I blogged a few years ago about a survey from Professors Alex Edmans, Tom Gosling, and Dirk Jenter that found CEOs are more motivated by a sense of “fairness” than by adding a few more zeros to their bank accounts. In a follow-up study that was just published in the American Economic Review: Insights, Professor Edmans teamed up with Pierre Chaigneau and Daniel Gottlieb to examine what type of “fairness” concerns are most motivating.

The pre-print version of the study is available here. In addition to including a lot of complex equations that reminded me why I became a lawyer and blogger instead of an economist, it offers these findings about pay-for-performance:

We showed that fairness concerns do not lead to the agent being paid fair wages for all output levels; in contrast, unfair wages can induce effort efficiently. The optimal contract involves two thresholds for output. The agent receives zero below the lower threshold, the entire output above the upper threshold, and the fair wage in between. When fairness concerns are sufficiently strong, the top region disappears, and the contract becomes performance-vesting equity. Most other contracting theories predict continuous contracts, or extreme discontinuities where the agent’s pay switches from zero to the entire output.

Even if the incentive constraint is slack, pay is increasing in output – paying the agent the fair wage over a range of outputs reduces perceived unfairness and satisfies the participation constraint efficiently. As a result, the firm can induce CEO effort “for free”, potentially rationalizing why incentives are given even to intrinsically motivated agents.

It makes sense that the threat of “no payout” is a big motivator. Money doesn’t buy happiness, especially when you’re already wealthy. So it sounds like companies are on to something by requiring “threshold” performance for a payout. It makes you wonder whether “moonshot awards” move the needle, but it’s probably difficult to generalize human motivations across the board…

– Liz Dunshee

As Meredith shared in early July, Glass Lewis is planning to change its quantitative pay-for-performance model for the 2026 proxy season. We probably won’t know all the details until mid-October (at least), but this FW Cook blog describes what we know so far about the new multi-test scorecard. Here are a few key points:

– Replaces the current letter grading system (i.e., A to F) with a numerical scorecard

– Extends the pay-for-performance alignment measurement period from 3 years to 5 years

– Expands the relative pay and performance comparisons beyond the GL peer group to include broader general industry and market capitalization peers

– Utilizes multiple definitions of pay with the introduction of CAP to the model

The blog provides detailed charts about Glass Lewis’s new scorecard approach. According to FW Cook’s summary, there will be five relative tests and one qualitative test (i.e., six total) – and the charts summarize the various tests and factors.

Under this model, you want to get a high score. Glass Lewis will use the relative tests to calculate a numerical overall P4P alignment score that ranges from 0 to 100, and will apply the qualitative test as a negative modifier – i.e., it can only reduce the overall P4P alignment score. The overall score translates to a level of P4P misalignment concern ranging from negligible (81 – 100) to severe (0 – 20).

– Liz Dunshee

On her “Deep Quarry” Substack newsletter, Olga Usvyatsky recently analyzed trends for Q2 2025 clawback disclosures. Unlike Q1, the clawbacks disclosed during the most recent quarter related to “Big R” restatements. But Olga reiterated her prediction that “little r” restatements will likely be the more common trigger over time – as well as her observation that “little r” Dodd-Frank clawbacks may tell investors as much about the company’s pay design as they do about financial reporting shortcomings:

…Additionally, when a quantitatively immaterial misstatement leads to a clawback, it implies that performance targets were so narrowly met that even a minor correction tipped the outcome. For example, if an executive bonus was triggered at exactly 100% of a revenue or EPS target, a 1–5% overstatement could have made the difference between receiving or forfeiting an award.

Setting aggressive performance targets is a double-edged sword. While ambitious goals can align management incentives with those of shareholders, they can also create incentives for excessive risk-taking or earnings management to meet aggressively set thresholds.

As I mentioned in my previous post, clawbacks after immaterial little r restatements are not necessarily a sign of wrongdoing. Yet, arguably, no-fault clawbacks may expose weaknesses in accounting reporting or operational performance, thus warranting more scrutiny.

Olga’s comment caught my eye because from the company perspective, it underscores the need for compensation committees and audit committees to collaborate to understand the potential impact of financial metrics and financial reporting decisions on incentive programs – and the benefits that may be gained from “scenario planning.” Olga also considered the message that a company might be sending when a “Big R” restatement is disclosed, but the correction doesn’t trigger any clawback:

Thus, the question: are companies with “Big R” restatements less likely to rely on accounting-based metrics in setting executive compensation? Or perhaps these companies have easier-to-reach performance targets that are met even if the actual numbers are restated? Similarly, does restructuring the executive compensation agreements to move away from (or rely less on) accounting-based metrics following the implementation of Rule 10D-1 signals a potentially lower accounting quality concerns and foreshadows a future restatement?

An analysis of those questions will require a bigger data set than what we currently have. Which brings us back to Q2 trends and the fact that the number of affected companies will continue to grow over time. Olga identified these key trends for the most recent quarter:

– The number of error correction flags declined sharply in Q2 2025 compared to Q2 2024.

– The number of companies with the recovery analysis flag increased in Q2 2025 compared to Q2 2024.

– A failure to adopt the mandatory clawback policies or to attach the compensation recovery policy as an exhibit to the annual report led to amended filings or non-compliance with exchange listing rules for some issuers.

– Two companies reported restatements-related clawbacks and two more companies disclosed that the recovery analysis is still ongoing.

Check out the “Borges’ Proxy Disclosure Blog” for continued updates on clawback-related disclosure examples. We’ll also be giving practical guidance on clawbacks – and more! – at our October “Proxy Disclosure & 22nd Annual Executive Compensation Conferences.” 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. Here’s the can’t miss agenda – and all the excellent speakers. You can sign up online or reach out to our team to register by emailing info@ccrcorp.com or calling 1.800.737.1271. Hotel rooms at the Virgin Hotel are going fast – so sign up today and book your room at our special rate!

– Liz Dunshee