One of the things I find tricky about the prescriptive rules governing the disclosure of executive compensation arrangements is their reference to and dependence on how stock and option awards are accounted for and reflected in the financial statements. The Summary Compensation Table Chapter of the Executive Compensation Disclosure Treatise has 170 references to ASC 718! So, when I saw that this BDO publication on ASC 718 had a section called “Accounting for Share-Based Payments In a Nutshell,” I picked it up to peruse!
Here’s its brief explanation of a difficult topic — modifying an existing award’s terms and conditions — from the “In a Nutshell” section:
– An entity may change the terms or conditions of an existing share-based payment award. An entity must account for a modification if it affects the award’s classification, vesting, or fair value.
– A modification to an equity-classified award is treated as an exchange of the original award for a new award with equal or greater value. If a grantee receives incremental value as a result of the modification, additional compensation cost is recognized on the modification date (for vested awards) or over the remaining vesting period (for unvested awards).
– A modification to a liability-classified award is remeasured based on the fair value of the award using the modified terms at the modification date and each reporting period thereafter, irrespective of whether the modification resulted in incremental value to the grantee.
Modifications that change an award’s vesting conditions affect the amount of compensation cost to be recognized based on whether the award is probable of vesting under its new terms. The accounting for a modification that results in reclassifying an award depends on the award’s classification before and after the modification.
At 258 pages long, the blueprint goes into much greater detail on this and other ASC 718-related topics.
Compensation Advisory Partners (CAP) recently reported on its review of CEO pay levels among 50 companies with fiscal years ending between August and October 2024. Here are some key findings from the report:
2024 median financial performance – as measured by revenue, earnings before interest and taxes (EBIT), and earnings per share (EPS) – was generally flat and consistent with 2023 performance.
Median CEO total direct compensation increased +9% year over year, driven by a +14% increase in actual bonus payout and a +7% increase in the grant-date value of long-term incentives (LTI).
For the second year in a row, median bonus payouts for CEOs were around target (i.e., 104% of target). Although financial performance was generally flat and annual incentive achievement was around target, CEO bonus payouts were up significantly. This is because, in general, companies with significant increases in bonus payouts (on average, approximately +280% increase) either rebounded from low payouts in 2023 or had continued sustained performance in 2024 and these increases were larger than the percentage change for companies that saw a decline in bonus (approximately 45%, on average).
It also found that approximately 25% of these companies adjusted an executive’s payout through individual performance or discretionary adjustments.
Less than half of the Early Filers use individual performance as a component of the annual incentive payout. Companies use individual performance to align the incentive payout with an executive’s contribution to the company and the results can raise or lower an executive’s payout relative to corporate performance.
Companies can also make discretionary adjustments to recognize overall company performance (more broadly than incentive plan metrics). Similar to individual performance, these adjustments may raise or lower the bonus payout. Only a handful of Early Filers made discretionary adjustments in 2024.
For 2025, CAP anticipates modest increases to CEO LTI given strong 2024 TSR performance, but they include cautionary notes. First, they say macroeconomic uncertainty is already impacting TSR (slightly down since September 30), and the unknown impact of tariffs means that some companies may have — and some companies may have not — incorporated tariff impacts in setting compensation metrics targets. My takeaway is that 2025 is going to be (already is) a very complicated and challenging year for incentivizing and retaining executives, disclosing decisions and garnering investor support for pay programs.
A few weeks ago, I recommended a few action items that can help you be prepared to implement your clawback policy in the unfortunate event your company determines that it needs to restate financials. Meredith has blogged about “the unlucky first few” companies that have had to analyze recoupment and make the required Item 402(w) disclosures. But now, a higher profile example has arrived, which will no doubt be a reference point for other companies that find themselves in this position.
You probably remember the news late last year about a “rogue employee” at a prominent retailer hiding over $150 million in cumulative delivery expenses over the course of nearly three years. At the time, the company disclosed that revisions should be made to its historical consolidated financial statements. The impact was not material to any prior period, but a correction was made in the Form 10-Q for the third fiscal quarter – which ended November 2, 2024.
