Due to security concerns, some public companies engage and pay for personal security services for their CEOs and other senior executives and also require their executives to use company aircraft for personal travel. In addition to their typically higher profile, public companies may also have heightened security concerns for their executives since Regulation FD often requires them to disclose their executives’ involvement in certain public events.
Companies are reassessing their security arrangements and other measures they take to protect the safety of their executives following the December 2024 shooting of the CEO of UnitedHealthcare. We’ve recently posted a new “Checklist: Executive Security” that addresses the following topics — all of which boards and management teams should be aware of as they consider changes to executive security programs:
– Recent trends in personal security spending by public companies
– Additional steps companies are now considering to minimize risks to their management teams
– Board fiduciary duty considerations
– SEC disclosure requirements
– Institutional investor and proxy advisor positions
– Tax and benefit implications of personal security arrangements
We also have related law firm memos posted in our “Management Perks” Practice Area.
As John shared yesterday on TheCorporateCounsel.net, Goodwin recently published its 2025 Proxy Statement Form Check. In addition to providing a chart laying out relevant Schedule 14A & Reg S-K line-item disclosure requirements, the document includes a detailed discussion of new and revised disclosure requirements that will apply to this year’s filings. The document also addresses certain “less than annual” disclosure requirements like say-on-pay frequency and CEO pay ratio.
Make sure to check out the SEC Compensation Disclosure Worksheets — one for SRCs/EGCs and another for all other companies — intended to assist companies with preparing proxy statement executive compensation disclosures. There is also a separate one for PvP disclosures. You can find these and other resources in our “Tabular Disclosures” and “Proxy Season Developments” Practice Areas.
This memo from Meridian Compensation Partners highlights some key issues that compensation committees need to pay attention to in 2025. They include business and political volatility, regulatory change, an expected increase in M&A, retention amidst uncertainty, and planning for executive retirement.
With respect to managing volatility, the memo says, “supporting the opportunistic behavior that can benefit the company and its investors may require more incentive design flexibility to appropriately reward executive leaders who can deliver business results, potentially in unconventional ways.” It suggests compensation committee evaluate each of these areas:
– Performance Metrics: Are the metrics used in the short-term and long-term incentive plans appropriate? Do they allow executives flexibility to drive the company’s success and adapt to a changing environment?
– Goal Setting: Given political uncertainty with the new administration, including potential tariffs and retaliatory tariffs companies should consider appropriate goals and what adjustment could be made for changes in public policy after the start of the performance measurement period.
– Goal Ranges: Does the expected volatility make the level of achievement less sure? If so, is it appropriate to expand the range around target goals? Or is it better to establish a target that is more likely to be achieved and tighten the payout range to limit the upside and downsides?
– Performance Measurement Periods: Given the business environment and potential limitations on the company’s ability to predict business activity over the next several years, a company may consider a shortened performance period, even though proxy advisors and many institutional shareholders prefer a three-year performance period.
– Adjusting Metrics and Use of Discretion: Have the appropriate non-reoccurring events been identified and defined for adjustment. Should the company establish principles to govern adjustment of payouts based on unanticipated events not included in the budget-setting process?
As Meredith noted last fall, there’s been a general sense that some companies would revisit DEI metrics in the wake of the June 2023 SCOTUS decisions on the Students for Fair Admissions cases. This WSJ article says that 2023 was the first time since at least 2019 that the percentage of S&P 500 companies using DEI metrics dropped compared to the prior year. And now, in light of recent developments, many companies are taking yet another look at these programs.
Companies aren’t necessarily abandoning the overall concept of diversity, according to the article, but they may be shifting incentives to promote other types of metrics. In some cases, changes may be due to the fact that they have gained a better understanding of how to promote beneficial types of diversity that support business goals. The Journal shares a few examples of how companies are refining comp programs:
– A financial services company dropped financial incentives related to diversity and inclusion. The company started adding diversity goals to executive compensation plans in 2018 so that certain performance-based payouts increased or decreased by as much as 10% depending on the change in representation among senior management of people of color, women, veterans and LGBTQ and disabled people. It said last year in a regulatory filing that the compensation incentive was no longer necessary because the company had significantly increased diversity since introducing the tie to pay.
– An electric utility company reduced the impact of DEI metrics in executive bonuses, saying it needed to offset increased weighting for operational targets. A range of criteria that included hiring women, people with disabilities, veterans, LGBTQ workers and those from racial and ethnic minorities accounted for 10% of a business leader’s 2023 cash award, described in the company’s most recent proxy, down from 15% a year earlier. The company said [in its 2024 proxy statement] that it was continuing to focus on its DEI culture and priorities.
– A medical technology company changed the metrics for annual cash awards. Just over a year ago, the company said certain targets, including companywide inclusion and diversity goals, could boost executives’ annual awards by as much as 5%. Now, the targets are instead built into individual goals.
Other companies are framing the goals differently, to explain why retaining different perspectives is valuable to the business and incentivized – but not tying that concept to demographic characteristics. We’ll get more visibility in the next few months about other changes made during 2024, and perhaps some companies will also preview what they’re doing for 2025.
