In late January, President Trump signed two Executive Orders — “Ending Radical and Wasteful Government DEI Programs and Preferencing” and “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” — which direct federal agencies to terminate federal contracts related to DEI within 60 days and the Attorney General to submit a report by May 21 with recommendations “to encourage the private sector to end illegal discrimination and preferences, including DEI.” As John shared on TheCorporateCounsel.net, a Maryland federal court entered a preliminary injunction enjoining enforcement of certain provisions of the two orders on Friday, but that injunction didn’t cover the part of the Executive Orders that directs the agencies to identify up to nine potential civil compliance investigations of organizations.
Shortly after the Executive Orders were announced, the Attorney General’s office released a memo regarding the implementation of these Executive Orders. It directs the DOJ’s Civil Rights Division and Office of Legal Policy to jointly submit a report to the AG’s office with recommendations for enforcing federal civil rights laws and include “proposals for criminal investigations” in addition to the up to nine potential civil compliance investigations of entities listed in the second Executive Order, including publicly traded companies.
Many companies took a close look at their DEI programs to ensure compliance with federal civil rights laws after the Students for Fair Admissions v. Harvard decision and private sector cases involving Section 1981 and Title VII of the Civil Rights Act. Now, public companies are considering what disclosures regarding DEI (including DEI metrics in executive compensation plans) should be provided in SEC reports and ESG/sustainability reports in light of these Executive Orders, the vacatur of Nasdaq’s “disclose or comply” board diversity rule and announcements by the proxy advisors.
– Students for Fair Admissions v. Harvard and private sector cases involving Section 1981 and Title VII of the Civil Rights Act
– The recent Executive Orders including the directive to federal agencies to identify potential “compliance investigations” aimed at deterring DEI programs constituting “illegal” discrimination
– How companies are considering legal risk, political risk, talent risk and business risk in preparing disclosures
– Companies, especially government contractors, weighing changes to the use of DEI metrics in compensation programs
– Disclosures regarding DEI metrics in compensation programs
– Human capital management disclosures in Form 10-Ks
– Required and voluntary board diversity disclosures in proxy statements after vacatur of Nasdaq’s “disclose or comply” board diversity rule
– ISS’s announcement that it will indefinitely halt consideration of certain diversity factors in making vote recommendations on director elections
– Voluntary proxy disclosures on DEI policies and practices
– Looking at committee charters and corporate governance guidelines
– Weighing whether to maintain the timing or delay publishing voluntary ESG reports
– Setting metrics for 2025 compensation programs
As always, if you have a topic you’d like to discuss on a podcast, please reach out to me at mervine@ccrcorp.com!
Due to security concerns, some public companies engage and pay for personal security services for their CEOs and other senior executives and also require their executives to use company aircraft for personal travel. In addition to their typically higher profile, public companies may also have heightened security concerns for their executives since Regulation FD often requires them to disclose their executives’ involvement in certain public events.
Companies are reassessing their security arrangements and other measures they take to protect the safety of their executives following the December 2024 shooting of the CEO of UnitedHealthcare. We’ve recently posted a new “Checklist: Executive Security” that addresses the following topics — all of which boards and management teams should be aware of as they consider changes to executive security programs:
– Recent trends in personal security spending by public companies
– Additional steps companies are now considering to minimize risks to their management teams
– Board fiduciary duty considerations
– SEC disclosure requirements
– Institutional investor and proxy advisor positions
– Tax and benefit implications of personal security arrangements
We also have related law firm memos posted in our “Management Perks” Practice Area.
As John shared yesterday on TheCorporateCounsel.net, Goodwin recently published its 2025 Proxy Statement Form Check. In addition to providing a chart laying out relevant Schedule 14A & Reg S-K line-item disclosure requirements, the document includes a detailed discussion of new and revised disclosure requirements that will apply to this year’s filings. The document also addresses certain “less than annual” disclosure requirements like say-on-pay frequency and CEO pay ratio.
Make sure to check out the SEC Compensation Disclosure Worksheets — one for SRCs/EGCs and another for all other companies — intended to assist companies with preparing proxy statement executive compensation disclosures. There is also a separate one for PvP disclosures. You can find these and other resources in our “Tabular Disclosures” and “Proxy Season Developments” Practice Areas.
This memo from Meridian Compensation Partners highlights some key issues that compensation committees need to pay attention to in 2025. They include business and political volatility, regulatory change, an expected increase in M&A, retention amidst uncertainty, and planning for executive retirement.