This apparently constituted a “little r” restatement. Both “clawback”-related checkboxes were marked on the Form 10-K that the company filed a couple of weeks ago. Now, the proxy statement is also here, with the “recoupment” disclosure beginning in detail on page 88. Here’s an excerpt:
The financial performance metrics used to determine payouts under the 2023 annual incentive plan (“STI Plan”) were total revenue (40%) and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) (40%). Total revenue was not affected by the error correction. The performance metrics used to determine payouts under the 2021 – 2023 performance share plan (“PRSU Plan”) were digital sales (50%) and relative total shareholder return (rTSR) (50%) determined over a three-year performance period using the S&P Retail Select Industry Index as the peer group. Digital sales were not affected by the error correction.
The proxy goes on to describe the recoupment analysis for the relevant metrics. Because of the rTSR metric, the company engaged a third party to conduct an event study and estimate the effect of the accounting restatement on the incentive metrics for the PRSU element of compensation. The committee determined there was no erroneously awarded compensation for the PRSUs, but the STI payouts were a different story:
The erroneously awarded compensation pursuant to the 2023 STI Plan was paid to Covered Officers in cash, net of tax withholding, in April 2024. The aggregate amount of erroneously awarded compensation that remained outstanding at the end of fiscal 2024 was $609,613, and at April 1, 2025 was $352,093. The CMD Committee will seek to recover the remaining amount of the erroneously awarded compensation from Covered Officers in accordance with the Clawback Policy during fiscal 2025.
This disclosure illustrates that the clawback process may be well underway – and perhaps even complete – by the time it’s disclosed in the proxy statement. The company appears to have acted quickly here.
Although this is one of the first companies that has had to analyze and disclose a Dodd-Frank clawback, it won’t be the last. Now there’s an instructive real-world framework.
Back in December, ISS published an “executive compensation” FAQ to alert companies that it would be taking a closer look at performance-vesting equity disclosures in the upcoming proxy season, especially for companies that show a disconnect between pay and performance. For example, ISS wants to see disclosure of forward-looking goals and robust disclosure of closing-cycle vesting results.
Now, the proxy advisor has published a “proxy season preview” – which includes a reminder about this FAQ. The report also contains other governance and executive compensation predictions & recommendations. Here are a few compensation-related takeaways:
– Fewer boards are tasked with demonstrating robust say-on-pay responsiveness. Last year’s higher say-on-pay support levels overall means that fewer boards are tasked with demonstrating robust responsiveness to low vote results. Core pay-for-performance areas are expected to remain in focus, such as the proportion of performance-conditioned pay, goal rigor, clarity of disclosure, and one-time awards.
– Performance equity disclosure and design deficiencies will be subject to greater scrutiny going forward. Beginning with the 2025 proxy season, ISS will place a greater focus on performance-vesting equity disclosure and design aspects, particularly for companies that exhibit a quantitative pay-for-performance misalignment. Multiple concerns identified with respect to performance equity programs will be more likely to result in an adverse vote recommendation in the context of a quantitative pay-for-performance misalignment.
– Investors may see increases in security-related perquisites in 2025. As many companies reevaluate the need for new or enhanced security protections for their top executives in the wake of recent events, security-related perquisites are likely to come to the forefront for many companies. It remains to be seen what impact this will have for 2025 proxy disclosures or how investors will evaluate potential increases in such perquisites, which often include executives’ personal use of company aircraft.
– Investors should be on the lookout for new clawback disclosures. Most listed companies have now implemented clawback policies that comply with the final Dodd-Frank rule and corresponding listing standards. Many investors will be on the lookout for additional disclosures for companies conducting clawback analyses, particularly given that the 2025 proxy season marks the first year in which end-of-year pay decisions are expressly subject to potential clawback under the listing standards.
As Dave Lynn noted in this site’s January webcast on “Your Upcoming Proxy Disclosures,” ISS added the “performance-vesting equity” FAQ in connection with potentially softening its stance on the heavy use of time-vested equity in future policy updates. For more about this year’s proxy advisor policies, check out this 16-minute podcast that Meredith taped with Compensation Advisory Partners’ Shaun Bisman.
Pearl Meyer recently reviewed the first 100 proxies filed by S&P 500 companies in 2025. These proxies primarily report on 2024 compensation, although some companies also disclose what they plan to do in 2025. Here are the key takeaways:
– Median CEO total compensation was $17.7 million in 2024, reflecting a 9.8% rise over 2023, mostly driven by increases in short- and long-term incentive values.
