Last Friday, the SEC announced that it will host a roundtable discussion on executive compensation disclosure requirements on June 26. It will be held at the SEC’s headquarters and open to the public (plus streamed live on SEC.gov). More Information on the agenda & speakers will be posted before the event.
In the meantime, Chairman Atkins issued a statement saying, “While it is undisputed that [the executive compensation] requirements, and the resulting disclosure, have become increasingly complex and lengthy, it is less clear if the increased complexity and length have provided investors with additional information that is material to their investment and voting decisions. It is important for the Commission to engage in retrospective reviews of its rules to ensure that they continue to be cost-effective and result in disclosure of material information without an overload of immaterial information.” He then includes the following questions for the staff to consider — and for members of the public to provide views on (before or after the event). Comments can be provided by mail or electronically — see the announcement for details.
Executive compensation decisions: setting compensation and making investment and voting decisions
– What is the process by which companies develop their executive compensation packages? What drives the development and decisions of compensation packages? What roles do the company’s management, the company’s compensation committee (or board of directors), and external advisors play in this development?
– Current disclosure requirements seek to unpack these processes for investors. How can our rules be revised to better inform investors about the material aspects of how executive compensation decisions are made?
– What level of detail regarding executive compensation information is material to investors in making their investment and voting decisions? Is there any information currently required to be disclosed in response to Item 402 of Regulation S-K that is not material to investors or that could be streamlined to improve the disclosure for investors? How do companies’ engagement with investors drive compensation decisions and compensation disclosure?
Executive compensation disclosure: past, present, and future
– The Commission substantially revised its executive compensation disclosure requirements in 2006 with requirements to provide, among other things, enhanced tabular disclosure of compensation amounts and a compensation discussion and analysis of the company’s compensation practices. The rules were intended to provide investors with a clearer and more complete picture of the compensation earned by a company’s executive officers. Have these disclosure requirements met these objectives? Do the required disclosures help investors to make informed investment and voting decisions? Given the complexity and length of these disclosures, are investors able to easily parse through the disclosure to identify the material information they need? In what ways could disclosure rules be revised to return to a simpler presentation and focus?
– The Dodd-Frank Act added several executive compensation related requirements to the securities laws, including shareholder advisory voting on various aspects of executive compensation. What types of disclosure do investors find material in making these voting decisions? Are companies able to provide such disclosure in a cost-effective manner? Do the current rules strike the right balance between eliciting material information and the costs to provide such information?
– With the experience of almost 20 years of implementing the 2006 rule amendments, how can the Commission address challenges that either companies or investors have encountered with executive compensation rules and the resulting disclosures in a cost-effective and efficient manner while continuing to provide material compensation information for investors? For example, are there requirements that are difficult or costly to comply with and that do not elicit material information for investors? Are there ways that we can reduce the cost or otherwise streamline the compensation information required by the rules
Executive compensation hot topics: exploring the challenging issues
– The Commission recently adopted rules implementing the requirements of Dodd Frank related to pay-versus-performance and clawbacks. Now that companies have implemented the new rules, are there any lessons we can learn from their implementation? Can these rules be improved? If so, how? For example, which requirements of these rules are the most difficult to comply with and how could we reduce those burdens while continuing to provide investors with material information and satisfy these statutory mandates?
– Since adoption of the pay-versus performance rules, I have continued to hear concerns regarding the rule’s definition of “compensation actually paid” (CAP). What has been companies’ experience in calculating CAP and what has been investors’ experience in using the information to make investment and voting decisions?
– What has been companies’ experience in applying the two-part analysis articulated by the Commission in 2006 with respect to evaluating whether perquisites for executive officers must be disclosed? How do disclosure requirements resulting from the test, and whether a cost constitutes a perquisite, affect companies’ decisions on whether or not to provide a perquisite? For example, how has the application of the analysis affected evaluations relating to the costs of security for executive officers? Are there types of perquisites that have been particularly difficult to analyze? How do investors use information regarding perquisites in making investment and voting decisions?
