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.
CEO pay tends to get the most attention from investors, proxy advisors, and the media – but when it comes to company performance, it’s obviously also important to keep the rest of the C-suite happy and properly incentivized. Especially because many companies say they consider “internal pay equity” when determining compensation. The Conference Board recently compared CEO total compensation to other key positions in the S&P 500 and Russell 3000. Here are the key findings:
– Between 2020 and 2024, the gap between total CEO compensation and non-CEO executives narrowed in the S&P but widened in the Russell 3000.
– There are substantial role variations by industry in the pay ratios of other executives to the CEO; for instance, for all NEOs in the Russell 3000, the differences are widest in materials, industrials, and utilities.
– In the Russell 3000, median total compensation for all NEOs does not exceed 50% of CEO median total compensation in any industry—although a small number of individual C-Suite positions in certain sectors do surpass this threshold.
– Gender pay gaps were smaller in the Russell 3000 but more pronounced in the S&P 500, with woman CMOs, in particular, earning significantly more than their men counterparts.
The positions included as part of The Conference Board’s analysis included CFOs, CLOs, COOs, CHROs, CMOs and NEOs as a whole.
A big insurance company is getting a bit of positive press for its announcement that it would incorporate customer satisfaction metrics into its incentive plan. As I’ve previously noted, it’s not uncommon for a company to include this type of metric in its executive compensation program. Info gathered by The Conference Board from 2024 proxy statements confirms this:
For example, in both the S&P 500 and the Russell 3000, emissions reduction and DEI metrics are both more commonly measured using a strategic scorecard approach, while customer satisfaction and employee health and safety metrics are more commonly included as a standalone metric, and cybersecurity is most commonly an individual performance assessment. These findings reflect executive-specific and company-wide responsibilities.
What is a little different here is that the initiative is responsive to an issue the industry is facing – and the company is committing to public updates on the overall strategic goal. The company has established 5 areas for improvement and says it will publish an annual “Customer Transparency Report” to make its progress toward its commitments clear. When it comes to the details of the compensation metric, the company’s proxy statement says that this metric is a component of the 2025 annual incentive plan. Strategic priorities are weighted at 25% for that plan, and within “strategic priorities,” customer and patient satisfaction is weighted at 15%, with this quantitative measurement:
Customer Net Provider Score (NPS) and progress on customer experience measures related to perception of value, ease of accessing care, and ease of interaction
On a more general note, I haven’t seen as much commentary this year on ESG metrics. Part of that may be due to shifts in the political environment, and part of that may be that these metrics have been normalized and there’s not as much to say. The report that I mentioned above from The Conference Board analyzed nuanced trends based on 2024 proxy statements. It will be interesting to see whether companies move away from and/or change their metrics over time – but we won’t have market-wide data about our current “moment” until after the 2025 (or even 2026) proxy season.
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.