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.
– Liz Dunshee
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.
– Meredith Ervine
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).
– Meredith Ervine
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!
– Meredith Ervine
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.
– Meredith Ervine