If you haven’t already heard, the Financial Accounting Standards Board (FASB) is set to shake up compensation reporting with new rules coming into effect in 2026. These regulations will require public companies to provide detailed disclosures about employee compensation, with a particular focus on incentive-based pay such as bonuses and commissions.

This marks a fundamental shift in how companies track and report compensation, with a primary objective of increasing transparency to give investors deeper insights into the financial impacts of compensation structures

These changes will have far-reaching implications for public companies, late-stage startups, and pre-IPO organizations, which will all face increased scrutiny from investors, regulators, and potential acquirers.

New Disclosure Requirements by Financial Regulators

The upcoming regulations mandate comprehensive disclosures in financial statements, focusing on compensation-related expenses. Companies will need to provide detailed breakdowns categorized under cost of goods sold and administrative expenses.

The new rules require disaggregated disclosure of compensation costs, including both fixed and variable components. Additionally, organizations must report the number of employees covered by different compensation plans. These requirements signify a major shift in how companies report and manage their compensation data.

Timeline and Compliance

Mandatory compliance with these new regulations is set for 2027. However, early adoption is strongly recommended to avoid last-minute complications. A gradual implementation approach is advised, which will allow companies to adapt their systems and processes over time instead of rushing to comply with the new regulations just before they go into effect.

Preparing for the New FASB Rules

Assessing Current Compensation Systems

As the new compensation reporting requirements deadline approaches, it's crucial that professionals evaluate their existing systems for tracking incentive compensation. Begin by identifying gaps in current tracking and reporting methods to ensure comprehensive coverage. Determine the accuracy of your incentive compensation calculations, as precise data will be essential for compliance.

Assess your ability to measure the return on investment (ROI) of compensation programs. This evaluation will not only help with regulatory compliance, but also provide valuable insights for strategic decision-making. Analyze how well your compensation programs align with company goals, as this alignment will be scrutinized under the new rules.

Implementing Centralized Tracking Systems

One way to get ahead of new requirements is to research and select incentive compensation management software solutions that can handle more complex compensation structures. Integrate data from various sources into a centralized system to ensure consistency and ease of reporting, and check that the systems you vet are compatible with existing financial reporting tools to streamline the disclosure process.

Train staff thoroughly on the new system including data input procedures to minimize errors and inconsistencies, and establish a schedule for regular system audits and updates to maintain accuracy and compliance over time.

Enhancing Data Accuracy and Efficiency

One crucial way to stay ahead is by standardizing processes for data collection and entry to ensure consistency across all compensation reporting. You should also implement automated data validation checks to catch errors early and maintain data integrity.

Embracing the Future of Compensation Reporting

The new rules present a unique opportunity for businesses to revolutionize their compensation reporting practices. By viewing these changes as a catalyst for improvement versus mere compliance, companies can move a step further – leveraging enhanced data insights to drive strategic decision-making and improving their ROI - Return on Incentives.