– Performance-based stock awards continue to be the predominant long-term incentive vehicle. Relative Total Shareholder Return (rTSR) continues to be the most prevalent performance-based equity award measure, with 64% of the first 100 S&P 500 proxy filers using that measure in 2024.
– Security-related perquisites increased in prevalence, likely reflecting heightened board concerns over executive safety.
– Diversity-related incentive measures significantly decreased in prevalence as companies increased focus on financial and strategic measures of performance.
On security-related perks, the memo gives this additional color:
Among the first 100 S&P 500 proxy filers in 2025, there is early evidence of an increase in executive security-related perquisites. We found the prevalence of disclosed security perquisites for CEOs increased from 24% in 2023 to 31% in 2024.
Following the United Healthcare murder late in 2024, boards are increasingly concerned as to the safety of CEOs and senior leadership. We expect the prevalence to increase further in 2025 as several companies prospectively disclosed adoptions of security programs in 2025 that don’t yet show up as perquisites for 2024.
On diversity-related metrics, I blogged in February about how companies have been refining or removing these metrics over the course of the past 1-2 years. Here’s what Pearl Meyer found on that from the early 2025 proxy statements:
The significant increase in recent years in the use of ESG and, more specifically, diversity and inclusion measures in executive incentives appears to be reversing course, at least in part due to the current political and social environment. Among the first 100 S&P 500 proxy filers, the prevalence of diversity measures in incentive programs sharply declined from 65% in 2023 to 35% in 2024. We expect a further decline in prevalence in 2025 as several companies proactively disclosed discontinuation for 2025.
Compensation Advisory Partners recently reviewed annual & long-term incentive program designs at 52 tech companies – grouped by revenue size into “small,” “medium,” and “large” categories. Here are the key findings:
Annual Incentive Plans
– Revenue and profitability are the most common metrics
– Complexity of plans (i.e., number of metrics and use of non-financial measures, etc.) increases as company size increases
Long-Term Incentive Plans
– Use of performance plans is nearly universal among CAP’s sample
– TSR is the most prevalent metric among larger companies; smaller companies focus on growth measures such as ARR balanced with profit-based metrics
– Emphasis on performance-based equity grows as companies get further from IPO and grow in size
See the full memo for details on the number of metrics used, prevalence of specific metrics by revenue size, how companies are applying individual performance factors, and more.
This Seyfarth memo summarizes the guidance contained in the two documents and identifies several specific areas of potential concern, including diverse interview slate policies, employee resource groups with membership restrictions, segregated training and programming, and mentoring or networking programs limited to members of protected classes.
It also notes that the EEOC guidance emphasized that no general business interest in diversity will justify race-motivated employment actions, and also clarified the EEOC’s position on how Title VII applies to other aspects of workplace DEI initiatives and practices. Here’s what the memo has to say about the EEOC’s positions on “reverse discrimination” and mixed motives:
Broad Application of Title VII and Rejection of the Concept of “Reverse” Discrimination: The EEOC’s technical assistance confirms the well-understood principle that Title VII’s protections “apply equally to all workers” and that “different treatment based on race, sex, or another protected characteristic can be unlawful discrimination, no matter which employees or applicants are harmed.” The EEOC rejects the concept of ‘reverse discrimination,’ stating that “there is no such thing as ‘reverse’ discrimination; there is only discrimination.”
Mixed Motive: The EEOC’s technical assistance confirms its position that the mixed-motive standard under Title VII applies fully to DEI-related employment decisions. The document states plainly: “An employment action still is unlawful even if race, sex, or another Title VII protected characteristic was just one factor among other factors contributing to the employer’s decision or action.” It explicitly rejects the argument that discrimination occurs only when protected characteristics are the “but-for” or deciding factor, making clear its position that even partial consideration of race, sex, or other protected characteristics in DEI initiatives can create Title VII liability.
The memo says that the EEOC’s guidance likely foreshadows its upcoming enforcement initiatives and recommends that companies whose current or recent DEI practices may run afoul of this guidance should consider conducting privileged reviews of those initiatives.
