I’ve been meaning to share a few key takeaways from one of my favorite programs at the Northwestern Securities Regulation Institute back in January. This was a “spotlight session” on the topic of clawback policies – with Latham’s Michele Anderson, Perkins Coie’s Allison Handy, and Compensia’s Mark Borges, who is also an Editor for this site. When it comes to implementing your clawback policy, Mark commented that you probably don’t need to work through all of the detailed mechanics for recovery in advance – but at the same time, you don’t want to be caught flat-footed. The panel offered these ideas to be prepared:
– Know the players: Which company functions will be involved in the recovery process? Will you need to engage third parties? For example, if your awards include a TSR or stock price component, you may need to involve a valuation expert. It’s a good idea to make a contact list in advance for the people who will be involved. Also consider who from management will be in charge of gathering data, in light of potential conflicts of interest.
– Know your plans: Understand which plans and awards will be implicated in the event of a restatement, and which financial measures the awards are tied to.
– Know recoupment sources & restrictions: Have a sense of how you would source the recoupment (e.g., would the officers have unrelated unvested equity awards?), and how applicable state laws may affect your ability to recover certain types of compensation.
– Watch developments: Stay on top of interpretive guidance and filing trends, to get a sense of how practices develop in terms of sourcing the recoupment, timeframes, etc.
– Maintain documentation: Keep specific and detailed documentation. It’s likely that clawback decisions will be litigated by executives and/or shareholders. This risk increases in proportion to the amount at stake.
Allison also noted that because companies are required to “promptly” recoup erroneously paid compensation, it’s important to coordinate efforts between the audit and compensation committees if the possibility of a restatement comes to light. The compensation committee needs to be in the loop on materiality determinations and affected financial measures so that its implementation of the clawback policy isn’t unduly delayed.
For more “implementation” recommendations, see this blog from Meredith last summer and this hypo blog that I shared last year.
When it comes to evaluating the alignment of executive pay with company performance for purposes of structuring compensation programs, compensation committees have a number of tools available. This Pay Governance memo discusses the evolution of conducting “pay for performance” assessments – and how to choose the right tool for the job.
The memo recounts that early efforts of comparing pay to performance were based on the “Total Compensation” figure in the Summary Compensation Table – which wasn’t an accurate portrayal of what an executive was earning. Companies, shareholders, and consultants then developed their own models of “Realizable Pay” – which provided useful insight but was not calculated or disclosed in a comparable manner across companies. The memo explains the concept of Realizable Pay as:
RP is a relatively straightforward concept and includes the sum of actual cash compensation earned, the aggregate value of in-the-money stock options, the current value of restricted shares, actual payouts from performance-share or -cash plans, plus the estimated value of outstanding performance-share or -cash plans granted during the performance period being examined (typically 3-5 years). It is also assumed that all shares earned during the performance period are held until the end of the applicable performance period.
When performing a RP analysis, the CEO’s RP is compared to that of the RP of the peer companies’ CEOs to determine the subject company’s percentile rank. The company’s TSR (or any other appropriate financial measure) is also compared to the TSR of its peers to determine the company’s performance percentile rank. The resulting RP and performance percentiles are then compared to determine if there is an alignment of pay and performance. For example, 50 th percentile RP and TSR would indicate a perfect match of pay outcomes and performance. In practice, however, perfect alignment rarely occurs, but pay outcomes within certain ranges (for example, between the 40 th and 60 th percentile) would likely demonstrate sufficient alignment to the Board and shareholders.
Then, along came the PVP rules – with the “revolutionary” concept of “Compensation Actually Paid.” The Pay Governance team walks through the elements of CAP and how those compare to the corresponding elements of Realizable Pay. It’s very helpful for anyone looking for a deeper understanding of these calculations – and for determining which type of calculation is best for your committee to use.
