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.
Managing the process of granting equity awards to employees in the U.S. alone is already a huge compliance effort, but multiply that by 10+ for multinational companies that grant awards to employees around the world — navigating many securities, tax, data privacy, etc., regulatory regimes. If you administer a global equity plan, this DLA Piper alert gives a select overview of recent changes in various countries that could impact your compliance:
China: Extension of preferential tax treatment and new SAFE reporting requirements. The preferential tax treatment for equity awards granted by publicly listed companies to employees in China under Notice 35 has been extended until December 31, 2027. This extension allows equity income to be taxed separately from other compensation and taxes to be calculated pursuant to a specific formula. Companies should also be prepared to comply with the new monthly exchange control reporting requirements imposed by some local SAFE offices, which require reporting of equity transaction data, assets, and liabilities via the AS-One system online before the 15th of each month.
Germany: Changes to the one-fifth rule for equity awards. Effective January 1, 2025, tax treatment of certain equity awards are subject to change. German employers are no longer required to apply the “one-fifth rule” for the taxation of equity award income. Employees may still claim the benefit in their individual tax returns, although the employer should report what equity award income is eligible for the benefit in the employees’ annual wage certificate. Employers should update their withholding processes and employee communications accordingly to reflect this change and are encouraged to inform employees of how to claim the benefit on their own.
India: Offset of tax collected at source (TCS) against salary withholding. From October 1, 2024, Indian employers may be able to offset tax collected at source (TCS) paid on outbound remittances against tax withholding on salary (TDS). The government is expected to issue detailed rules and procedures to facilitate this offset, allowing employers to reduce the TDS by the amount of TCS already paid. This development is expected to enhance the financial management of equity plans and provide relief to employees. Employees may still be able to obtain a refund for any TCS paid in connection with participation in an employee share plan in their tax return for the 2024/2025 fiscal year.
Israel: Enhanced reporting requirements for equity plans. Starting January 1, 2025, the Israeli Tax Authority (ITA) will enforce new rules for filing and reporting equity plans under Section 102 of the Income Tax Ordinance. Companies must now complete a comprehensive questionnaire as part of the filing process, which includes detailed representations about the equity plan. Additionally, the ITA will require annual and quarterly reports for both trustee and non-trustee plans, detailing grant activities, employee statuses, and tax calculations. To facilitate compliance, the ITA will introduce electronic filing systems for these reports, aiming to streamline the process and ensure accurate data submission.
Moldova: New legal provisions for stock options grants. For equity incentive plans adopted on or after January 1, 2025, the Moldovan Fiscal Code includes a new preferential tax regime for equity awards granted under a “long-term incentive program” that provide the right to receive free shares of a company’s stock or a right to acquire shares at a preferential price. The new regime should allow employees to defer taxation to the date the shares underlying the awards are sold provided three conditions are met: (1) the employee share plan is approved at a general meeting of shareholders, (2) the shares subject to the awards must not exceed 25 percent of the parent’s social capital, and (3) the awards must be subject to a minimum three-year vesting schedule. If the conditions are met, then the gain at sale should benefit from capital gains tax treatment whereby employees will only be subject to tax on 50 percent of the gain at sale.
Vietnam: New exchange control requirements under Circular No. 23. Effective August 12, 2024, Circular No. 23 has removed the requirement to register a foreign company’s employee share plan with the State Bank of Vietnam (SBV) previously required under Circular 10. Instead, companies must now submit necessary documentation with a commercial bank for review before the bank will provide the foreign exchange services needed to operate a company’s plan. This change also introduces a monthly reporting requirement with the SBV, replacing the previous quarterly reporting obligation, and prohibits the outflow of currency related to offshore awards (eg, offering an ESPP will generally still not be permitted). All transactions related to a company’s plan must still be processed through a dedicated account with a local commercial bank.
According to this Pay Governance memo, over 700 companies in the Russell 3000 submitted equity plan proposals in 2024. Here are key trends to know if you’ll be submitting a proposal this year:
• Nearly 25% of Russell 3000 companies submitted an equity plan proposal in 2024. Shareholder support was strong, about 90% on average, and less than 1% of proposals failed to receive majority support (very similar to 2023 levels).
• It is most common for companies to return to shareholders every 2 to 3 years to seek equity plan approvals.
