According to this NASPP blog – and the 2024 Equity Incentives Design Survey that NASPP cosponsored with Deloitte Tax – over 90% of public companies now offer performance-based equity awards.
That state isn’t shocking, but NASPP and Deloitte have been doing this survey a long time – and the trend line for these types of awards is striking. 25 years ago – before “say on pay” had entered our lives – only 29% of public companies used performance equity. Crazy! Today, the prevalence does vary by industry, with tech and life sciences lagging.
The blog looks at 6 trends in these types of awards. Here’s an excerpt:
Trend #5: Vesting is typically conditioned on two or more metrics
A full 76% of companies use two or more metrics to measure performance. Most (41%) use two metrics, while 26% use three and 10% use four or more.
Across all industries, TSR is the most popular metric, and EPS is the third most popular. For tech and life sciences companies, revenue ranks second, but it drops to fourth among other sectors, where ROIC/RONA take the second spot.
Trend #6: Three years is the standard performance period
An overwhelming majority—83%—of companies use a three-year performance period for their awards. We see little variation across industries, though the few companies that use a different period are more likely to be in the tech and life sciences sectors.
About half of companies that measure performance over less than three years impose additional service conditions (i.e., a “service tail”) that extend beyond the performance period, typically by two years or less. Only 13% of companies with a three-year performance period impose a service tail.
At our upcoming “Proxy Disclosure & 22nd Annual Executive Compensation Conferences,” we’ll be discussing key issues in structure & disclosure for short-term and long-term incentives. The Conferences are happening in Las Vegas on October 21st & 22nd – right before the big NASPP Conference in the same location – and it’s not too late to register! You can do that by signing up online or by reaching out to our team at info@ccrcorp.com or 1.800.737.1271. Here’s the full agenda – full of practical insights to help you as you head into year-end and the 2026 proxy season.
I blogged on Monday about accounting values for stock options. Now, we have an interesting example of accounting values for restricted stock!
As you’ve probably read, Tesla announced a big restricted stock grant to Elon Musk – valued at about $30 billion – in order to make up for the 2018 option award that he’s continuing to appeal and because “retaining Elon is more important than ever before” in light of today’s AI talent war and Tesla’s opportunities. Those reasons are all described in this letter to shareholders.
Even though the award is a grant of restricted stock, it requires Elon to pay a “purchase price” upon vesting that is equal to the exercise price per share of his 2018 award (that “moonshot” award had been subject to performance conditions that were achieved). As far as the new grant, it says there’s no “double dipping” if he ends up being entitled to his original 2018 award. Other than that, there are no performance conditions besides staying employed until the vesting date, which is two years away.
Which leads us to the accounting consequences. Tesla says the award is unlikely to ever vest – and therefore worth $0 from an accounting perspective. From the 8-K:
The Company expects to account for the 2025 CEO Interim Award as a grant of restricted stock with a performance condition in accordance with ASC Topic 718, which for purposes of the 2025 CEO Interim Award is based upon the probability of certain conditions being met. Restricted stock with a performance condition is accounted for by recognizing compensation expense over the requisite service period, based on the accounting grant-date fair value, but only if and when the vesting of the award becomes probable. . . .
As of the date of this report, the Company expects that the performance condition of the 2025 CEO Interim Award will not be deemed to be probable of being met. As a result, the Company currently expects that it will not recognize a compensation expense upon the issuance of the award. However, the Company will reassess the probability of the performance condition being met at least quarterly….
The Company is unable to predict whether a compensation expense will be recognized at any time during the two-year requisite service period, or thereafter.
For illustrative purposes only, if the approvals had been obtained on August 1, 2025, based on the closing stock price on such date, the accounting grant-date fair value of the 2025 CEO Interim Award would have been approximately $23.7 billion. This amount is based on such assumptions and is provided only for illustrative purposes. It does not reflect the accounting grant-date fair value of the 2025 CEO Interim Award that will be calculated in the future and disclosed in the Company’s future financial statements, nor is it indicative of the timing of recognizing any compensation expenses.
It is fascinating to think about the analysis that led to the $0 accounting value. I assume it’s that the company believes it has a strong case about the 2018 options being reinstated and not that it expects Elon to leave before the vesting date.