When it comes to the question of the day – “Which is better?” – the answer is every lawyer’s favorite: “It depends.” Based on Pay Governance’s assessments of disclosures & performance, CAP can be a useful data point in assessing pay versus performance, and although it’s not as accurate as Realizable Pay, it’s also not as time-consuming and complex to calculate. Again, understanding the elements of these calculations can help you know just how closely your CAP measure would compare to Realizable Pay – i.e., “whether the juice is worth the squeeze.” The memo concludes:
Both RP and PVP have revolutionized the assessment of executive pay for performance that can be used to demonstrate alignment of pay and performance both internally and externally, rather than relying on a static assessment of pay for performance based on SCT grant values of equity incentives. Indeed, recent academic research suggests that the PVP data is already influencing investors’ voting preferences.
Whether to use RP or the PVP data to construct a shareholder outcome-based pay for performance analysis may depend on the degree of precision a compensation committee may require when assessing pay for performance, the relative importance of certain pay elements such as cash long-term incentive, and the level of effort the company wishes to expend to prepare the analysis, among other considerations. In either case, these methods are far superior to SCT compensation-based pay for performance analyses, which do not consider pay outcomes and can result in both false positive and false negative conclusions regarding pay and performance alignment.
In a recent “Deep Quarry” newsletter, Olga Usvyatsky shares some recent trends in clawback-related disclosures. She notes that only two of the about 250 companies that “checked the box” in 2024 actually sought to clawback excess compensation following a restatement. She surveyed a sample of about 30 recovery analysis disclosures and found four broad justifications companies cited for why no recoupment was necessary. Those are:
– The restatement did not affect the performance metrics used for compensation purposes (about 53% of the sample).
– No performance-based compensation was awarded during the applicable restatement period (about 13% of the sample).
– The restatement affected the performance metrics but did not affect the payouts (about 17% of the sample).
– A general statement that no recovery is required (about 17% of the sample).
The newsletter goes into greater detail on the last two cited reasons, which I’ve summarized below:
– Of the companies that noted that the restatement impacted the metrics but not payouts, she notes that three companies considered the impact of the restatement on TSR (all were “little r” restatements). Then she shares disclosure from one such company that determined that PSUs were still appropriately paid out at 200% based on relative TSR due to the company’s high level of financial performance even as restated.
– With respect to general statements that no recovery was required, Olga notes that numerous Corp Fin comment letters asked companies to elaborate on why no recovery was necessary.
The “Equity Compensation Plan Information” Table required by Item 201(d) of Regulation S-K is a bit of a trap for the unwary. Here’s why:
10-K: The equity compensation disclosure required by Item 201(d) is to be included each year in a company’s annual report on Form 10-K. Item 5 of Form 10-K says to furnish the information required under Item 201, and Item 12 says to furnish the information required under Item 201(d). CDI 106.01 clarifies that Item 201(d) disclosure should be included in Part III, Item 12 when included in the 10-K.
Proxy Statement: When shareholder approval of a compensation plan is sought, Item 10(c) of Schedule 14A requires Item 201(d) disclosure in the proxy statement. Companies may voluntarily provide this disclosure in the proxy even if there’s no plan proposal, and CDI 106.01 clarifies that a company may rely on General Instruction G.3. to Form 10-K to incorporate Item 201(d) disclosure by reference to a proxy statement — even if the company is not seeking shareholder action on a compensation plan at its annual meeting. (Note that the 10-K disclosure requirement is NOT dependent on whether compensation plan approval is being sought.)
When you don’t see the Item 201(d) table in a proxy statement, this means you can’t “check the Item 201(d) box” on your proxy form check just by confirming there’s no plan proposal. Go check the Form 10-K for the Item 201(d) table. If it wasn’t there, it should be in the proxy statement, even if the company isn’t submitting a plan proposal at the annual meeting.
I must admit that I’ve had trouble keeping up with the status of tariffs. Yesterday, when I read this Semler Brossy article about incentive program impacts, I had to quickly check where things stood. Semler Brossy says this uncertainty — from the back and forth among governments — is all the more reason that boards and compensation committees need to develop a framework for responding to tariffs (from a compensation perspective) before they are announced.