We spend a lot of time around here talking about say-on-pay votes. Even though they are non-binding advisory resolutions, one reason it’s important to make a strong case for say-on-pay in your proxy statement is because a negative result can be “blood in the water” for activists. In this blog from Meredith on our DealLawyers.com site, she elaborates on how pay concerns can be used against companies in proxy contests:
This recent alert from Compensation Advisory Partners updates research from 2015 on how often and when activist investors raise issues with executive pay during proxy contests. In 48 contests at Russell 3000 companies, CAP found that executive pay concerns were identified by the activists in 23 of those contests and that activists have raised concerns about compensation in about half of proxy contests annually for each of the last five years. Typically, pay concerns are included as evidence of issues with the company’s strategic direction:
Data indicates that executive compensation was often tied to broader concerns about the companies’ strategic direction, operational execution, and financial performance. Essentially, executive compensation disagreements were not the main and sole rationale for engaging in the contest. Instead, activist investors use these disagreements to highlight deeper underlying concerns with a company’s direction or performance to induce change.
For instance, if total shareholder return (TSR) is not used as a performance metric while the company has faced a prolonged period of shareholder value decline alongside rising CEO compensation, activist investors will highlight these issues as signs of a flawed business strategy and misaligned incentive structures. In many cases, concerns about executive compensation support their broader calls for leadership changes, strategic adjustments, and stronger governance practices.
Not surprisingly, the most commonly cited issue was pay-for-performance misalignment (91% of the time). But other issues were cited as well, including:
– Excessive CEO pay (57%)
– Weak corporate governance structures (26%)
– Outsized peer comparisons (17%)
– Performance metric adjustments (17%)
– High dilution (13%)
– Excessive perquisites (13%)
– Long-term incentive plan design (13%)
– High director compensation (9%)
– Lack of disclosure (9%)
– Excessive change-in-control provisions (9%)
If you work with life science companies – especially those in the development stage – you know that executive compensation arrangements look quite different from what you see in the S&P 500. Two recent articles from Aon (available for download) give helpful info about trends.
One memo looks at usage of options vs. RSUs. The other covers special performance-based awards – including metrics, performance periods, participation, and payout curves. Here are a few observations about performance metrics:
● On average, companies use 1.4 metrics.
● It is common for development and early-stage commercial companies to use milestone-based goals in special LTI plans, often those which are tied to a successful data read-out. As these goals are generally binary, the milestone is either achieved or not.
● Late development stage and early-stage commercial companies generally use hurdle-based plans tied to achievement of specific stock prices or financial goal (typically revenue) in special LTI plans. The underlying goal is commonly aligned to a value inflection point.
● Mature commercial companies tend to have better visibility into their financial performance, which is why they use a PSU design tied to their LRP.
Here’s the latest 151-page guide for compensation committees from Wachtell. This year’s guide addresses a number of developments, including the newly-required disclosure regarding the timing of option grants, the expanded definition of “covered employees” under Section 162(m) that will become effective for tax years beginning after December 31, 2026 and the increased focus on disclosure of performance-vesting equity and clawback policies that go beyond Dodd-Frank requirements in the proxy advisors’ most recent voting guidelines. The guide’s excellent summary of the proxy advisors’ voting guidelines concerning executive compensation practices is definitely worth a look.
As usual, the guide includes a sample “Compensation [and Management Development] Committee Charter” as an exhibit, although it notes, “It would be a mistake for any company to simply copy published models. The creation of charters requires experience and careful thought . . . we recommend that each company tailor its compensation committee charter and written procedures to those that are necessary and practical for the particular company.”
This blog from Meridian Compensation Partners walks through two main approaches that companies can leverage — either together or independently — to start the process of determining the right size for a new share pool request. One looks internally — what the company needs — and the other looks externally — what proxy advisors and investors will expect. Ultimately, most companies will need to closely assess both, but the blog notes situations where companies may focus more on one than the other.
– Ground-Up Approach: This method involves calculating the projected annual equity value needed for grants, typically guided by burn rate, historical share usage and/or peer and market benchmarks. The projection is then scaled to cover the desired number of years the share pool should last (external stakeholders generally prefer a share request sufficient for 2-3 years).
This approach may be suited for companies with controlled ownership, moderate share pool needs, strong shareholder relations, or no major strategic changes anticipated.
– Directive Approach (based on Shareholder and Regulatory Expectations): Institutional shareholders and proxy advisory firms, such as ISS and Glass Lewis, have guidelines on acceptable burn rates, dilution levels and share pool sizes. Aligning with these guidelines can help companies gain shareholder support for additional shares, especially when share pool requests are sizable.
Situations where this may be appropriate include: companies with meaningful institutional shareholder ownership; and companies that require a significant increase in the share pool, or that have major plan provisions not aligned with shareholder interests.
The blog also discusses factors that will influence the company’s assessment under the Directive Approach — including the impact that plan design may have on the ability to get the increase approved — reiterating a note I shared in January that certain provisions that provide flexibility to the compensation committee continue to be popular with companies despite being disfavored by the proxy advisors.