It certainly seems that the SEC’s retrospective review of executive compensation disclosures will be very broad! I immediately noted that clawbacks, PvP (in particular, the CAP calculation) and perks (in particular, executive security) were all specifically noted — while CEO pay ratio was not. But Mark Borges said he suspects pay ratio is probably in the spotlight as well. He also noted that each of the cited rules is statutorily mandated — so the Commission is probably most interested in how it can streamline the compliance burden associated with these disclosures.
In case you missed it yesterday, we’re delighted to welcome Mark Borges back to our blogging team, with the “Borges’ Proxy Disclosure Blog“! Mark doesn’t really need an introduction, but for those who haven’t met him, Mark is a Principal at Compensia. He regularly speaks on webcasts on our sites and on NASPP – as well as at our annual conferences. I always learn a lot from Mark – he is full of real-life practice pointers and plugged into the very latest developments.
One of the many reasons Mark knows so much is that he’s an avid reader of proxy statements. His blog is key resource if you are wanting to follow how companies are handling:
– New requirements,
– Tricky situations, and
– Changing “best practices”
Mark’s “relaunch” post covers learnings from recent disclosures about clawback analyses under Item 402(w).
There will be more to come! Subscribe to Mark’s blog to get an email whenever he’s found a disclosure to highlight. Welcome back, Mark!!
I shared an “early filer” stat last month that showed that spending on personal security arrangements had increased in 2024, compared to 2023. A new analysis from Equilar shows that the trend is holding true with additional companies. Here’s more detail:
An Equilar study of S&P 500 companies reveals that an increasing number are offering security perquisites as part of executive compensation packages. The analysis examines 208 companies that have filed proxy statements by April 2, 2025, and finds that almost a third (31.3%) of them provided some type of security perk in 2024. This represents a 27.8% rise between 2023 and 2024, and a 47.6% increase from 2021.
Additionally, the median spending on security perquisites has seen a significant increase of 118.9%, increasing from $43,068 in 2021 to $94,276 in 2024. This includes a 36.3% upturn between 2023 and 2024, when the median spending rose from $69,180.
Equilar also found that companies that have significantly increased spending have provided some color to justify that spend. Here are a couple of examples:
At a company where security spending increased by over 8,000% – The Company’s 2025 proxy statement specifically details security concerns and direct threats experienced by its CEO and senior executives, referencing recent publicized security incidents involving executives at other companies.
At companies that added security as a benefit – As of April 2, 2025, fourteen large-cap companies that did not previously provide security benefits to their executives have begun doing so. One such company, Centene Corporation, even notes in its recent proxy filing that the new security protections are correlated to the security issues experienced by executives within the healthcare industry.
Since most of the disclosures underlying Equilar’s analysis are about 2024 spending – which largely predated the tragic December murder of Brian Thompson – it’s likely that proxy statements filed next spring will show even greater levels of personal security. This can include actual security as well as requirements like avoiding commercial air travel. Remember that in the SEC’s view, these benefits are disclosable as “perquisites” even though many view them as necessary in today’s day and age. We have a checklist for members that can help with parsing executive security trends and disclosure requirements.
In early say-on-pay stats that I shared a few weeks ago, only a few companies have received an “against” recommendation from ISS so far this year. Despite that good news, a recent analysis from Exequity says that companies with summer meetings – specifically, those in June – shouldn’t get too comfortable. Here’s why:
In fact, as much as there is a seasonality to proxy filings and annual meetings, there seems to be seasonality to ISS recommendations. Exequity analyzed SOP voting results and ISS “Against” recommendations month by month from 2011 to 2024. The data indicates that companies with annual meetings in June are more likely to receive adverse recommendations from ISS than those holding meetings in other months.
Exequity found that last year, 43% of all adverse recommendations came in June! Here’s what the data showed from 2011 – 2024:
• The average annual rate of “Against” recommendations for January through May was 10% and July through December 13%.
• The average annual rate of “Against” recommendations in June was 18%.
• This trend holds on an annual basis despite the dates of annual meetings slowly shifting away from April and into June over the period measured (~14% of meetings in June 2011 versus 26% in June 2024).