That framework needs to address in-flight incentives — where any adjustments will attract criticism — and new awards — where it is “easier to justify taking tariffs into account in goal setting.” Generally investors “view tariffs as having an operational impact that businesses are expected to work through” and expect companies to “adjust operations and not accounting.” And, while the level of uncertainty may be too great to address tariffs in goals today, boards still need to be doing the following in the short term:
Discuss the possible scenarios where adjusting incentives may be necessary. No matter what happens in the future, the committee can build consensus about how to plan for future actions when and if tariffs are imposed and outline likely scenarios where tariffs may require a change to incentive plans.
Size potential adjustments. Following alignment on a framework, estimate the cost of any changes and their resulting impacts under various tariff scenarios outlined above.
Build flexibility into existing plan language. This ensures appropriate discretion/actions can take place should an adjustment be deemed necessary.
Conduct a deep dive into the existing incentive plans. Keep an eye on ways incentive plans might be made more durable. This could be by adding emphasis on relative metrics, expanding threshold and maximum goal ranges, or adding an additional operational modifier that allows for subjective year-end assessment (note: this list is non-exhaustive).
The article goes on to provide a flow chart that could guide decision-making when a compensation committee considers whether adjustments to in-flight awards should be made.
A PvP comment letter and related response made public on EDGAR in December (hat tip to Ali Nardali of K&L Gates for sharing this letter!) appears to provide additional color on Regulation S-K CDI 128D.11. This CDI was one of the more surprising of the 15 PvP CDIs the Staff published in February 2023. It indicated that the Company-Selected Measure could not be measured over a multi-year period that includes the applicable fiscal year as the final year.
The January-February 2025 issue of The Corporate Executive includes the article “Pay Versus Performance Disclosure: Lessons from SEC Comment Letters.” Here’s a blurb about this comment letter from the article.
In a September 2024 comment letter issued to First Horizon Corporation, the Staff […] pointed to this CDI.
“We note your disclosure under your pay versus performance table that the amounts shown for your Company-Selected Measure, A-ROTCE, are shown as averages for the three-year performance period ended with the relevant fiscal year. In future filings, please ensure that the quantified performance information regarding your Company-Selected Measure is not measured over a multi-year period. Refer to Item 402(v)(2)(vi) of Regulation S-K and Regulation S-K Compliance and Disclosure Interpretation 128D.11.
For example, if, in your assessment, A-ROTCE represents the most important financial performance measure used to link compensation actually paid to your named executive officers, for the most recently completed fiscal year, to company performance, please present the A-ROTCE results on a single-year basis for each individual year presented in your pay versus performance table, even if you use the measure as part of a multi-year compensation program.”
In response to the comment, the company agreed to present the Company-Selected Measure as a single-year measure, and not as a multi-year measure, and that single-year presentation would be followed in all tables and charts that disclose or analyze the Company-Selected Measure. However, it went on to note that, in practice, the Company-Selected Measure was actually used by averaging three consecutive annual numbers and that the company intends to continue to provide narrative disclosure explaining how the measure is used and how its actual use differs from the single-year data required to be presented for purposes of Item 402(v)(2)(vi) of Regulation S-K.
The article notes that many companies initially intended to use a measure from their long-term incentive program as the Company-Selected Measure. But then CDI 128D.11 was released, which most companies read to mean that the Company-Selected Measure could not be a multi-year measure, so they opted to use a financial performance measure with a one-year performance period from the annual cash incentive program instead.
This seems to suggest that Regulation S-K CDI 128D.11 was meant to limit the presentation of the Company-Selected Measure to performance against that Measure over the applicable fiscal year — not intended to prohibit the selection of a measure that is used and measured over a multi-year period in the compensation program as the Company-Selected Measure. However, that selection might seem counterintuitive where a one-year measurement period does not sync with how the company measures its metrics for long-term compensation.
With the number of subsections that have been tacked onto Item 402 through the years, it can be easy to forget Item 402(s) as you’re wrapping up your proxy statement. That Item says that to the extent that risks arising from a company’s compensation policies & practices – for executives and/or other employees – are reasonably likely to have a material adverse effect on the company, the company must discuss its compensation policies & practices as they relate to risk management practices and risk-taking incentives.
