A recent study from a group of finance professors reinforces the rationale for director stock ownership guidelines. Based on analyzing 5,000+ companies from 2008 – 2021, the authors found that director equity is correlated with a lower likelihood of a stock price crash – but the strength of the correlation depends on the characteristics of the board and the company. Here are a few risks that directors who have “skin in the game” are likely to avoid:
1. Over-Investment
Prior studies have linked over-investment—particularly in low-return projects—to crash risk. When directors are inattentive, managers may engage in empire building or value-destroying acquisitions. We find that higher DEC is associated with significantly lower levels of abnormal investment, consistent with enhanced board oversight discouraging inefficient capital allocation.
2. Financial Misreporting
We use future financial restatements flagged as fraudulent (from the WRDS non-reliance dataset) as an indicator of opaque reporting. Firms with more equity-compensated directors are significantly less likely to restate their financials due to fraud, suggesting improved monitoring of accounting practices.
3. Bad News Hoarding
Delayed disclosure of adverse information is a central cause of crash risk. Using a standard event-study approach, we find that cumulative abnormal returns around earnings announcements are more negative when firms report bad news—especially when DEC is low. However, this stock price decline is significantly muted in firms with high DEC, indicating that bad news is more likely to be released in a timely and incremental fashion, rather than building up and triggering a crash.
Collectively, these findings support the enhanced monitoring view: DEC reduces managerial opportunism and strengthens governance.
There’s no one-size-fits-all. The analysis found that the benefits of director equity compensation were greatest at companies that had entrenched management, more opaque financial reporting, and transient institutional investor ownership – and when directors were well-qualified and not overcommitted. The data also seemed to show that the benefits of director equity ownership were most pronounced, and stock price crashes less likely, among boards that had a relatively higher proportion of women directors.
Most S&P 500 CEOs earned more compensation last year than in 2023 – but 31% experienced a drop in pay in 2024. That resulted in an overall median increase of 7.5%, compared to a 9.2% increase for the prior year-over-year period. These numbers come from a recent proxy statement analysis by ISS-Corporate Solutions of 320 large-cap companies. Here are a few more stats:
– Median pay was $16.8 million
– For the 69% of CEOs who earned more pay, the median increase was 13.2%
– For the 31% of CEOs who earned less pay, the median decrease was 7.2%
ISS-Corporate notes that pay growth was largely driven by increases in the value of equity awards, in light of strong total shareholder returns. So, executives might see lower pay this year if the market stays down. The magnitude and direction of pay changes also varied across industries:
Industries with the most drastic increases in CEO compensation include Consumer Durables & Apparel and Commercial & Professional Services with median changes of 21.2 percent and 16.9 percent respectively. CEO compensation decreased by a median of 4.4 percent for companies in the Food, Beverage, & Tobacco industry.
Semler Brossy recently published its first say-on-pay report for 2025. Based on 140 Russell 3000 companies and 37 S&P 500 companies that have had meetings on or prior to April 8th, the results are looking good. Here’s more detail:
– The average Russell 3000 vote result (92.5%) thus far in 2025 is 160 basis points higher than the index’s 2024 average (90.9%)
– No companies have failed Say on Pay yet in the Russell 3000, compared to one failure at this time last year
– 5.0% of Russell 3000 companies and 2.7% of S&P 500 companies have received an “Against” recommendation from ISS thus far in 2025, both of which are lower than the rates at this time last year
The report notes that these results continue a positive multi-year trend of increasing say-on-pay support and fewer failures. But it also cautions that this is a small sample size and summary results are likely to change over the course of the year. Stay tuned!
I blogged a few months ago about the unique challenges that life sciences / biotech companies face with equity awards. This Pearl Meyer memo delves into the very common problem of underwater stock options – and suggests “auto forfeiture” of significantly underwater options as a way to improve the durability of the equity pool. Here’s an excerpt:
There are a variety of ways that an auto-forfeiture provision can be structured. In its simplest form, the agreement could stipulate that on, for example, the fifth anniversary of the grant date, and each anniversary thereafter until the term is reached, if the price of the company’s stock is more than 50% higher than the exercise price, the option is automatically forfeited and returned back to the equity pool. Companies can tailor aspects of this to their specific needs, including how deeply underwater the option needs to be, the measurement period, the method for measuring the stock price, and so on. Another example of customization, as well as simplification, is to have one measurement period for all options granted in a given year which reduces administrative burden.
This solution requires careful planning. The memo gives these high-level steps:
1. Seek legal counsel on the feasibility of this approach, including, but not limited to, checking your stock plan(s) to ensure that forfeited stock options return back to the available pool for reissuance.
2. Seek advice from the finance group (or outside equity valuation experts) on the valuation of stock options with these provisions to ensure they are able to implement this structure on the accounting side. It is likely accounting will require a more sophisticated option valuation methodology than the standard Black-Scholes option pricing model that many companies use.
