The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

January 8, 2025

Tomorrow’s Webcast: “The Latest – Your Upcoming Proxy Disclosures”

Tune in at 2:00 pm Eastern tomorrow – Thursday, January 9th – for our annual 90-minute webcast, “The Latest: Your Upcoming Proxy Disclosures.” We’ll hear from Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Goodwin Procter and TheCorporateCounsel.net and Ron Mueller of Gibson Dunn on a variety of compensation “hot topics” – including:

– Potential Impact of New Administration on SEC Rulemaking

– Potential Impact on Compensation Disclosure (Pay Ratio, Rule 701 and more)

– Evolution of Clawback Policies, Disclosures to Date and Clawback Mechanics

– Pay vs. Performance — Preparing for the First Year of Five-Year Disclosure

– Proxy Advisor Compensation Policy Updates

– The Key CD&A Topics and Tabular Insights

– New Item 402(x) and Equity Grant Policies

– Incentive Plan and ESG Metric Trends

– Compensation-Related Shareholder Proposals

– Planning for 2025 Say-on-Pay Votes

– Planning for 2025 Equity Plan Proposals

Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.

We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 90-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

This program will also be eligible for on-demand CLE credit when the archive is posted, typically within 48 hours of the original air date. Instructions on how to qualify for on-demand CLE credit will be posted on the archive page.

Liz Dunshee

January 7, 2025

The Pay & Proxy Podcast: “Considering CEO Equity in Pre-retirement Years”

As we kick off a new year, many people are reflecting on their goals and plans for the future. For your CEO, that may include retirement planning. And these days, that transition may come sooner than you expect!

According to a WTW memo that Meredith recently shared, CEOs have been retiring at younger ages in recent years. In addition to the obvious succession planning issues that this creates, there are also a few things that compensation committees can consider in order to optimize equity awards during an executive’s last few working years.

In the latest 10-minute episode of The Pay & Proxy Podcast, Meredith was joined by WTW’s Mike Oclaray and Kate King to discuss this topic. Tune in to hear:

– Statistics from five years of pay history for recently retired S&P 500 CEOs

– Why compensation committees should reconsider LTI strategy as CEOs near retirement

– Assessing existing equity awards to understand treatment on retirement and the value of in-flight awards that may be prorated or truncated

– Potential alternatives to consider in light of an impending retirement, including a larger grant, a change to pay mix or vesting or a special performance award

– A real-world example of improving CEO equity awards to sync with remaining tenure and align the CEO’s interests with those of the organization and shareholders

Check out this LinkedIn post from Aon’s Laura Wanlass for other things to consider around executive transitions. Thinking ahead about contracts and disclosures can help you avoid negative votes at your annual meeting.

Liz Dunshee

January 6, 2025

BlackRock’s 2025 Voting Policies: Compensation-Related Updates

In December, BlackRock published its voting guidelines that will apply to 2025 annual meetings – including updates to its guidelines for U.S. securities as well as its “Global Principles.”

BlackRock made only incremental updates to the policies that relate to executive compensation – and some changes may be articulating factors that the investment stewardship team was already applying in practice to its voting decisions. Nevertheless, if BlackRock holds significant voting power at your company, you may want to do the following:

– Check how your disclosures (and compensation committee discussions) stack up against BlackRock’s updated expectations.

– Consider submitting your equity plan for approval sooner than you otherwise would have.

– Warn your compensation committee members about BlackRock’s threat to vote against them for two new reasons: “imprudent use” of equity awards and option repricings.

Diving into the guidelines, here are the highlights for the compensation-related changes:

Focus on financial value: When it comes to linking pay to performance, BlackRock now specifies that it means “financial” value creation.

Your rationale for compensation decisions: New language encourages companies to clearly explain how compensation outcomes have rewarded performance (versus basing pay increases solely on peer benchmarking). The policy clarifies that companies should consider rigorous measure(s) of outperformance in addition to peer benchmarking.

Clawbacks: BlackRock built on its existing policy to say that it expects boards to exercise limited discretion in forgoing, releasing or settling amounts subject to recovery for executives and not to indemnify or insure executives for losses they incur.