Whether or not a company determines that there is a material risk that triggers this public disclosure, it’s important to conduct and document the assessment that led to the conclusion. That helps those of us reviewing disclosures ensure there’s support for what the company does – or doesn’t – say, and if something goes sideways in the future, it can help the company avoid or defend against claims that this disclosure was improperly omitted or inaccurate. This ClearBridge memo lays out the four key steps for conducting the assessment:
1. Identify compensation program features (“compensation principles”) that either can encourage excessive risk-taking or can mitigate against excessive risk-taking (see next page for examples)
2. Review all employee compensation plans and policies (not just executive officer plans and policies; should also include sales/commission/other plans)
3. Review company’s business risks (e.g., risk factors disclosed in company’s 10-K) and identify compensation principles related to these business risks
4. Assess the company’s business risk and compensation program relative to compensation principles
5. Determine potential implications for the compensation program going forward
The memo goes on to provide examples of practices that may encourage more risk-taking. The SEC rules don’t forbid companies from having risk-promoting incentives, but you would need to consider whether the compensation-risks are reasonably likely to have a material adverse effect. If the answer to that question is “yes,” you then need to disclose how you manage those risks.
Last month, the Corp Fin Staff issued guidance on beneficial ownership reports, which you may think has nothing to do with compensation. But as we’ve noted over on TheCorporateCounsel.net, fallout from this guidance is disrupting the willingness of some asset managers to engage with companies in which they have a significant ownership interest, as they take time to analyze whether doing so could affect their reporting requirements.
Against that backdrop, although the biggest asset managers BlackRock and Vanguard have resumed engagements, this Cooley memo points out that companies that are trying to demonstrate responsiveness to a prior-year low say-on-pay vote may still find it difficult to get investor meetings on the calendar at this stage of the game. If that applies to you, the Cooley team suggests considering:
– Outreach to a broader and different set of shareholders (including less than 5% holders).
– Taking extra care to disclose their executive compensation programs in their proxy statement in a persuasively favorable manner that relies less heavily on the nature and consequences of their shareholder outreach efforts.
– Alternative means of disclosing information, such as filing additional soliciting materials and pointing investors to that information.
I blogged yesterday about the annual update to State Street Global Advisors’ voting policy. As I mentioned, there were no changes to the description of factors that SSGA considers in its say-on-pay analysis, but the policy no longer says what happens if SSGA determines that pay & performance are misaligned. Dave shared a similar shift about board diversity yesterday on TheCorporateCounsel.net.
Bigger picture, as Dave mentioned in his blog, and as called out in the “Introduction to the 2025 Proxy Season” published by SSGA along with its new policy, these are only a couple of examples of SSGA continuing to describe certain expectations for disclosure, etc. – but the policy no longer indicating what happens if a company falls short. Except with respect to whether it will support certain shareholder proposals, SSGA has moved away from “specific potential voting outcomes.”
Compensia’s Hannah Orowitz reached out to highlight another example – which compensation committee chairs will want to know. When it comes to publishing EEO-1 reports, the 2025 policy says:
We expect disclosure on the composition of both the board and workforce.
Previously, the policy had said that SSGA may vote against the chair of the compensation committee at companies in the S&P 500 that don’t disclose their EEO-1 reports. SSGA had also encouraged non-U.S. companies to disclose EEO-1 information in alignment with SASB guidance and nationally appropriate frameworks.
Without the bright line voting standard, it’s unclear what will happen if a company fails to comply with policy expectations. The jury is out on whether that’s a good or bad thing for companies – though some are predicting that we may see a broader pullback in transparency. It’s also possible that the general “anti-diversity” environment will discourage some employees from even participating in demographic surveys. If that happens, companies will need to continue to consider whether the data they publish is an accurate representation (or has appropriate disclaimers), and investors will need to continue to consider whether the data is useful.
For now, though, it’s unlikely that calls for workforce demographics will completely disappear. For example, SSGA’s policy continues to list publication of workforce and board demographics as a factor in its assessment of proposals that call for enhanced DEI disclosures, although this year’s policy does not go into as much detail as last year’s as to what that disclosure should look like.
