Last week, the SEC held a meeting of its Investor Advisory Committee – and one of the topics covered was market perspectives on non-GAAP financial disclosures. Jeff Mahoney – who is General Counsel at the Council of Institutional Investors – participated in that panel discussion. Although it has been a few years since CII submitted its rulemaking petition and follow-up letter on this topic, Jeff gave a strong reminder that transparency of non-GAAP measures in the context of executive compensation disclosures remains a priority for CII and its members. In fact, it’s one of the three main advocacy priorities that CII has identified for 2025. Here’s how CII describes the issue:
While there may be reasonable reasons for companies to use non-GAAP financial measures in executive compensation programs, there is the potential for boards to misuse them in a manner that may reward executives despite poor performance. Due to a loophole that permits companies not to reconcile non-GAAP target measures used for executive compensation with GAAP, investors are not always able to monitor the appropriateness of exclusions and other adjustments to GAAP being incorporated into executive compensation decisions.
Importantly, this loophole applies only to the Compensation, Discussion & Analysis (CD&A) section of the proxy statement. For over two decades, the SEC has generally required companies to give equal prominence to GAAP and non-GAAP financial measures as well as provide a quantitative reconciliation of the numbers in most financial filings. The solution is straightforward: The SEC should require that the CD&A include an explanation of why non-GAAP measures are better for determining executive pay than GAAP, and provide a quantitative reconciliation (or a hyperlink to reconciliation in another SEC filing) of these two sets of numbers.
Remember that ISS also encourages transparency around non-GAAP adjustments that affect compensation, as discussed in FAQ No. 41 and my blog from last year.
On The Proxy Season blog on TheCorporateCounsel.net, Liz recently shared a new 44-page report (available for download) from the team at AQTION that gives an up-to-date look at the perspectives of the world’s 65 largest institutional investors (asset managers, sovereign wealth funds, and pension funds) – including the extent to which they rely on proxy advisors, how they’re approaching engagements, and more. (AQTION is a London-based firm providing investor engagement advice using data from SquareWell Partners.)
Although proxy advisors do help these firms gather information about portfolio companies and execute votes, over 90% of votes are linked to the investors’ own custom policies. That means perspectives and reactions to your pay program may differ greatly among your large institutional investors. And, while 2025 updates to voting guidelines have generally become less prescriptive and more principles-based, “investors are increasingly expecting higher standards of board responsiveness to shareholder concerns; this includes on unequal voting rights, and exceptional remuneration, both of which were identified as trend topics for investors.”
With respect to “exceptional remuneration,” which refers to awards granted outside of the standard pay package, the report says 34 out of the Top 65 investors provide insight into their position.
Eight investors (including J.P. Morgan Asset Management and Aberdeen Investments) are against one-off awards “as a matter of principle.”
The remaining 26 take a case-by-case approach and may support special awards outside of where the company can demonstrate “truly exceptional circumstances and significant additional value creation.”
It notes that understanding your top investors’ public positions and voting behavior is more important than ever since investors are less vocal in their engagement with portfolio companies.
The popularity of relative TSR as a long-term incentive plans metric makes a lot of sense given how challenging it can be to set multi-year goals for absolute metrics. I have always thought of rTSR plans as pretty much identical company to company — with the exception of the rTSR comparison group. But this HLS blog from the Equilar team says it’s actually not so “plain vanilla” and discusses the variables to consider when using it as a metric. Those include:
– The length of time to measure
– The comparator group
– Whether to factor in stock price averaging
– The weighting or modifier effect on the overall payouts
– Whether to implement additional contingencies (e.g., absolute floors or caps)
– The payout scale (most commonly threshold payout of 50%, maximum payout of 200% and threshold/target/maximum goals of the 25th/50th/75th percentiles)
All these factors have an impact on the Monte Carlo valuation that determines the accounting expense the company recognizes on the awards. And they may have an impact on company performance. Looking at a sample of 1,049 CEO awards between 2020 and 2024 by Russell 3000 companies, the companies with more rigorous rTSR plan design outperformed the other companies in the sample (but the blog says a larger study is needed to determine whether there’s really a correlation).