Equity compensation plans: BlackRock added a new paragraph – “We find it helpful when companies submit their equity compensation plans for shareholder approval more frequently than required by listing exchange standards to facilitate the timely consideration of evolving plan governance practices. Particularly when share reserve requests grow significantly versus prior plans, boards should clearly explain any material factors that may potentially contribute to changes from the company’s past equity usage. We may support an equity plan share request if we determine that support for such plan is in the best interests of shareholders; however, we may also vote against members of the compensation committee to signal our concerns about the structure or design of the equity compensation plan or the company’s equity grant practices and the imprudent use of equity.”

Repricings: For option repricings and exchanges, the policy specifies that BlackRock may vote against members of the compensation committee where a board implements or approves a repricing or option exchange without shareholder approval. Where such a repricing or option exchange includes named executive officers, we may also vote against the company’s annual advisory vote on executive compensation. This builds on BlackRock’s existing policy of voting against equity plans that permit repricing without shareholder approval.

Liz Dunshee

December 19, 2024

CEO Pay: Say-On-Pay Didn’t Curb Growth, but Drove Pay-for-Performance Focus

This recent Pay Governance memo confirmed that now — well over 10 years into mandatory say-on-pay votes — increased shareholder democracy on executive compensation has still not had the effect of lowering CEO pay. (At least not to the extent intended. A recent academic study suggests that the say-on-pay vote lowers total CEO pay levels by about 6.6%.) Using a constant company sample of 166 companies in the S&P 500 over 2008 to 2022, Pay Governance research has shown that:

– CEO pay has continued to increase post-Dodd-Frank
– CEO pay increases were reflective of a 64% increase in revenue and more than doubling of market cap for a constant sample of S&P 500 companies over the same period

That said, there has been a significant shift in pay practices and focus on quantum of pay at certain levels:

– There’s a continued trend of pay compression at large public companies with significantly lower increases in pay at the 90th percentile than other percentiles (before SOP, CEO pay at the 90th percentile was 4.5 times the 10th percentile; more recently, that ratio is 2.5)
– S&P 500 CEO pay is significantly more performance-based (90% of CEO pay is now delivered in annual or long-term incentives versus 84% before SOP)
– The mix of long-term incentives has shifted significantly towards PSUs (from 34% before SOP to 63% today)

The article argues that the strong, typically 90+ percent average support for say-on-pay proposals validates the historical increases and today’s performance-based pay model.

Programming Note: I can’t believe I’m saying this, but this is our final post on The Advisors’ Blog in 2024 (barring any major developments)! Thanks for your participation in our sites this year – we couldn’t do this without you! I’m so thankful for this professional community, and my New Year’s wish for us all is more community — personal and professional! I hope I get to see many of you in 2025! Happy Holidays!

Meredith Ervine 

December 18, 2024

Perks: Latest Enforcement Action Provides Timely Proxy Season Reminder

Yesterday, the SEC announced that it settled charges against a company related to an alleged failure to disclose approximately $1 million worth of perquisites predominantly related to its CEO’s use of chartered aircraft. The SEC’s order against the company states that its process did not apply the “integrally-and-directly-related standard.” Instead, the company’s “system for identifying, tracking, and calculating perquisites incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure” and “incorrectly viewed the CEO’s business expenses to include expenses associated with the CEO’s personal flights, including transportation, meals, and hotel.” If this sounds familiar, it is!

In this case, the company discovered the error and revised its disclosure in a subsequent proxy statement:

On April 28, 2023, Express filed its fiscal year 2022 proxy statement, which, among other things, provided revised disclosures regarding perquisites and personal benefits provided to the CEO for fiscal years 2020 and 2021. Express also disclosed that the CEO voluntarily reimbursed the company approximately $454,000 for private air travel and expenses that were determined to be perquisites or personal expenses.

At the risk of sounding like a broken record, I’m going to share this reminder from the order:

According to the Adopting Release, “an item is not a perquisite or personal benefit,” and does not need to be reported, “if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.” The Adopting Release also states that “the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.”

According to the Adopting Release, even where the company “has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.” Indeed, “business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”

As always, the devil is in the details! For a refresher, check out the “Perks & Other Personal Benefits” Chapter of our Executive Compensation Disclosure Treatise — many pages are devoted to airplane use!