Why do ISS “against” recommendations peak in June? Exequity ran the numbers to see if it could be explained by pay & performance disconnects, “repeat offenders,” or industry considerations. None of those possible explanations panned out. The low-hanging joke would be that maybe ISS is just tired and cranky by the time June rolls around. I know a few comp consultants and securities lawyers who could empathize with that! But – as explained in the chapter of our Disclosure Treatise on “Say-on-Pay Solicitation Strategies” – the proxy advisor does have quantitative & qualitative models that are intended to ensure that companies get consistent treatment, so I’d be careful in jumping to that conclusion.
That said, given the influence of ISS recommendations on say-on-pay outcomes, even an unexplained trend like the “June Phenomenon” deserves attention. You may get some weird looks if you suggest moving your annual meeting solely because of this. But hey, plenty of athletes do strange superstitious things on game day, so maybe it’s worth carrying that practice over to the annual meeting sphere (also remember to wear your lucky socks). Of course, rescheduling an annual meeting also isn’t a decision to make lightly! The (potential) benefits with ISS might be outweighed by the costs of disrupting everyone’s calendars, potential changes to deadlines, etc.
A few weeks ago, I shared an analysis from Compensation Advisory Partners that looked at how companies are responding to calls for forward-looking disclosure of incentive targets. In the latest 16-minute episode of “The Pay & Proxy Podcast,” Meredith caught up with CAP’s Margaret Engel and Louisa Heywood for even more color. They discussed:
1. ISS’s 2025 focus on forward-looking goals disclosure for long-term incentive (LTI) plans
2. Compensation Discussion & Analysis disclosure requirements for performance targets
3. How the 100 largest US companies currently approach disclosures related to LTI performance targets
4. How companies will likely approach this disclosure going forward
5. How CAP and its clients are thinking about the potential shift in the treatment of time-based equity that ISS signaled may be on the horizon
As always, if you have a compensation-related topic you’d like to discuss on a podcast, feel free to ping Meredith at mervine@ccrcorp.com!
Last week, the WSJ reported that members of the House Ways and Means Committee are considering expanding IRC Section 162(m), which most readers of this blog know limits a public company’s deduction of compensation paid to covered employees to $1 million per year. It’s unclear from the article how exactly the budget bill might reflect an expansion of Section 162(m), but it sounds like it might expand the restriction to a broader group.
Remember that the expansion of this group — currently limited to a company’s named executive officers — is already happening. The 2021 American Rescue Plan Act amended the definition of “covered employee” to add a public company’s five highest compensated employees (even if they are not executive officers) for tax years beginning January 1, 2027 and thereafter. In January, the IRS and the Treasury Department issued proposed regulations to implement the change.
We’ve recently bombarded you with considerations for compensation programs in times of great volatility and uncertainty — related to everything from 409A valuations, flexibility in pay programs, trailing average prices to determine grant sizes, handling underwater options and how to think about adjustments. This Cooley alert has even more! Here are some other things to think through — if you haven’t already.
Preserve company cash if appropriate. Market uncertainty can often strain a company’s cash resources, or at least reinforce the need for prudent cash flow management. Companies should consider whether they have the flexibility to settle awards in equity rather than cash, mindful that doing so can trigger significant securities law, accounting and disclosure consequences. In addition, companies should work with equity plan administrators to evaluate the availability of net settlement for exercise price payment or tax withholding purposes, and perhaps consider limiting the availability of at least net exercise price payment to only individuals subject to Section 16 reporting requirements.
Assess adequacy of share reserves. Companies should confirm the number of shares available under their equity incentive compensation plans, including employee stock purchase plans (ESPPs), to ensure that sufficient shares remain available for purchase, particularly if there has been a steep drop in price since the share pool was last assessed (or, in the case of an ESPP, since the commencement of the current offering period). Similarly, if there are individual or aggregate award limits under a plan based on share number, those may need to be revisited to ensure that they continue to provide adequate headroom.
Review ESPP documents. ESPP documents often contain provisions that either automatically or at the discretion of the plan administrator will cancel an offering period and start a new offering period if the stock price on the purchase date is lower than the stock price on the offering period commencement date. ESPP documents should be reviewed to determine whether they contain an automatic or permissive restart feature. Companies with plans that do not currently utilize an automatic or permissive restart feature should consider whether to include such a feature in future offerings to preserve shares.