There are of course other interesting aspects to this award and the approval process. The Financial Times pointed out that this is an interim award – the board is continuing to work on a longer-term compensation strategy that will be submitted to shareholders at the company’s November 6th meeting. (I blogged about that timing on The Proxy Season Blog over on TheCorporateCounsel.net).
The FT also low-key criticizes that the award was recommended by a special committee of 2 directors and then approved by the board. Delaware courts had obviously looked closely at the processes and disclosures for the earlier award, but now that Tesla is redomiciled in Texas, they don’t have to worry as much about shareholder suits.
We’ve all heard the parable of the blind men & the elephant. Everyone is convinced they know The Truth based on their different perspectives. This Meridian memo reminded me that it’s kinda the same thing when it comes to perks. The memo points out that there are several lenses through which to consider this element of compensation:
– Companies: Value perks that make executives more productive, less distracted, healthier and/or safer. These are the predominant objectives for most Committees when adopting perquisites.
– Investors/Shareholders: Are generally not opposed to perquisites provided that they are not excessive, are within market norms and demonstrate a legitimate business purpose.
– Proxy Advisors: May view perquisites as a poor pay practice if they are “excessive.” Examples include tax gross-ups and “excessive” company plan and automobile use. Both ISS and Glass Lewis have published research on executive perquisites.
– Executives: May view perquisites as more valuable than a similar amount of cash because they facilitate material assistance in managing complex professional and personal responsibilities. Among the most common are financial planning assistance, company car, personal use of company plan and/or executive physicals.
The memo suggests key questions for comp committees to ask when considering perquisites with these perspectives in mind. It also covers two other elements of compensation that may be overlooked or misunderstood – retirement & severance benefits.
At our upcoming “Proxy Disclosure & 22nd Annual Executive Compensation Conferences,” we’ll be discussing a perk that’s been on everyone’s mind this year – executive security – as well as other key issues in structuring short-term and long-term incentives and in executive compensation disclosures. The Conferences are happening in Las Vegas on October 21st & 22nd – it’s not too late to register! You can do that by signing up online or by reaching out to our team at info@ccrcorp.com or 1.800.737.1271. Here’s the full agenda – full of practical insights to help you as you head into year-end and the 2026 proxy season.
One of the issues raised by some comments on the SEC’s executive compensation disclosure rules is that the current tables mix together target and earned compensation and show values that differ from what executives actually take home as pay. For example, for stock options, awards are reported at their grant date fair value but are valuable to the executives only if the stock price increases. This Pay Governance memo gives one of the clearest descriptions I’ve seen of how the accounting value of stock options differs from the in-the-money compensatory value, and why that matters:
Stock option accounting rules require companies to determine the fair value of stock-based compensation awards at the date of grant, which are significant and irreversible. This requires an option-pricing model, such as the Black-Scholes-Merton (Black-Scholes) model or a lattice (Binomial) model, that factors the exercise price, stock price volatility, expected term, dividend yield, and risk-free interest rate at the time of grant to estimate an economic value of the award.
However, this accounting value differs significantly from the in-the-money value of options, which is zero at the time of grant. This can be confusing to Compensation Committees, HR leaders, and recipients, as the grants are set and disclosed in the proxy’s Summary Compensation Table at their accounting value. In some cases, option awards expire without ever being in-the-money. However, in most cases, option grants are exercised after vesting at a higher stock price, which can yield greater in-the-money value than the accounting value.
The valuation models can affect decisions. The memo continues:
When companies grant stock options, they typically utilize the accounting value to calculate a number of options that would be equivalent to a grant of a full-value award, such as a time-based restricted stock unit (RSU). For example, if the accounting value of an option was $5 versus the stock price of $20, the company would grant four options compared to one full value award.
This creates more leverage in potential values, which has yielded significant value for many organizations as the S&P 500 has grown ~600%, a compound annual growth rate of ~14% over the 2010-to-2024 time period covered in the analysis. However, there is still a population of companies where such leverage has not paid off with the option being underwater and having zero value while an RSU would have kept some value.
While many companies have moved away from stock options, they’re still in play. Pay Governance analyzed option grants by S&P 500 companies from 2010 to 2019, finding that around 65% of the options (1,409) ended up with an in-the-money present value that was above the accounting value. The memo also delves into trends by industry.
