Yesterday, I shared this Semler Brossy alert that recommends acting now to develop a discretionary scorecard — i.e., a “reference point all parties can refer to when evaluating how well management is keeping the business moving forward” — to “serve as a basis for whether discretion might be warranted” when approving payouts under 2025 short-term incentive programs. It says time is of the essence. To get you started, it includes some suggestions — and even provides some examples.
In our work navigating the challenges posed by tariffs and related executive actions, we have come across several “buckets” of metrics that boards can mix and match according to their unique challenges and goals:
Adapt – Respond to disruption and reposition the business: Speed and impact of tariff mitigation; Pricing strategy shifts; New sourcing, manufacturing, or distribution pathways; Maintaining supply chain continuity; Cost containment without damaging future growth or quality; Workforce agility (redeployments, upskilling); Liquidity; Retention of key talent and customers; Brand and reputation protection
Grow – Position for long-term value creation: New product/service launches; Share gains in key markets; Key customer wins; Growth in recurring/high-margin revenue; Digital acceleration; Expansion into new channels, geographies, or customer segments; Strategic initiative advancement (e.g., tech investment, operational improvements)
The memo says that committees will probably pull metrics from several of the buckets (without assigning a weight to any of them) and that progress against the scorecard should be a standing agenda item for the remainder of the year. Then, when considering the size and scope of adjustments, committees must consider these key questions:
– Who should participate in any discretionary adjustments? Boards will need to decide whether all executives participate or whether the most senior executives, with the greatest need for alignment with shareholders, warrant consideration. Most often, boards will treat executives as a team, but sometimes individual contributors with an outsized impact could be recognized. Candidates for discretion should have a meaningful effect on the facets of the business directly affected by or that are vital to overcoming present challenges.
– What are the most important criteria by which to apply discretion? . . . It is best to selectively choose a few key metrics instead of the entire gamut, focusing on areas where executive decisions can make a tangible impact on long-term growth trajectories.
– What level of discretion is appropriate? Discretionary changes, in almost all cases, should aim to bring payouts to threshold, or somewhere between threshold and target. In most cases, relative outperformance would have to be exceptionally high to warrant moving payouts above target.
Check out the alert for example scorecards for healthcare, manufacturing and consumer products companies.
Our October “Proxy Disclosure & 22nd Annual Executive Compensation Conferences” are well-timed to share the latest and greatest thinking on 2025 incentive programs, and we have a panel — featuring Brandon Gantus of Wilson Sonsini, Ali Nardali of K&L Gates and Tara Tays of Pay Governance — devoted to discussing today’s key issues for short-term incentives. Join us in Las Vegas on October 21st & 22nd – right before NASPP’s annual conference in the same location – or virtually, if you can’t attend in person, so you don’t miss any of our great content. Sign up online or reach out to our team at info@ccrcorp.com or 1.800.737.1271.
It continues to look likely that many compensation committees are going to have to grapple with what to do if annual incentives don’t meet thresholds this year. Sometimes that result is appropriate and warranted, but other times it doesn’t sit well with compensation committees that may feel that management — all things considered — navigated a challenging environment comparatively well. Plan language may give the committee the option of making discretionary adjustments, but this approach can make investors uneasy and result in say-on-pay and even director support issues. This Semler Brossy alert says there are broadly two situations where discretion may be appropriate to adjust outcomes in management’s favor:
When management makes a qualitative, but objectively measured, improvement to the company’s long-term outlook. This may include launching a new product earlier than planned, reconfiguring a product’s design, sourcing, or distribution to be more cost-effective, achieving a key customer win, or improving product quality or service offerings.
When the company outperforms its peers. Improvements in relative market share, brand reputation, margin growth, etc., are still useful benchmarks, as everyone is “going through this together.” Outperforming the field still indicates outsized performance.
Together with these circumstances, discretionary adjustments are better received when they reward good future positioning (versus solely addressing short-term problems), are reciprocal (adjustments in response to an external factor are both upward and downward), and they’re appropriately sized (aka, get executives closer to threshold, not over target).
The alert encourages compensation committees to consider developing a discretionary scorecard, “a non-binding, unweighted set of strategic metrics that the board deems indicative of success during turbulent times,” which “allows boards to approach the topic of discretionary adjustments with flexibility and confidence” and offers these three advantages:
1. They offer hope. An incentive program that won’t pay out, through no fault of the employees, can be demoralizing.
2. They give people direction. A well-designed scorecard says, “We know we can’t control the tariffs, but here is a list of variables we can control.”
3. They provide rationale in advance. Shareholders are justifiably skeptical of claims that the board “can evaluate performance at the end.” Establishing the parameters of success in advance will bolster the company’s case with shareholders if/when adjustments are disclosed in the proxy.
I have always focused on number 3, but of course, 1 and 2 are potentially even more important! And here’s the key to really getting the benefit there: time is of the essence!
The sooner this scorecard is developed, the more effective it will be. Since yearly goals have already been set, a discretionary scorecard will run in parallel with the current incentive plan, and crucially, it comes with no weightings among measures or a promise of payment. Because it is non-binding, the scorecard gives the board time and flexibility to determine any adjustments later in the year. If the board feels like relief is warranted based on discretionary factors, they already have a strong, quantifiable foundation from which to base their decision.
Semler Brossy has some tips for developing these scorecards as well! (More on that to come!)
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.