With respect to managing volatility, the memo says, “supporting the opportunistic behavior that can benefit the company and its investors may require more incentive design flexibility to appropriately reward executive leaders who can deliver business results, potentially in unconventional ways.” It suggests compensation committee evaluate each of these areas:
– Performance Metrics: Are the metrics used in the short-term and long-term incentive plans appropriate? Do they allow executives flexibility to drive the company’s success and adapt to a changing environment?
– Goal Setting: Given political uncertainty with the new administration, including potential tariffs and retaliatory tariffs companies should consider appropriate goals and what adjustment could be made for changes in public policy after the start of the performance measurement period.
– Goal Ranges: Does the expected volatility make the level of achievement less sure? If so, is it appropriate to expand the range around target goals? Or is it better to establish a target that is more likely to be achieved and tighten the payout range to limit the upside and downsides?
– Performance Measurement Periods: Given the business environment and potential limitations on the company’s ability to predict business activity over the next several years, a company may consider a shortened performance period, even though proxy advisors and many institutional shareholders prefer a three-year performance period.
– Adjusting Metrics and Use of Discretion: Have the appropriate non-reoccurring events been identified and defined for adjustment. Should the company establish principles to govern adjustment of payouts based on unanticipated events not included in the budget-setting process?
As Meredith noted last fall, there’s been a general sense that some companies would revisit DEI metrics in the wake of the June 2023 SCOTUS decisions on the Students for Fair Admissions cases. This WSJ article says that 2023 was the first time since at least 2019 that the percentage of S&P 500 companies using DEI metrics dropped compared to the prior year. And now, in light of recent developments, many companies are taking yet another look at these programs.
Companies aren’t necessarily abandoning the overall concept of diversity, according to the article, but they may be shifting incentives to promote other types of metrics. In some cases, changes may be due to the fact that they have gained a better understanding of how to promote beneficial types of diversity that support business goals. The Journal shares a few examples of how companies are refining comp programs:
– A financial services company dropped financial incentives related to diversity and inclusion. The company started adding diversity goals to executive compensation plans in 2018 so that certain performance-based payouts increased or decreased by as much as 10% depending on the change in representation among senior management of people of color, women, veterans and LGBTQ and disabled people. It said last year in a regulatory filing that the compensation incentive was no longer necessary because the company had significantly increased diversity since introducing the tie to pay.
– An electric utility company reduced the impact of DEI metrics in executive bonuses, saying it needed to offset increased weighting for operational targets. A range of criteria that included hiring women, people with disabilities, veterans, LGBTQ workers and those from racial and ethnic minorities accounted for 10% of a business leader’s 2023 cash award, described in the company’s most recent proxy, down from 15% a year earlier. The company said [in its 2024 proxy statement] that it was continuing to focus on its DEI culture and priorities.
– A medical technology company changed the metrics for annual cash awards. Just over a year ago, the company said certain targets, including companywide inclusion and diversity goals, could boost executives’ annual awards by as much as 5%. Now, the targets are instead built into individual goals.
Other companies are framing the goals differently, to explain why retaining different perspectives is valuable to the business and incentivized – but not tying that concept to demographic characteristics. We’ll get more visibility in the next few months about other changes made during 2024, and perhaps some companies will also preview what they’re doing for 2025.
We spend a lot of time around here talking about say-on-pay votes. Even though they are non-binding advisory resolutions, one reason it’s important to make a strong case for say-on-pay in your proxy statement is because a negative result can be “blood in the water” for activists. In this blog from Meredith on our DealLawyers.com site, she elaborates on how pay concerns can be used against companies in proxy contests:
This recent alert from Compensation Advisory Partners updates research from 2015 on how often and when activist investors raise issues with executive pay during proxy contests. In 48 contests at Russell 3000 companies, CAP found that executive pay concerns were identified by the activists in 23 of those contests and that activists have raised concerns about compensation in about half of proxy contests annually for each of the last five years. Typically, pay concerns are included as evidence of issues with the company’s strategic direction:
Data indicates that executive compensation was often tied to broader concerns about the companies’ strategic direction, operational execution, and financial performance. Essentially, executive compensation disagreements were not the main and sole rationale for engaging in the contest. Instead, activist investors use these disagreements to highlight deeper underlying concerns with a company’s direction or performance to induce change.
For instance, if total shareholder return (TSR) is not used as a performance metric while the company has faced a prolonged period of shareholder value decline alongside rising CEO compensation, activist investors will highlight these issues as signs of a flawed business strategy and misaligned incentive structures. In many cases, concerns about executive compensation support their broader calls for leadership changes, strategic adjustments, and stronger governance practices.