ClearBridge recently released its survey of annual incentive plan practices based on disclosures in 2024 proxy statements filed by companies in the ClearBridge 300 (100 companies in the S&P SmallCap 600 Index, 100 companies in the S&P MidCap 400 Index and 100 companies in the S&P 500 Index). Here are some key findings from the report:
– 93% of companies use a formulaic annual incentive plan.
– Most companies used two to three performance measures in their annual incentive plans, with three being the most common across all market caps. This represents an increase in recent years mostly because of an increased use of a “scorecard” approach.
– In 2024, financial metrics represented 79% of weighting for CEOs, and non-financial metrics represented 21%.
– The most common threshold payout opportunity was 50% of target, but there is a growing trend among large-cap companies to use lower threshold payout opportunities (25% or less) to provide downside protection for below-target results.
– Maximum pay was most commonly set at 200% of target, with small- and mid-cap companies setting maximum opportunities at less than 200% more frequently than large-cap companies.
It’ll be particularly interesting to see how the use of non-financial measures continues to evolve from this report to the next report, which I believe will be on 2026 proxy disclosures.
Managing the process of granting equity awards to employees in the U.S. alone is already a huge compliance effort, but multiply that by 10+ for multinational companies that grant awards to employees around the world — navigating many securities, tax, data privacy, etc., regulatory regimes. If you administer a global equity plan, this DLA Piper alert gives a select overview of recent changes in various countries that could impact your compliance:
China: Extension of preferential tax treatment and new SAFE reporting requirements. The preferential tax treatment for equity awards granted by publicly listed companies to employees in China under Notice 35 has been extended until December 31, 2027. This extension allows equity income to be taxed separately from other compensation and taxes to be calculated pursuant to a specific formula. Companies should also be prepared to comply with the new monthly exchange control reporting requirements imposed by some local SAFE offices, which require reporting of equity transaction data, assets, and liabilities via the AS-One system online before the 15th of each month.
Germany: Changes to the one-fifth rule for equity awards. Effective January 1, 2025, tax treatment of certain equity awards are subject to change. German employers are no longer required to apply the “one-fifth rule” for the taxation of equity award income. Employees may still claim the benefit in their individual tax returns, although the employer should report what equity award income is eligible for the benefit in the employees’ annual wage certificate. Employers should update their withholding processes and employee communications accordingly to reflect this change and are encouraged to inform employees of how to claim the benefit on their own.
India: Offset of tax collected at source (TCS) against salary withholding. From October 1, 2024, Indian employers may be able to offset tax collected at source (TCS) paid on outbound remittances against tax withholding on salary (TDS). The government is expected to issue detailed rules and procedures to facilitate this offset, allowing employers to reduce the TDS by the amount of TCS already paid. This development is expected to enhance the financial management of equity plans and provide relief to employees. Employees may still be able to obtain a refund for any TCS paid in connection with participation in an employee share plan in their tax return for the 2024/2025 fiscal year.
Israel: Enhanced reporting requirements for equity plans. Starting January 1, 2025, the Israeli Tax Authority (ITA) will enforce new rules for filing and reporting equity plans under Section 102 of the Income Tax Ordinance. Companies must now complete a comprehensive questionnaire as part of the filing process, which includes detailed representations about the equity plan. Additionally, the ITA will require annual and quarterly reports for both trustee and non-trustee plans, detailing grant activities, employee statuses, and tax calculations. To facilitate compliance, the ITA will introduce electronic filing systems for these reports, aiming to streamline the process and ensure accurate data submission.
Moldova: New legal provisions for stock options grants. For equity incentive plans adopted on or after January 1, 2025, the Moldovan Fiscal Code includes a new preferential tax regime for equity awards granted under a “long-term incentive program” that provide the right to receive free shares of a company’s stock or a right to acquire shares at a preferential price. The new regime should allow employees to defer taxation to the date the shares underlying the awards are sold provided three conditions are met: (1) the employee share plan is approved at a general meeting of shareholders, (2) the shares subject to the awards must not exceed 25 percent of the parent’s social capital, and (3) the awards must be subject to a minimum three-year vesting schedule. If the conditions are met, then the gain at sale should benefit from capital gains tax treatment whereby employees will only be subject to tax on 50 percent of the gain at sale.
Vietnam: New exchange control requirements under Circular No. 23. Effective August 12, 2024, Circular No. 23 has removed the requirement to register a foreign company’s employee share plan with the State Bank of Vietnam (SBV) previously required under Circular 10. Instead, companies must now submit necessary documentation with a commercial bank for review before the bank will provide the foreign exchange services needed to operate a company’s plan. This change also introduces a monthly reporting requirement with the SBV, replacing the previous quarterly reporting obligation, and prohibits the outflow of currency related to offshore awards (eg, offering an ESPP will generally still not be permitted). All transactions related to a company’s plan must still be processed through a dedicated account with a local commercial bank.