• Proxy advisor opposition to equity plan proposals typically results in lower shareholder support; however, the equity plan proposal failure rate increases very modestly (to a failure rate of less than 4%).
• Russell 3000 companies that received low shareholder support had median potential dilution of 20%, or double the median of the overall Russell 3000 potential dilution of 10%.
• Among the small sample of companies that failed to receive shareholder support over the last two years, approximately half were in the healthcare sector, and the majority of companies that failed had higher potential dilution levels compared to the median of their respective sector.
• There are several steps companies can take to navigate toward a successful shareholder vote outcome for an equity plan proposal, including analyzing the share reserve needs and relative potential dilution, understanding top shareholder voting policies and proxy advisor concerns, and clearly disclosing the shareholder-friendly features of the equity plan.
Last month, Chancellor McCormick approved the settlement in Tesla’s big director compensation case. Although the amounts in this case were dwarfed by Tornetta, the directors are returning and forgoing about $920 million in total value – that’s a big deal! This Reuters article summarizes:
The settlement requires Tesla board members including Denholm and Murdoch to return roughly $277 million in cash, $459 million in stock options and to forgo stock options for 2021-23 worth $184 million. The settlement was not covered by insurance, according to a court filing by the shareholder who brought the case.
The damages will be reduced by $176 million, which is what the judge awarded to the plaintiffs’ lawyers. According to Reuters, that’s the 4th-largest fee award in the history of Delaware derivative suits.
I’ve previously blogged about the governance aspects of the settlement, which had been proposed way back in 2023. In addition to requiring the Compensation Committee to annually review director compensation with advice from an independent consultant, it requires Tesla to submit director compensation to a shareholder vote for the next 5 years. The settlement agreement says (in part):
On an annual basis, Tesla shall submit the proposed annual compensation to be paid to Non-Employee Directors to an approval vote of the majority of Unaffiliated Tesla Stockholders present in person or represented by proxy and entitled to vote on such decision.
Mike Levin at The Activist Investor shared in his newsletter that he objected to the settlement language about the vote. He’s concerned there’s no enforcement mechanism if the shareholders vote against director pay – i.e., the vote will be treated as a mere advisory recommendation, similar to say-on-pay. Here’s an excerpt describing his objection:
As for the enforceability of the shareholder vote, the settlement provides for a shareholder vote on director comp for the next five years. It states a voting standard (majority of shares voting at the AGM) and excludes directors from voting on their own comp. Yet, it is completely silent as to the consequence of a majority of shareholders voting against the proposed director comp for a given year. We urged her to require specific consequences of such a vote, namely TSLA doesn’t pay them.
Chancellor McCormick “doesn’t see it [our] way.” She states a brief, cryptic rationale: “…the company is committing to condition director compensation on approval by the minority stockholders. That agreement and that term is as enforceable as any corporate agreement.”
Your guess is as good as mine on how this will play out. One thing I’m sure of is that this won’t be the last time we’ll be blogging about Tesla’s director pay. We’ll be watching the vote!
There are no significant changes to Vanguard’s “executive pay” policies this year, although the updated policies do tighten the language in a few places, e.g.:
– Referring to “long-term returns” (rather than “long-term value”)
– In the context of assessing alignment between incentive targets & strategy, the language clarifies that the company sets its strategy
– Noting that, where pay-related proposals consistently receive low support, the funds look for boards to demonstrate “consideration of” shareholder concerns (rather than “responsiveness to” – although the “responsiveness” language still appears elsewhere, so don’t consider this a free pass to ignore feedback)
– For determining whether there is concern with a peer group, the policy clarifies that Vanguard is looking at whether the company’s disclosed peer group is not aligned with the company in size or sector
As Dave noted, the 2025 policies also take a more general approach to proposals, versus signaling how it will approach particular topics. Included on the cutting room floor is commentary about shareholder proposals that request disclosure of workforce demographics, such as EEO-1 reports. In addition, Vanguard eliminated a paragraph about its voting criteria for annual or long-term bonus plans and other proposals relating to executive pay – which had been similar to the say-on-pay & plan analysis disclosed elsewhere.