Not surprisingly, the most commonly cited issue was pay-for-performance misalignment (91% of the time). But other issues were cited as well, including:
– Excessive CEO pay (57%)
– Weak corporate governance structures (26%)
– Outsized peer comparisons (17%)
– Performance metric adjustments (17%)
– High dilution (13%)
– Excessive perquisites (13%)
– Long-term incentive plan design (13%)
– High director compensation (9%)
– Lack of disclosure (9%)
– Excessive change-in-control provisions (9%)
If you work with life science companies – especially those in the development stage – you know that executive compensation arrangements look quite different from what you see in the S&P 500. Two recent articles from Aon (available for download) give helpful info about trends.
One memo looks at usage of options vs. RSUs. The other covers special performance-based awards – including metrics, performance periods, participation, and payout curves. Here are a few observations about performance metrics:
● On average, companies use 1.4 metrics.
● It is common for development and early-stage commercial companies to use milestone-based goals in special LTI plans, often those which are tied to a successful data read-out. As these goals are generally binary, the milestone is either achieved or not.
● Late development stage and early-stage commercial companies generally use hurdle-based plans tied to achievement of specific stock prices or financial goal (typically revenue) in special LTI plans. The underlying goal is commonly aligned to a value inflection point.
● Mature commercial companies tend to have better visibility into their financial performance, which is why they use a PSU design tied to their LRP.
Here’s the latest 151-page guide for compensation committees from Wachtell. This year’s guide addresses a number of developments, including the newly-required disclosure regarding the timing of option grants, the expanded definition of “covered employees” under Section 162(m) that will become effective for tax years beginning after December 31, 2026 and the increased focus on disclosure of performance-vesting equity and clawback policies that go beyond Dodd-Frank requirements in the proxy advisors’ most recent voting guidelines. The guide’s excellent summary of the proxy advisors’ voting guidelines concerning executive compensation practices is definitely worth a look.
As usual, the guide includes a sample “Compensation [and Management Development] Committee Charter” as an exhibit, although it notes, “It would be a mistake for any company to simply copy published models. The creation of charters requires experience and careful thought . . . we recommend that each company tailor its compensation committee charter and written procedures to those that are necessary and practical for the particular company.”
This blog from Meridian Compensation Partners walks through two main approaches that companies can leverage — either together or independently — to start the process of determining the right size for a new share pool request. One looks internally — what the company needs — and the other looks externally — what proxy advisors and investors will expect. Ultimately, most companies will need to closely assess both, but the blog notes situations where companies may focus more on one than the other.
– Ground-Up Approach: This method involves calculating the projected annual equity value needed for grants, typically guided by burn rate, historical share usage and/or peer and market benchmarks. The projection is then scaled to cover the desired number of years the share pool should last (external stakeholders generally prefer a share request sufficient for 2-3 years).
This approach may be suited for companies with controlled ownership, moderate share pool needs, strong shareholder relations, or no major strategic changes anticipated.
– Directive Approach (based on Shareholder and Regulatory Expectations): Institutional shareholders and proxy advisory firms, such as ISS and Glass Lewis, have guidelines on acceptable burn rates, dilution levels and share pool sizes. Aligning with these guidelines can help companies gain shareholder support for additional shares, especially when share pool requests are sizable.
Situations where this may be appropriate include: companies with meaningful institutional shareholder ownership; and companies that require a significant increase in the share pool, or that have major plan provisions not aligned with shareholder interests.
The blog also discusses factors that will influence the company’s assessment under the Directive Approach — including the impact that plan design may have on the ability to get the increase approved — reiterating a note I shared in January that certain provisions that provide flexibility to the compensation committee continue to be popular with companies despite being disfavored by the proxy advisors.
ClearBridge recently released its survey of annual incentive plan practices based on disclosures in 2024 proxy statements filed by companies in the ClearBridge 300 (100 companies in the S&P SmallCap 600 Index, 100 companies in the S&P MidCap 400 Index and 100 companies in the S&P 500 Index). Here are some key findings from the report:
– 93% of companies use a formulaic annual incentive plan.
– Most companies used two to three performance measures in their annual incentive plans, with three being the most common across all market caps. This represents an increase in recent years mostly because of an increased use of a “scorecard” approach.
– In 2024, financial metrics represented 79% of weighting for CEOs, and non-financial metrics represented 21%.
– The most common threshold payout opportunity was 50% of target, but there is a growing trend among large-cap companies to use lower threshold payout opportunities (25% or less) to provide downside protection for below-target results.
– Maximum pay was most commonly set at 200% of target, with small- and mid-cap companies setting maximum opportunities at less than 200% more frequently than large-cap companies.
It’ll be particularly interesting to see how the use of non-financial measures continues to evolve from this report to the next report, which I believe will be on 2026 proxy disclosures.