When it comes to getting the votes you want during proxy season, if you want to look especially smart to your boss and save your company (and yourself) from time-consuming back-and-forth, the best thing you can do is sign up for our “Proxy Disclosure & 22nd Annual Executive Compensation Conferences.” We will close out the second day with our always popular panel “Navigating ISS & Glass Lewis,” which features a conversation with representatives from both proxy advisors – moderated by Davis Polk’s Ning Chiu. This is going to be a very practical session on the types of disclosures & practices that will (or won’t) help your cause on say-on-pay, compensation committee elections, and equity incentive plan approvals.
Our 2025 Conferences will be taking place Monday & Tuesday, October 21-22 in Las Vegas, Nevada, with a virtual option for those who can’t attend in person. Join us for engaging sessions full of essential and practical guidance, direct from the experts. Register now to lock in our early bird rate and save your seat!
For a few years now, one of the most common executive compensation-related shareholder proposals has sought shareholder approval of new severance packages that exceed a certain multiple (usually 2.99x) of an executive’s base salary and bonus. These were particularly popular in 2023, and they remained the most prominent compensation-related proposal in 2024. So far — through May 1 — they are still common but have continued to decline this year. ISS-Corporate reports:
With respect to executive compensation topics, included under governance-related proposals, the number of shareholder proposals seeking shareholder ratification of severance payments has continued to decline. In 2023, we saw an increase to a record high of 39 such proposals, two of which received majority support. The number of proposals regarding executive severance agreements declined this year to 28 (from 33 in 2024), and so far, none of these proposals have received majority support.
I recently shared on The Proxy Season Blog on TheCorporateCounsel.net that “anti-ESG” groups have been responsible for about 20% of this year’s Rule 14a-8 shareholder proposals – which is a 5% uptick compared to last year and represents about 4x as many proposals. These proposals aren’t getting much support from shareholders. Still, there is one variation that compensation folks shouldn’t ignore.
This year, the National Legal and Policy Center has submitted several Rule 14a-8 proposals aimed at eliminating diversity metrics from incentive plans – including at Coca-Cola, American Express, and Merck. Although the wording varies, each resolution follows this general format:
Shareholders request the Board of Directors’ Compensation and Management Development Committee to revisit its incentive guidelines for executive pay, to identify and consider eliminating discriminatory DEI milestones from compensation inducements.
To the extent that companies use DEI-related metrics, they typically appear in annual programs – and as discussed in our “Top Compensation Consultants Speak” webcast last week and in my earlier blog, many companies have already moved away from these metrics, especially if they were quantitative. Yet, despite the wording of the proposal and the practice of companies revisiting their annual incentive metrics every year, the Corp Fin Staff didn’t agree that the proposal could be excluded based on companyarguments of “substantial implementation.” While no-action responses are always fact-specific, this suggests companies may not be able to sidestep these proposals simply because they revisit their metrics each year – and that the bar for excluding these proposals under Rule 14a-8(i)(10) may be higher than some hoped.
On top of that, the proponent seems to broadly define “DEI milestones.” For example, Merck disclosed in last year’s proxy statement that its “Sustainability” metrics were based on worldwide access to health and engagement and inclusion of employees. On a standalone basis, that doesn’t scream “DEI milestones.” This year, the company clarified that this is measured through employee surveys.
All this to say, NLPC’s net is wide. If it continues to pursue this proposal, a company may find itself dealing with it even if the incentive plan doesn’t expressly incorporate DEI targets or refer to “diversity” – for example, if disclosures outside the CD&A discuss diversity programs or if the basis for non-financial incentives is unclear. The good news is that the companies that received the proposal this year have provided a good framework for statements in opposition.
It’s not uncommon for equity award agreements to say that the recipient will forfeit their awards if they breach non-solicitation, non-competition, and/or confidentiality provisions. Ideally, the very thought of forfeiting their valuable equity deters people from engaging in these behaviors. But not always. And a recent case from the Delaware Court of Chancery held that if a company isn’t careful about contract law basics, it might have limited recourse if a former employee says: “So what?” This memo from Troutman Pepper Locke explains the case:
The agreement was governed by Delaware law and identified the issuance of the units as “adequate and sufficient consideration” for the restrictive covenants. The agreement further provided that if Doorly was terminated for cause or breached the restrictive covenants, his vested and unvested units would be “automatically forfeited.” Relevant here, the agreement did not create a right of employment, nor were there any allegations that Doorly received a promotion, increased compensation, expanded responsibilities, or enhanced access to company information in exchange for signing the agreement.