3. Assess the impact based on the go-forward compensation program, including but not limited to, how significant the option grants are as a percentage of the overall equity grants made, the likelihood of grants being materially underwater in the future, etc.
4. Socialize this concept and the analysis with the appropriate senior leaders in the company, and if aligned, the compensation committee of the board.
5. Establish the language to use in future award agreements, as well as processes and protocols to ensure that the grants do not run afoul of any accounting or legal rules.
6. Develop language for plan participants that explains the new provision, including its benefits to the company and benefits to the plan participant.
See this Pay Governance memo from 2023 for more suggested alternatives to address underwater options without having to reprice or exchange the awards.
Over on The Proxy Season blog on TheCorporateCounsel.net, I recently shared that investors are taking a range of approaches to engagement meetings following the February Corp Fin Staff guidance on Schedule 13G eligibility. Based on a recent episode of the “Timely Takes” podcast featuring Brian Breheny of Skadden, Rick Hansen of HP, and Allie Rutherford of PJT Camberview, Skadden’s memo and this FW Cook blog, those approaches include one or more of the following, which investors may apply to engagement with all their portfolio companies or only some portfolio companies (where they hold 5%):
– Not engaging at all (i.e., not taking meetings)
– Engaging but not participating (i.e., taking meetings but taking a “listen only” approach)
– Participating with a “listen first” approach, asking open-ended or less specific questions and not providing transparency around voting intentions
– Communicating that they prefer the company to do the outreach, set the agenda items and stick to the preset agenda topics
– Starting some or all meetings with a disclaimer
– Continuing as they always have (some smaller investors)
Here are some tips the above-mentioned resources shared for navigating the shifting dynamics of investor meetings this proxy season:
– Be prepared for many different styles of meetings, and know how each investor is approaching engagement meetings before you engage. HP’s Rick Hansen says this is exactly the type of information you should be leaning on your proxy solicitor to provide.
– Know that silence is not acceptance. FW Cook notes that no questions or comments from an investor doesn’t mean they are supportive of a practice.
– Address the “elephant in the room.” Both the podcast participants and the FW Cook blog stress the importance of knowing pain points (specific to your company and also specific to the investor based on their policies) and addressing them proactively since they’re still likely to impact their vote, given the bullet above. Skadden’s Brian Breheny stresses that companies need to be more proactive than ever — to get the meeting and set the agenda, already knowing the investor’s perspectives.
– The differing approaches might mean that some investor voices and positions are much “louder” than others. PJT Camberview’s Allie Rutherford reminded us that there are many perspectives you’re not hearing in meetings.
– Consider affirmatively responding to any investor disclaimer. Brian noted that saying something like, “we understand and we realize that’s not your intent” might make the investor more comfortable engaging.
– Make sure your proxy and communication materials preemptively address concerns, including those specific to certain investor’s policies.
Allie noted that investors are in “get-through season” mode, and there may be another pause before offseason engagement, during which investors will reassess and possibly make changes. In the meantime, keep calm and engage on. They also stressed that building long-term relationships through engagement remains very important.
This alert from Meridian Compensation Partners discusses how to prepare executive compensation programs for a business transformation. First, it says you should be asking these questions to determine whether special retention awards will be necessary:
– Do our executives have sufficient unvested equity awards (“holding power” or “retention glue”)? There are a variety of circumstances that can lead to retention risks – insufficient “skin in the game,” recent business challenges, uncertainty and risk in the transformation itself, etc. Whatever the cause – insufficient equity holding power increases the risk of losing key personnel. Equity holdings also create an incentive for achieving company objectives and reward executives for the longer-term value created for shareholders from the transformation.
– Is our compensation competitive with (or better than) market? Ensuring that ongoing compensation is market-competitive reduces an executive’s incentive to look for alternative opportunities.
– Do we have the right severance and Change-in-Control termination protections? Business transformation may increase employee concern with loss of employment. Reasonable severance protections can mitigate these concerns, keep key leaders focused on the business and the transformation and reduce retention risk.
Once retention risk is addressed, focus should turn to incentivizing executives by asking this next set of questions:
– Are we paying for the right outcomes (i.e., correct performance metrics)?
– Are we setting the right performance goals?
– Does our payout curve provide adequate upside while balancing risk and uncertainty?
It concludes with this reminder:
Your compensation program should be tailored to your company’s unique circumstances, particularly in a transformation scenario. A business focused review of your pay program is a critical part of getting ready for a business transformation.
This Zayla Partners post warns that 2025 is a high-risk year for compensation whiplash — i.e., massive and unpredictable swings in pay outcomes. It’s certainly not a new issue, but companies are again wondering what they can do proactively to ensure their incentive compensation programs still appropriately reward executives, even if unanticipated, non-recurring events outside the company’s control threaten to disrupt the company’s carefully thought-out goal-setting process.