Pay Governance recently provided a rundown of the top issues compensation committees are discussing — and will continue to discuss — this year. The following topics are top-of-mind for compensation committees today — based on the 250+ meetings that Pay Governance partners or consultants have been involved with so far this year.
1. Enhanced Executive Security
2. Potential Impact of Tariffs on Incentive Plans
3. One Big Beautiful Bill Act – Proposed Impact on Executive Pay
4. Navigating Shifting Pressures on ESG and DEI Goals
5. Balancing Pay Decisions in Challenging Sectors
6. Incentive Plan Alternatives Amid Uncertainty
7. Heightened Scrutiny on Goal-Setting Practices
8. Alignment of Incentive Plan Payouts and TSR
9. Long-Term Incentive Vehicle Mix
10. Diverging Say-on-Pay Perspectives: Institutional Investors vs. Proxy Advisors
11. Shareholder Outreach Challenges
12. Talent Retention and Succession Planning
The report briefly discusses each topic — explaining why each of these is getting a lot of attention from boards and providing some statistics. For example, with respect to diverging say-on-pay perspectives, here’s what the alert provides:
SOP support from large institutional investors has remained consistently strong in recent years. However, recent data reveal a decline in alignment between institutional investors and proxy advisors on SOP voting outcomes. This suggests that institutional investors may be placing less reliance on proxy advisor guidance and increasingly forming independent judgments on executive compensation matters. It may also highlight an emerging shift in how executive pay practices are evaluated and signal a broader rebalancing of influence in shaping SOP results.
Last week, ISS launched its Annual Global Benchmark Policy Survey. The survey is open for comment until August 22 at 5 p.m. ET. As usual, this is a key step in ISS’s formulation of voting policies for 2026 AGMs. As Dave pointed out on TheCorporateCounsel.net, this year’s survey addresses non-executive director pay and numerous executive compensation topics, including time-vs. performance-based long-term incentives, ISS’s say-on-pay responsiveness policy and the modification or removal of ESG metrics for in-flight awards.
Non-executive director pay – In accordance with its Benchmark voting policy, ISS’s reports include cautionary language if high (outlier) non-employee director pay levels and/or other problematic director pay practices are identified at a company. It will generally make adverse recommendations for the committee members approving director pay after two consecutive years, absent disclosure of a reasonable rationale. ISS notes concern that waiting two consecutive years might result in missing single or non-consecutive years of problematic director pay practices and asks for input on whether any specific problematic director pay practices may warrant immediate adverse recommendations (even in year one).
Time- vs. performance-based equity – Recognizing that some investors have advocated for reducing the emphasis on performance-based equity awards while others continue to believe that performance-based equity programs can provide insight into performance expectations and meaningful incentives, ISS asks whether respondents’ organizations consider time-based equity acceptable for all or part of executive long-term incentive awards. It then asks some follow-up questions, including:
– What vesting and/or post-vesting retention periods the organization considers sufficiently long-term for a company to move to time-based equity for part or all of its long-term incentives. When I’ve spoken to compensation consultants about this, they’ve identified this time-period as a key factor in understanding whether any policy shift to further embrace time-based awards would be welcome to corporate boards, so I’ll highlight that the multiple-choice responses in the survey (to the extent they provide a period) range from 3 to 7 years.
– In a program with a mix of time- and performance-based awards, what the organization considers a reasonable mix. The multiple choice responses in the survey (to the extent they provide a percentage) range from 25% to 50%.
– To solicit more detailed input on preferences for the breakdown between the vesting period and a post-vest holding period and what constitutes meaningful stock retention requirements.
Say-on-pay responsiveness policy – This question recognizes that companies might have a harder time meeting ISS’s say-on-pay responsiveness policy following the SEC’s February 2025 Schedule 13D/G guidance and asks how ISS should view (1) disclosures that a company was unable to obtain shareholder feedback after attempting to engage plus (2) whether pay program changes at a company with a low say-on-pay vote can be viewed as responsive even if the company was unable to get feedback from shareholders.
Modification or removal of ESG metrics – ISS asks how it should assess the removal of ESG or DEI metrics from in-flight awards.
As Liz shared today on TheCorporateCounsel.net, Glass Lewis is out with its policy survey as well.
