Item 402: Executive Compensation Disclosure

Item 402 of Regulation S-K, a rule from the U.S. Securities and Exchange Commission (SEC), mandates that public companies provide clear and comparable information about how they pay their top executives. The purpose is to give shareholders a standardized view of the compensation packages and philosophies that are approved by the board of directors. This information is a required component of a company’s public filings, appearing in the annual proxy statement sent to shareholders before they vote on company matters. The disclosures foster transparency, allowing investors to understand the incentives driving executive performance and to assess whether pay aligns with the company’s results. By standardizing the format, the rule helps investors compare compensation practices across different companies.

Identifying the Key Players

The executive compensation disclosures focus on a specific group known as “Named Executive Officers,” or NEOs. This group is precisely defined to capture the company’s most influential leaders. The list of NEOs always includes any person who served as the Principal Executive Officer (CEO) or Principal Financial Officer (CFO) at any point during the most recently completed fiscal year. The group is then expanded to include the three most highly compensated executive officers, other than the CEO and CFO, who were serving at the end of the fiscal year.

To identify these three individuals, a specific calculation of “total compensation” is used, which excludes the annual change in pension value and nonqualified deferred compensation earnings. An executive must have total compensation of more than $100,000 to be considered for this part of the NEO group. The rules also allow for including up to two additional individuals who would have been among the top three most highly compensated but were not serving as executive officers at year-end.

The Compensation Discussion and Analysis

The Compensation Discussion and Analysis (CD&A) is the narrative portion of the executive pay disclosure, explaining the “why” behind the numbers in subsequent tables. In this section, the company’s compensation committee details the objectives, policies, and processes it uses to determine executive pay. Within the CD&A, a company must discuss its overarching compensation philosophy and what each element of compensation is designed to reward.

For example, a company might explain that salary provides a stable income, while an annual bonus rewards short-term corporate goals. A significant part of the CD&A involves benchmarking and peer groups. Companies explain how they compare their executive pay levels to those of a select group of competitor companies, how that peer group was selected, and how the company uses the resulting data.

Furthermore, the CD&A must describe the specific performance metrics tied to incentive compensation. While SEC rules permit a company to omit specific quantitative targets if disclosure would cause competitive harm, it must still discuss the difficulty of achieving those targets. The role of the compensation committee, its consultants, and the CEO in the compensation decision-making process is also a required topic.

The Summary Compensation Table

The Summary Compensation Table (SCT) provides a comprehensive, three-year look at total compensation for each NEO in a standardized format. The first columns after the NEO’s name and year are for “Salary” and “Bonus.” The Salary column reports the base salary earned, while the Bonus column reports discretionary cash payments. If an executive forgoes salary or bonus for non-cash compensation, the value is still reported in these columns.

Following the cash columns are “Stock Awards” and “Option Awards,” which represent the aggregate grant date fair value of equity awards granted during the year. This value is calculated in accordance with accounting standards (FASB ASC Topic 718) and reflects the award’s value at the time it is granted, though the ultimate value to the executive will depend on future stock performance.

The “Non-Equity Incentive Plan Compensation” column captures payments earned under plans tied to performance metrics not based on stock price, such as annual cash bonuses with pre-set goals.

A more complex column is the “Change in Pension Value and NQDC Earnings.” This has two components: the change in the actuarial present value of the executive’s accumulated pension benefits and any above-market earnings on nonqualified deferred compensation (NQDC) plans.

Finally, the “All Other Compensation” column is a catch-all for any compensation that does not fit into other categories. This is where perquisites and other personal benefits are reported if their total value exceeds $10,000. Any perquisite that exceeds the greater of $25,000 or 10% of total perquisites must be separately identified and quantified in a footnote.

Supplemental Compensation Tables and Disclosures

Beyond the Summary Compensation Table, several supplemental tables and narrative disclosures are required that provide more granular detail on specific compensation elements. These disclosures offer a deeper look into future potential earnings from equity awards, retirement benefits, and potential payouts if an executive leaves the company. One set of tables focuses on the specifics of equity compensation:

• The Grants of Plan-Based Awards Table details each individual stock and option award granted to NEOs during the year, including the number of shares and grant date fair value.
• The Outstanding Equity Awards at Fiscal Year-End Table shows all unexercised options and unvested stock awards held by each NEO at the end of the year.
• The Option Exercises and Stock Vested Table discloses the value realized by executives during the year from exercising options or the vesting of stock awards.

For proxy statements filed in 2025, new disclosures are required about the timing of stock option and Stock Appreciation Right (SAR) grants in relation to the release of material nonpublic information (MNPI). Companies must provide a narrative about their policies and a table of any such awards granted to NEOs within a window beginning four business days before and ending one business day after the release of MNPI.

Another group of disclosures details post-employment compensation. The Pension Benefits Table discloses the actuarial present value of each NEO’s accumulated benefit under any defined benefit pension plans. For executives in nonqualified deferred compensation plans, the Nonqualified Deferred Compensation Table shows their contributions, company contributions, earnings, and year-end balances. A narrative disclosure must also detail potential payments upon termination or a change in control.

Other key disclosures provide broader context:

• The Director Compensation Table presents information about the pay of non-employee directors in a format similar to the SCT.
• The Pay Versus Performance disclosure requires a table and narrative comparing the compensation “actually paid” to NEOs with the company’s financial performance over the last five fiscal years.
• The CEO Pay Ratio disclosure presents the ratio of the CEO’s annual total compensation to the median annual total compensation of all other company employees.