Here are a few things compensation committees might consider:
– Broadening performance ranges between threshold, target and maximum
– Shortening performance periods
– Diversifying metrics
– Adding relative metrics
– Adding strategic metrics
– Incorporating more time-vested equity
Companies also sometimes delay setting performance goals or identify certain unanticipated events that the compensation committee will adjust for during or after the performance period.
For a deep dive on this, head to the landing page for our upcoming webcast “The Top Compensation Consultants Speak” to add it to your calendar and then tune in on May 21st at 2 pm ET. I always love hearing from Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay, and Pearl Meyer’s Jan Koors, and they have lots to talk about this year — including plan design and goal setting amid uncertainty and volatility.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
The HR Policy Association recently released the results of its 2025 CHRO Survey. The announcement summarized some of the results, but the full report is only available to members. I was interested to see the following data on DEI disclosures and practices in the summary.
Few CHROs reported that they expect their companies to decrease the following:
– Employee resource group programs (4%)
– Mentorship programs (10%)
– Training (23%)
However, over half reported that they expect their companies to decrease these things:
– Participation in outside culture surveys (51%)
– Tying DEI metrics to executive pay (53%)
– Setting public quantitative goals (64%)
With respect to DEI metrics, this is consistent with trends we’ve seen in 2025 proxy statements so far. Liz recently shared that the prevalence of diversity measures dropped from 65% in 2023 to 35% in 2024 in the first 100 proxies filed by S&P 500 companies and several others disclosed their planned discontinuation for 2025 compensation programs.
Earlier this month, I shared a reminder that ISS wants companies to start disclosing performance goals that will apply to long-term incentive awards for the upcoming performance period – not just the completed year that the proxy statement primarily discusses. This is most relevant when there’s a quantitative pay-for-performance misalignment.
Is anyone doing this? Compensation Advisory Partners reviewed recent disclosures of the 100 largest U.S. public companies and found:
Most companies do not disclose forward-looking financial targets that cover future years. Companies often determine that disclosure of forward-looking business plan targets exposes the company to competitive harm. Disclosing forward-looking goals can also put companies in a precarious position when there is a disconnect between internal budget scenarios built on non-GAAP metrics and accounting scenarios that are reported externally under GAAP.
CAP found that the degree of disclosure varies based on whether the performance targets are relative or absolute:
– 30% of companies with absolute performance metrics in the LTI plan disclose forward-looking goals
– 68% of companies with relative performance metrics disclose forward-looking goals – e.g., 50th percentile rTSR achievement will result in payout at target levels
The CAP team predicts that the prevalence of these disclosures may increase over time – especially for relative metrics with non-sensitive performance-payout structures. Companies will have to balance competitive concerns with say-on-pay expectations and may have a more difficult decision if they’re already under the “pay disconnect” microscope for other reasons.
It appears that if there’s one thing we can count on in 2025, it’s uncertainty. Market swings and unpredictable business conditions complicate things for compensation committees. But as Dave recently wrote on TheCorporateCounsel.net, “we’ve seen this movie before” – and fortunately, we’ve got a solid playbook to pull from.
One great addition to that toolkit is this Gibson Dunn blog – which revisits “lessons learned” from the 2008 financial crisis and the COVID-19 pandemic and applies them to today’s rocky road. Here’s an excerpt:
The Road to a 409A Issue is Paved with Good Intentions
An executive or other service provider may elect to forego current compensation to conserve free cash flow, for internal or external optics, or other reasons relevant to the company. Salary and perquisites tend to be the first looked to for adjustment, with bonuses and long-term compensation trailing. Regardless of the bucket of compensation reduced or eliminated, a service provider who agrees to a reduction may ask for a “make-whole” or similar commitment from the company.
This can raise the specter of Internal Revenue Code Section 409A in two key ways: (1) creating new deferred compensation, and (2) impermissibly deferring compensation from one year to the next. The former impacts how the compensation can be structured, can limit flexibility to amend or terminate the arrangement in the future, and can result in payroll tax being incurred in an earlier year than the compensation is delivered. Impermissibly deferring compensation from one year to the next can come with accelerated income inclusion, a hefty 20% additional tax to the service provider, and potential reporting and withholding consequences to the employer.
In any case where a service provider forgoes compensation otherwise promised, and especially if there is an element of a “make-whole” or similar commitment, this should be structured carefully and in coordination with counsel.
The blog also raises these points:
1. Be mindful of how declining stock prices affect equity award sizing and award values. For more suggestions on handling those issues, check out my 2022 blog on managing your burn rate and Emily’s review of equity grant practices during volatile times.
2. Tread carefully on any modifications to in-flight awards – they’re a “third rail” for investors.
3. For committees in the process of establishing new programs or goals, build in flexibility and set goals and metrics that can withstand continued uncertainty. Emily’s blog on pandemic-era compensation practices is worth revisiting for ideas.
The Gibson Dunn team recommends a “learn-and-see” approach right now – consistent review of relevant data sets, coordinating with external advisers, and leaving aside one-size-fits-all programs in favor of understanding practices specific to the industry.