Yesterday, I shared some compensation practices consistently utilized by enduring high-performing companies per WTW. The WTW article is quick to say that these practices might not fit your organization. That said, they recommend companies at least ask some questions and consider some lessons from the approaches taken by these companies. Here’s one of their suggestions:
Challenge yourself with questions such as:
– Could we reduce our number of performance metrics across both STI and LTI to optimize focus on what truly matters to strategy execution and value creation?
– Should we revisit our performance ranges and recalibrate our payout opportunities?
– Is our LTI vesting cycle sufficiently long?
– Could stock options (or another form of share-appreciation LTI) make sense as we expect renewed growth?
The answer to each could be “no” or “not now,” but asking these questions can be beneficial toward ensuring the pay program evolves in step with your organization’s strategy and performance journey.
Do the executive compensation programs of companies with TSRs that have consistently surpassed the broader equities market have any consistent, differentiating aspects? That’s the question WTW set out to answer in a recent look at how enduring high performers (defined as S&P 500 companies with TSR that outperformed the overall S&P 500 about 90% of the time in the past 10 years) pay their executives. And the answer is yes. This article says these companies “follow a path less traveled.” Here are some specifics:
EHPs leverage incentive compensation to provide for greater risk and reward potential via a greater emphasis on performance-based pay and more upside and downside potential in incentive payout curves. In EHPs, CEOs’ target total direct compensation comprises a higher portion in short-term incentives (STI) plus long-term incentives (LTI) than in the broader market
EHPs provide more leveraged incentive payout opportunities. (E.g., the average STI maximum payout as a percentage of target award is 200% in the broad market, whereas the average maximum payout among EHPs is 215%. At the bottom of payout curves, the broad-market STI threshold payout is, on average, 22% of target while the average EHP STI threshold payout is just 13%.)
EHPs seek focus by using fewer performance metrics and tend to encourage a longer-term perspective through longer LTI vesting. Whereas the number of STI metrics in the broad market is typically four or more, EHPs tend to use three or fewer STI metrics. Likewise, nearly half of companies in the broad market use three or more metrics for long-term performance plans (LTPP), while nearly half of EHPs use two metrics and about one-quarter use just one metric. EHPs also maintain longer LTI vesting periods.
For LTIs, EHPs apply greater emphasis on stock price appreciation by being more likely to use stock options. While the prevalence of time-vested restricted shares/units is lower among EHPs (68%) than other companies (75%), more EHPs (53%) use stock options than other companies (40%). We also observed that, while both EHPs and other companies typically grant stock options with a 10-year term, EHPs are more likely to use a seven-year term.
This recent blog from NASPP Director Barbara Baska discusses the various options and common approaches to equity award retirement provisions. She shares some helpful survey data if you’re looking to understand how your approach stacks up generally. (Note that the survey responses related to all employees receiving equity — not just the c-suite.)
Almost 75% of respondents to the NASPP/Deloitte Tax 2024 Equity Incentives Design Survey pay out performance-based awards to retires, while 65% pay out service-based full value awards and only 63% pay out service-based stock options/SARs.
When paying out equity awards to retirees, companies must decide between accelerating vesting or allowing awards to continue to vest as originally scheduled. For performance awards, the predominant practice is to pay out the awards to retirees only at the end of the performance period (i.e., continuing vesting). Acceleration is considerably more common for service-based awards. For full value awards, 27% of respondents to the 2024 survey accelerate vesting and 32% continue vesting. For stock options, 22% accelerate vesting and 38% continue vesting.
For service-based awards, companies are more likely to provide a full payout (45% for options and 38% for full value awards) than a pro-rata payout (15% for options and 21% for full value awards). Practices are more evenly divided for performance awards: 36% of companies provide a full payout and 34% pay out awards on a pro rata basis.
With respect to retirement eligibility, just over 40% of respondents to the 2024 survey require employees to achieve both a minimum age and minimum years of service to be eligible to retire. But this is less than half of companies—the other 57% of respondents are all over the map:
At 16% of companies, employees are eligible to retire when the sum of their age and their years of service equal a specified number (e.g., age + years of service = 70).
At 10% of companies, employees can be eligible to retire when they reach A) a minimum age with a specified number of years of service or B) an older minimum age regardless of their years of service. For example, employees might be eligible to retire when they are 50 and have 10 years of service or when they are 55.
Retirement eligibility is contingent only on age at 8% of companies.
The remaining 23% of companies use a variety of other approaches.