We’ve often discussed here the evolving role of the compensation committee and its ever-widening mandate — especially as it relates to human capital management. This HLS blog from Semler Brossy aims to provide “a roadmap, sample calendars, and tips” to build your “‘next-generation’ compensation committee that can help talent-forward organizations succeed.” For example, here are tips to get started if your compensation committee lacks prior HCM experience:
[W]e have found that a “crawl, walk, run” orientation helps quickly bring everyone up to speed.
Start with report-outs and establish your organization’s baseline of relevant topics (crawl).
From there, have HCM teams provide updates on the progress of HCM initiatives (walk).
Finally, consider bringing in business unit leaders to discuss how they are fostering a healthy culture and retaining talent (run).
The committee will then feel empowered to ask challenging, insightful questions about overall HCM strategies at all levels of the organization. Throughout, the hope is to align these discussions about HCM with discussions on broader compensation strategy.
It can seem overwhelming to add agenda topics to otherwise packed meetings. The blog shares some scheduling tips to make this lift more doable:
New responsibilities will add more time to board meetings, but there are natural times when HCM discussions can align with other agenda items. For companies with a calendar fiscal year, summer meetings are an easier time to review HCM issues stemming from company strategy.
Future committee meetings can then tackle the items identified as HCM priorities, with conversation topics and agendas flowing from these initial discussions. Another time-saving strategy is to pull standard approval and compliance items into a “bonus agenda.” Committees can present those materials with good context ahead of the meeting, ask for questions on the materials, and then get a combined approval.
The blog also gave this interesting example of a board in the “run” stage of HCM oversight:
On the more extreme end of the data-collection spectrum, some boards get feedback directly from management by inviting them into the boardroom. Delta Air Lines, for example, has an employee committee that “relays employee concerns, perspectives, and suggestions directly to our executives and Board of Directors.” While this is far from the norm, it illustrates a potential model for further board/management collaboration in the future.
Speaking of busy compensation committees, the executive compensation world is in a time of great change. Our October “Proxy Disclosure & 22nd Annual Executive Compensation Conferences” are your chance to hear from our great speakers to make sure you’re staying up to speed! Our conferences are Tuesday & Wednesday, October 21 & 22, at Virgin Hotels Las Vegas. And don’t miss out on our Welcome Party Celebrating CCRcorp’s 50th Anniversary from 4 to 7 pm PT on Monday, October 20. (Don’t worry! We have a virtual option if you are unable to attend in person!)
Equity award agreements often provide that the awardee will forfeit the awards if they breach various restrictive covenants — usually, non-solicitation, non-competition, and/or confidentiality. These forfeiture provisions can create some challenges for drafters. In May, Liz shared a recent case in which the Delaware Court of Chancery refused to enforce the covenants following the forfeiture of the units, as the agreement explicitly stated that the units were the sole consideration for those covenants.
The 10th Circuit also addressed these terms in an award agreement — and specifically found that the forfeiture provision can be enforceable even when the non-compete itself may not meet the applicable state law’s reasonableness standard. This Proskauer blog describes the facts:
A retirement agreement allowed the former CEO of Spirit AeroSystems (“Spirit”) to receive cash payments and continue vesting in certain stock awards if he continued working for Spirit as a consultant and complied with a non-compete agreement. The CEO subsequently contracted with a hedge fund that was pursuing a proxy contest against one of Spirit’s suppliers. Spirit determined that this activity breached the non-compete and therefore stopped payments to the CEO and cut off continued vesting of the stock, resulting in forfeiture of the CEO’s then-unvested stock awards.
As the blog notes, the court distinguished the forfeiture of future compensation from a traditional penalty for competition.
Under Kansas case law, the former is valid and enforceable only if “reasonable under the circumstances and not adverse to the public welfare.” But the court concluded that Kansas law does not subject the latter to the same reasonableness standard because it does not restrain competition in the same way. Rather than imposing a penalty, a forfeiture for competition provision “merely provides a monetary incentive in the form of future benefits for not competing.” The court reasoned that a forfeiture for competition provision gives the worker “a choice between competing and thereby forgoing the future benefits or not competing and receiving those benefits.” And because the forfeiture applied only to future compensation, it did not amount to a penalty: the executive forfeited only “the opportunity for the shares to vest notwithstanding his retirement.”