Doorly eventually resigned from Cross Fire, but Cross Fire subsequently characterized the separation as “for-cause termination” because Doorly allegedly breached the restrictive covenants in the agreement by creating an entity that competed with Cross Fire customers and recruited a Cross Fire employee, resulting in the automatic forfeiture of the units. The plaintiff filed this action against Doorly seeking an injunction to enforce the restrictive covenants, damages for breach of contract, and a declaratory judgment. Doorly moved to dismiss and argued that the forfeiture of the units eliminated the consideration for the agreement, rendering the restrictive covenants unenforceable.
Here’s the takeaway:
The court agreed with Doorly and dismissed the plaintiff’s claims because the agreement explicitly provided that the units were the sole consideration for the restrictive covenants. Without the units, according to the court, there was no consideration to support the agreement, making the restrictive covenants unenforceable under basic contract law principles. In its analysis, the court emphasized the necessity of consideration for the enforceability of contracts, particularly when imposing new restrictive covenants on an existing employee.
The decision is important for employers, especially sponsor-backed companies, who intend to constrain employees with restrictive covenants, to ensure that any restrictive covenants are supported by valid consideration (e.g., promotion or bonus) to be enforceable.
Early returns are in for this year’s equity plans. I don’t want to jinx it, but things are looking good so far! Here are stats from Semler Brossy as of May 15th (pg. 6):
• Average vote support for equity proposals thus far in the proxy season (90.3%) is 40 basis points above the average vote support observed at this time last year (89.9%)
• No companies have received vote support below 50% in 2025
• ISS has recommended “Against” 21.3% of equity proposals, which is far below the 2024 full-year rate
• Average support for equity proposals that received an ISS “Against” recommendation thus far in 2025 (78%) is aligned with average vote support observed for companies that received an ISS “Against” in the past decade (76%)
The report goes on to spell out what is already implicit in the stats above: companies that receive an “Against” recommendation from ISS see support levels about 15% below than those that receive a “For” recommendation. It’s not clear whether this year’s results are a function of companies incorporating the plan features – and prohibitions – that investors and ISS want to see, or if there has been an update to how the methodology is being applied this year.
With equity being such an important part of compensation – not just for executives, but for much of the workforce – it’s important to be able to incorporate info about the latest trends into your own decisions and proposals. Especially in today’s volatile environment…what approach protects the share pool while also giving flexibility?
Based on skills matrices for the 50 largest US public companies, Farient Advisors recently identified these trends in skills held by compensation committee chairs over the past 5 years:
– Human capital and compensation experience have tripled
– Industry and business acumen has increased by 46%
– Governance, risk management, and public policy expertise have risen by 46%
– Accounting and finance experience has grown by 33%
– Global experience has increased by 32%
The Farient blog also notes that certain soft skills are particularly important for compensation committee chairs, who are often tasked with difficult conversations with executives and also get a lot of face time with shareholders in engagement meetings.
Emotional Intelligence and Communication Skills: Pay is personal. As Chairs engage with diverse stakeholders — from executives and board members to shareholders and employees — emotional intelligence is paramount. The ability to foster open communication, build trust, and navigate sensitive discussions surrounding pay is essential. Strong interpersonal skills enable the Chair to facilitate engaging and constructive conversations about compensation philosophy and practices, ensuring all voices are heard and considered.
Further, the ability to communicate to shareholders the strategy and rationale behind compensation decisions provides transparency and deepens their understanding of the board’s actions. While not all will agree with every committee decision, understanding that those decisions are rooted in sound strategy, analysis, and governance will go a long way in avoiding undue scrutiny.
Tune in at 2:00 pm Eastern today for our annual 60-minute webcast, “The Top Compensation Consultants Speak.” We’ll hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest considerations for compensation committees. The panel will cover the following topics:
– DEI Programs, Disclosures & Metrics: The Compensation Committee’s Role
– Plan Design & Goal Setting Amid Uncertainty & Volatility
– Key Changes in Investor & Proxy Advisor Policies & their Impact in 2025
– Metrics & Perks: Notable Observations from the 2025 Proxy Season So Far
– Compensation-Related Shareholder Engagement
– Did Dodd-Frank Rules Reduce or Curb CEO Pay or Change Incentive Design?
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