Meredith Ervine 

December 17, 2024

ISS: Updated Exec Comp FAQs Seek More Disclosure on Performance-Based Equity

On Friday, ISS posted updated FAQs on executive compensation policies (new and materially updated questions are highlighted in yellow). This follows an off-cycle update in October of this year, which noted that another update would follow in December. Question 46, addressing when a clawback policy is considered “robust,” is highlighted but unchanged from the October updates.

Here’s a paraphrased recap of the questions that were materially updated:

– Computation of Realizable Pay (Question 24): The realizable pay chart will not be displayed for companies that have experienced multiple CEO changes (2 or more) within the three-year measurement period. (This was previewed in October.)

Evaluation of Program Metrics (Question 39): While still not endorsing TSR or any other specific metric, ISS will consider the following factors when evaluating metrics: Whether the program emphasizes objective metrics that are linked to quantifiable goals, as opposed to highly subjective or discretionary metrics; The rationale for selecting metrics, including the linkage to company strategy and shareholder value; The rationale for atypical metrics or significant metric changes from the prior year; and/or The clarity of disclosure around adjustments for non-GAAP metrics, including the impact on payouts.

Changes to In-Flight Programs (Question 42): Consistent with a prior FAQ focused on COVID-era pay program changes, ISS still generally views changes to in-process pay programs (e.g., metrics, performance targets and/or measurement periods) negatively. Clear disclosure is expected addressing rationale and how the changes do not “circumvent pay-for-performance outcomes.”

Most importantly, ISS added the following new FAQ, which was also previewed by the proxy advisor when it announced the opening of the comment period on proposed changes to its benchmark voting policies:

ISS previously announced adaptations to the pay-for-performance qualitative review effective for the 2025 proxy season, relating to the evaluation of performance-vesting equity awards. What does this entail? (Question 34) 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. While ISS has historically analyzed the disclosure and design of incentive programs as part of the qualitative review, investors have increasingly expressed concerns with the potential pitfalls surrounding performance equity programs. As such, existing qualitative considerations around performance equity programs going forward will be subject to greater scrutiny in the context of a quantitative pay-for-performance misalignment. Typical considerations include the following non-exhaustive list:

– Non-disclosure of forward-looking goals (note: retrospective disclosure of goals at the end of the performance period will carry less mitigating weight than it has in prior years);
– Poor disclosure of closing-cycle vesting results;
– Poor disclosure of the rationale for metric changes, metric adjustments or program design;
– Unusually large pay opportunities, including maximum vesting opportunities;
– Non-rigorous goals that do not appear to strongly incentivize for outperformance; and/or
– Overly complex performance equity structures.

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.

Aon’s Laura Wanlass shared this helpful commentary on this new FAQ on LinkedIn:

ISS did signal proactively in previous weeks that there would be a requirement for more forward-looking goal disclosure at the onset of a performance period and it has been codified in FAQ 34. The middle ground practice has always been to commit to and actually disclose full performance plan design and outcome information at the conclusion of the performance period (i.e., some companies don’t give forward looking guidance and/or there are competitive harm considerations). I suspect this factor won’t be a deal breaker on a stand-alone basis but will likely require one or more additional issues from this new list of qualitative evaluation factors to drive a negative vote recommendation.

Yesterday, ISS also posted updated FAQ documents for equity compensation plans, the pay-for-performance mechanics, and the peer group methodology, with very minimal changes. With respect to equity compensation plans, I’m happy to report that the only highlighted FAQ reads: “For 2025, there are no new factors, and no changes to factor weightings or passing scores for any of the EPSC models.”

Meredith Ervine 

December 16, 2024

CEO Pay: Planning for Retirement

While a majority of companies don’t modify their CEO’s LTI vehicle mix or vesting schedules in the years leading up to retirement, this WTW memo makes the case for taking steps to “optimize” a CEO’s compensation before their pre-retirement years. Staying the course may not make much sense at a point when a CEO is a few years from retirement.

For example, assume a CEO annually receives grants comprised of PSUs (50%), stock options (30%) and RSUs (20%). Stock options with a standard 10-year term would be “out of sync with the remaining tenure” and don’t really have the intended effect of aligning the CEO’s interests with those of the company and shareholders.

After projecting the timeframe to retirement, assessing current equity award terms and estimating the value of in-flight awards that will be prorated or truncated, the article notes a few example alternatives to consider:

– A larger final equity grant made two or three years before retirement could continue to align your CEO’s pay with their final-years performance while effectively avoiding proration, truncation and/or lost value.