SSGA also considers the role of the board in overseeing workforce demographics, DEI-related efforts, etc. in assessing other disclosure-related proposals, including on the topics of human capital management, DEI, pay equity – but some companies may have more flexibility in responding to proposals than in prior years. That’s because for all disclosure-related shareholder proposal topics that the policy covers, SSGA says it will only assess the proposal if the company has determined the topic is material:
As outlined above, the pillars of our Asset Stewardship Program rest on effective board oversight, quality disclosure and shareholder protection. We are frequently asked to evaluate proposals on various topics, including requests for enhanced disclosure. Where a company receives a proposal on a topic that the company has determined is material to its business, we will assess the proposal in accordance with the below criteria that we believe represent quality disclosure on commonly requested disclosure topics. In each case, in assessing the proposal against the applicable criteria, we may review the company’s relevant disclosures against industry and market practice (e.g., peer disclosure, relevant frameworks, relevant industry guidance).
Late last week, State Street Global Advisors published the annual update to its “Global Proxy Voting & Engagement Policy” – which will apply to 2025 annual meetings. Dave blogged about the governance-related changes today on TheCorporateCounsel.net.
As Dave noted, and as Meredith shared over on TheCorporateCounsel.net a couple weeks ago, recent guidance from the Corp Fin Staff about beneficial ownership reporting recently caused certain other asset managers to evaluate their engagement practices – and at the same time, biginvestors and proxy advisors are defanging some of their voting policies. For SSGA, the cover page notes:
When engaging with and voting proxies with respect to the portfolio companies in which we invest our clients’ assets, we do so on behalf of and in the best interests of the client accounts we manage and do not seek to change or influence control of any such portfolio companies. The State Street Global Advisors Global Proxy Voting and Engagement Policy (the “Policy”) contains certain policies that State Street Global Advisors will only apply in jurisdictions where permitted by local law and regulations. State Street Global Advisors will not apply any policies contained herein in any jurisdictions where State Street Global Advisors believes that implementing or following such policies would be deemed to constitute seeking to change or influence control of a portfolio company.
This year’s policy also clarifies that, while SSGA uses ISS for vote execution and administrative services, it doesn’t follow the voting recommendations of ISS or any other proxy advisor. When it comes to executive compensation, SSGA’s policy was already pretty high-level, and SSGA didn’t change the description of expectations and factors it considers in its “say-on-pay” assessment, which is in line with how Vanguard handled this year’s (minimal)updates on this topic. SSGA’s “Board Accountability” policy continues to say:
We consider it the board’s responsibility to determine the appropriate level of executive compensation. Despite the differences among the possible types of plans and awards, there is a simple underlying philosophy that guides our analysis of executive compensation: we believe that there should be a direct relationship between executive compensation and company performance over the long term. Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance. When assessing remuneration reports, we consider factors such as adequate disclosure of various remuneration elements, absolute and relative pay levels, peer selection and benchmarking, the mix of long-term and short-term incentives, alignment of pay structures with shareholder interests, as well as with corporate strategy and performance. For example, criteria we may consider include the following:
• Overall quantum relative to company performance
• Vesting periods and length of performance targets
• Mix of performance, time and options-based stock units
• Use of special grants and one-time awards
• Retesting and repricing features
• Disclosure and transparency.
The change this year is that the policy no longer expressly states what happens if the SSGA team believes that pay is misaligned. Previously, the policy specified the potential consequence of voting against say-on-pay and/or members of the compensation committee. It’s too early to know whether this means SSGA will take a lighter touch in its compensation reviews, compared to past practices. Here’s how it voted in 2023, for reference, according to the stewardship report published last year:
In 2023, for example, we voted against executive compensation at a company because the portion of long-term compensation linked to performance outcomes was too low.
In 2023, there were 22,164 proposals on compensation practices or policies across our global investment portfolios. This represented 11 percent of all proposals that we voted on in 2023. In 2023, we supported approximately 77 percent of pay-related proposals, compared to 78 percent in the previous year.