the new disclosure mandates.

Evaluating current equity grant practices is crucial to ensure they adequately account for the timing of stock option and SAR awards relative to MNPI disclosures.

Additionally, it may be wise to implement measures that prevent the granting of equity awards during the Covered Period to sidestep any unnecessary scrutiny that could arise from the required tabular disclosures.

Source: Natlawreview.com