– A special performance-based grant could help to underscore and celebrate achievements toward the end of the CEO’s successful tenure.

– A change to the equity pay mix and/or vesting period could help to do the same.

In the above example, the article says, “it would be reasonable to grant no more stock options to the retiring CEO, while delivering final grants via PSUs and/or RSUs.”

Meredith Ervine 

December 12, 2024

Executive Security Arrangements: Disclosure & Tax Implications

I’ve previously described costs & disclosure approaches for executive security arrangements. Unfortunately, these arrangements are top of mind for many companies right now. This Baker McKenzie blog discusses the personal & corporate tax issues to consider if you are enhancing your security programs. And here’s a reminder that John shared yesterday on TheCorporateCounsel.net:

In light of the shocking murder of UnitedHealth’s CEO last week and the risk that similar events may occur in the future, many companies are enhancing security arrangements for their executives or establishing those arrangements for the first time. While companies may be inclined to conclude that these security arrangements are a necessary business expense, they need to be aware that the SEC typically views them as “perks” subject to disclosure in proxy materials.  This excerpt from Chapter 7 of our Executive Compensation Disclosure Treatise (available on CompensationStandards.com) explains the SEC’s position:

From the company’s perspective, [personal security] expense is integrally and directly related to the performance of its executives’ duties—necessary to ensure their safety, particularly where they frequently travel internationally or their celebrity makes them an inviting target for kidnapping or other personal injury.

Notwithstanding these beliefs, the SEC has expressly stated that it considers expenditures incurred to ensure the personal safety of a named executive officer to be a disclosable perquisite. Specifically, the SEC has held that business purpose or convenience does not affect the treatment of an item as a perquisite where it is not integrally and directly related to the performance by the executive of his or her job.

Accordingly, a company’s decision to provide an item of personal benefit for security purposes does not affect its characterization as a perquisite. For example, a company policy that for security purposes an executive (or an executive and his or her family) must use company aircraft or other company means of travel for personal travel, or must use company or company-provided property for vacations, does not affect the conclusion that the item provided is a perquisite or personal benefit.

Companies should also note that as part of its qualitative evaluation of executive comp programs, ISS has sometimes been critical of the amounts expended for executives’ personal security arrangements. Whether recent events will prompt the SEC to take a more nuanced position or ISS to reconsider what security expenditures should be regarded as “excessive” remains to be seen.

Liz Dunshee

December 11, 2024

More on “Dodd-Frank Clawbacks: Early Comment Letters Show Staff Scrutiny”

I blogged a few months back about comment letters that the Corp Fin Staff has started to issue for disclosures that may implicate a clawback recovery analysis. Although comment letters are always specific to the particular company and its circumstances, they also give the rest of us insight into issues that the Staff is prioritizing in its reviews. Now, more comments are rolling in. Here are a couple of tips based on recent correspondence:

– If you check the second box on your 10-K cover page, the Staff expects to see disclosure about a recovery analysis (see this comment letter).

– If you disclose a recovery analysis, make sure to include an Interactive Sata File in accordance with Rule 405 of Reg S-T (see this comment letter – and this FPI comment letter).

Liz Dunshee

December 10, 2024

Clawback Policy Trends in the “SV 150”

Wilson Sonsini has released its 2024 Silicon Valley 150 Corporate Governance Report, which analyzes governance and proxy season trends among the Valley’s largest public companies. Lots of interesting stuff in here – including commentary & data points for say-on-pay, pay ratio, perks, and pay versus performance. Beginning on page 55, the report looks at clawback policy trends in the SV 150. Here are a few takeaways:

– Companies that adopted the required new NYSE/Nasdaq clawback policy overwhelmingly kept those policies strictly on terms with the NYSE/Nasdaq requirements (although a handful went beyond, either in terms of officers covered or types of conduct that could result in a clawback). 

– Even companies with more than one clawback policy only filed the one required NYSE/Nasdaq policy with the 10-K — although surprisingly 7 companies that were required to file their policy missed the requirement altogether and didn’t file it (note to form checkers in 2025 . . .). 

– At least 67 of the companies kept their old clawback policy too and describe the terms in their proxy statement.

As we’ve noted, proxy advisors – and some investors – are now factoring the scope of clawback policies into their voting decisions.

Liz Dunshee