Based on a NASPP/Deloitte survey, respondents using a multi-day trailing average closing price to convert their target equity award values into a number of shares increased from 27% in 2019 to 42% in 2022. I remember many companies switching from a single closing price to an average (for example, the 30-trading-day average closing price ending the day preceding the grant date) in 2020 due to COVID volatility. I suspect some of those companies made the change and never looked back.
As this NASPP blog argues, there are a lot of good reasons to make this switch — especially with the stock price volatility we’re seeing today — but there are also some traps for the unwary. The blog uses this fictitious example to show the inconsistent outcomes that a single-day closing price can cause:
My fictitious company is granting RSUs to two employees . . . Each employee is to receive an RSU worth $10,000. Employee A’s RSU is granted on February 20, when the stock price is $34 per share. Employee B’s RSU is granted one month later, on March 20, when the stock price has dropped to $23 per share.
If we use the FMV on the grant date to determine the number of shares in each grant, employee A will receive a grant for 294 shares ($10,000 divided by $34 per share) and employee B receives a grant for 434 shares ($10,000 divided by $23 per share). Employee B’s grant is almost 1.5 times the size of employee A’s grant. Not because employee B deserves more shares but merely because employee B’s grant was timed fortuitously . . .
Using even just a 30-day average would have smoothed out the differences between the two grants considerably. The 30-day average for Employee A’s grant is $33 per share. The S&P 500 was fairly stable for the 30 days leading up to February 20, so the 30-day average doesn’t have a big impact on Employee A’s grant. It would be for 303 shares instead of 294 shares.
But using a 30-day average has a significant impact on Employee B’s grant. The 30-day average on March 20 is $30. This reduces the size of Employee B’s grant to 333 shares, which is more comparable to the grant that Employee A received just a month before. The current value of both grants is also more comparable. After six months, when the stock has recovered to $34 per share, the value of employee A’s grant is worth a little over $10,000 and Employee B’s grant is worth a little over $11,000.
Using averages also means that grant sizes are more predictable, making it easier to forecast share usage and less likely that the company will use its plan shares more quickly than anticipated. It does, however, complicate things a bit — what you communicate to your executives will match the target values you describe in your Compensation Discussion & Analysis section of your proxy statement (which will also explain the average price used for the conversion), but it will not match the company’s accounting expense or the grant date fair value reported in the proxy statement tables for named executive officers. But communication and disclosure shouldn’t drive business decisions, and the blog suggests you do your own analysis.
What do you do right now? NASPP is updating their survey, and if you want to participate (to access to the full survey results), it closes this Friday — May 9!
The Trump Administration moved quickly in its first 100 days to implement the “deregulation” part of its regulatory agenda. We’ve shared a number of deregulation developments on TheCorporateCounsel.net, including:
– The first deregulation Executive Order saying that whenever an agency promulgates a new rule, regulation, or guidance, it must identify at least 10 existing rules, regulations, or guidance documents to be repealed;
– The second deregulation Executive Order and subsequent memo saying all agency heads should prioritize repealing regulations that could be struck down as overreach or otherwise unlawful under recent Supreme Court cases, and do so without notice and comment where consistent with the Administrative Procedure Act’s “good cause” exception (likely to be litigated);
– A letter from members of the House Financial Services Committee to then Acting Chairman Uyeda calling on the SEC to withdraw several final and proposed rules — notably including two Corp Fin rules, one being Pay Versus Performance; and
– Most recently, the Trump Administration’s new suggestion box for the public to “submit your deregulatory vision” — i.e., a new online form on Regulations.gov run by the General Services Administration and the Office of Management and Budget where the public can submit ideas for bothersome rules and regulations they’d like to see on the chopping block.
In his blog on the suggestion box, Dave asked, “Which SEC rules and regulations are you going to drop a dime on to the GSA/OMB?” So let’s run an anonymous quick poll!
This poll is all just fun and games, but I should note that some of these rules are Congressionally mandated, in which case it’s not likely that they’d be done away with completely, but I’m sure there are tweaks we’d all welcome!
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.