The agreement included both a forfeiture-for-competition provision and traditional enforcement rights (to pursue monetary damages and specific performance), but the court found that the two could be severed under the agreement’s terms. The court found that a “forfeiture-for-competition provision should be presumed enforceable” absent the presence of policy concerns — e.g., that imbalanced bargaining power may result in a one-sided non-compete and that overbroad non-competes can have more widespread harm. It found those didn’t apply here and pointed to the specific circumstances of the awardee — a sophisticated executive — and the negotiation — including his support of counsel.
Notably, this is a Federal court applying Kansas law — so the blog notes it’s limited as far as binding authority goes. And some clearly reject forfeiture for competition. But the blog says it provides “meaningful authority for the proposition that a forfeiture for competition provision can be enforced even if applicable law otherwise limits the enforceability of non-compete provisions,” and it provides this drafting tip.
If an agreement has more than one enforcement mechanism (e.g., a right to seek damages and injunctive relief and a separate statement that breach will result in forfeiture of certain compensation or benefits), it is important to make each enforcement mechanism distinct and severable from the others. The result of this case could have been different if the agreement did not have a severability clause.
It also helps to state clearly that amounts subject to forfeiture are not considered earned or fully vested (even if considered vested for tax purposes) unless and until the employee has satisfied all applicable conditions. Clarity on this point helps the court to distinguish between a permissible compensatory incentive to comply and a potentially impermissible penalty for breach.
I’m loving that Mark Borges has returned in force with his “Borges’ Proxy Disclosure Blog.” Members of this site can visit the blog – and can sign up to get that blog pushed out to them via email whenever there is a new entry. All you need to do is click the link on the left side of the blog and enter your email address. Here are a few of Mark’s recent updates:
Mark doesn’t simply flag the disclosure – although even that is helpful! He also adds context and commentary from his years of experience.
If you aren’t yet a member with access to the Borges’ Proxy Disclosure Blog and all of the other resources on this site – such as our checklists, resource libraries, and the essential Lynn & Borges’s “Executive Compensation Disclosure Treatise” – email info@ccrcorp.com, call 1.800.737.1271, or sign up online. There is no risk in trying a membership! During the first 100 days as an activated member, you may cancel for any reason and receive a full refund!
As Bruce Brumberg recently highlighted on myStockOptions.com, the “One Big Beautiful Bill” Act (OBBBA) introduced some tax changes that compensation committees and execs may want to consider when structuring pay programs with stock options and RSUs. One thing to consider is that due to the Bill’s phaseout of the increased SALT deduction, equity vesting dates could impact availability of the deduction. Bruce’s Forbes article on this topic points out that this may also create an “alternative minimum tax” issue for options:
Whenever you exercise incentive stock options (ISOs) and hold the stock, you need to consider whether this will trigger the AMT, as the exercise spread becomes part of your AMT income (AMTI). Dealing with the AMT will be more of a hassle for anyone with ISOs trying to obtain the preferential ISO tax treatment at sale. The denial of the SALT deduction under the AMT rules, where instead it’s added back to your income to increase your AMTI, will now play a bigger role. Given the quirky way in which AMT income is determined, taking SALT deductions up to the $40,000 cap could make it more likely that you will trigger the AMT with an ISO exercise/hold. (For details on the AMT calculation, see an FAQ at the website myStockOptions.com.)
The article also summarizes changes for pre-IPO companies that issue Qualified Small Business Stock (QSBS) after the date of the Bill:
For QSBS, the OBBBA increased the gross-asset test for companies eligible to issue QSBS to $75 million and raised the amount of the capital gain exclusion on your tax return to $15 million. It also added shorter stock-holding periods for the exclusion of capital gain income from taxes. Now there are three tiers:
– 100% exclusion for shares held five years
– 75% for shares held four years
– 50% for shares held three years
The article says that timing will be a big deal, since half of the law comes into effect for 2025, followed by the other half in 2026. That means “creative tax planning” will be in full force this year around stock option exercise strategies, charitable gifts, and deductions.
The biggest takeaway for me in all of this stuff is to remind executives and employees to consult their own tax advisors. Also, don’t forget the possibility of Section 16 issues for tax planning transactions! Alan Dye & Peter Romeo have created a lot of resources on Section16.net about how to report these types of transactions and avoid short-swing foot faults. And check out the memos we’ve posted on this site about the benefits and executive compensation implications of the OBBBA.