People are optimistic that we’ll see more IPOs this year. If your company is considering going public, this ClearBridge Compensation Group memo outlines equity compensation issues that should be part of the planning. Here are the key takeaways:
Establishing a Stock Plan
▪ Median initial share pool is 10% of basic common shares outstanding (“CSO”)
▪ Majority of companies include an evergreen provision upon going public (~4% to 5% of basic CSO annually), recognizing they are almost always removed when shareholder approval is next requested
One-Time Special Grants in Connection with Going Public
▪ For CEOs, grants typically range from ~0.5% to 2.5% of market cap at grant, with an inverse relationship between market cap and grant value as a percent of market cap (i.e., grant values as a percent of market cap are generally higher at companies with lower market caps and vice versa)
▪ Over 2/3 of these grants include a performance-based vehicle such as stock options or performance share units (“PSUs”), often in combination with time-vested restricted stock units (“RSUs”)
▪ Most common performance metric is stock price/total shareholder return (“TSR”)
Go-Forward LTI Compensation
▪ >90% of public companies grant LTI on an annual basis, typically limited to more senior levels in the organization (e.g., directors and above)
▪ Common to initially solely grant time-vested vehicles (e.g., RSUs) annually, with companies generally beginning to introduce performance-vested LTI (e.g., PSUs) annually within 3 years
For even more info about compensation-related considerations before going public, check out the full memo – as well as Meredith’s blog last fall about “cheap stock” and other issues. Also visit our “IPOs” Practice Area for more resources.
This HLS Blog post by ISS discusses the balancing act companies play when considering the terms of their equity plans and award agreements. On the one hand, compensation committees want flexibility to administer these programs to best attract and retain employees. On the other hand, investors prefer certainty and want to know that equity incentive plan shares will be used reasonably.
To see how companies are managing this balance, ISS studied trends in key plan terms since 2020 with a focus on minimum vesting requirements, payment of dividends and dividend equivalents on unvested awards, limits to the administrator’s capacity to accelerate awards, liberal share recycling, vesting conditions upon a change in control, repricing and cash buyouts and evergreen provisions. Here are the key takeaways from their review:
– No more than 15% of equity plans on the ballot over the past five years limit the plan administrator’s capacity to accelerate awards.
– Companies’ inclusion of Minimum Vesting Requirements within their plans has remained consistent. Over the past five years, four out of 10 equity plan proposals contain minimum vesting provisions.
– Although considered a problematic practice, there was a 5% increase in plan proposals with evergreen provisions within the Russell 3000 index in 2023.
– The prevalence of S&P 500 companies prohibiting the liberal share recycling of full value awards has decreased from 78% in 2020 to 70% in 2023. The same trend was observed for the liberal share recycling of appreciation awards, which decreased from 94% in 2020 to 90% in 2024.
One of the final enforcement actions announced during Gary Gensler’s tenure as SEC Chair highlights one of the many traps for the unwary when modifying stock awards. The Cooley PubCo blog describes this commonly considered scenario at issue in the enforcement action:
Celsius, a developer and seller of fitness energy drinks traded on the Nasdaq Capital Market, usually provided that unvested stock awards to employees and directors would be forfeited if the individual left the company. However, in the second and third quarters of 2021, the SEC alleged, for six departing employees and retiring board members, “Celsius accelerated the vesting periods or allowed vesting to continue past their departure date, so the stock awards to these individuals would not be forfeited or cancelled upon their departure.”
ASC Topic No. 718 governing Stock Compensation requires a revaluation of awards as of the date of any modification, which includes changes to the vesting terms. The SEC alleged that the company did not have adequate internal accounting controls to reasonably assure that any equity award modifications were properly accounted for and, as a result, no one “consulted” ASC 718 or took steps to ensure the modifications were accounted for in accordance with GAAP. This caused some issues:
In a current report on Form 8-K filed in March 2022, the company disclosed that its stock-based compensation expenses had been materially understated for two quarters, and that, as a result, Celsius had overstated net income by approximately 400% for the three months ended June 30, 2021, and understated net loss by approximately 130% for the three months ended September 30, 2021. In its 2021 Form 10-K, the company included restated financial information for the periods ended June 30, 2021, and September 30, 2021, which “caused Celsius’s previously reported net income to become a net loss for the three- and nine-month periods ended September 30, 2021.”
Anytime you’re considering changes to outstanding equity awards, it’s time to consult the accountants and lawyers. The proxy disclosure implications of modifying equity awards are discussed in the “Executive Compensation Disclosure Treatise” — including in the “Summary Compensation Table” Chapter and the “Equity Tables” Chapter.