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.
In late January, President Trump signed two Executive Orders — “Ending Radical and Wasteful Government DEI Programs and Preferencing” and “Ending Illegal Discrimination and Restoring Merit-Based Opportunity” — which direct federal agencies to terminate federal contracts related to DEI within 60 days and the Attorney General to submit a report by May 21 with recommendations “to encourage the private sector to end illegal discrimination and preferences, including DEI.” As John shared on TheCorporateCounsel.net, a Maryland federal court entered a preliminary injunction enjoining enforcement of certain provisions of the two orders on Friday, but that injunction didn’t cover the part of the Executive Orders that directs the agencies to identify up to nine potential civil compliance investigations of organizations.
Shortly after the Executive Orders were announced, the Attorney General’s office released a memo regarding the implementation of these Executive Orders. It directs the DOJ’s Civil Rights Division and Office of Legal Policy to jointly submit a report to the AG’s office with recommendations for enforcing federal civil rights laws and include “proposals for criminal investigations” in addition to the up to nine potential civil compliance investigations of entities listed in the second Executive Order, including publicly traded companies.
Many companies took a close look at their DEI programs to ensure compliance with federal civil rights laws after the Students for Fair Admissions v. Harvard decision and private sector cases involving Section 1981 and Title VII of the Civil Rights Act. Now, public companies are considering what disclosures regarding DEI (including DEI metrics in executive compensation plans) should be provided in SEC reports and ESG/sustainability reports in light of these Executive Orders, the vacatur of Nasdaq’s “disclose or comply” board diversity rule and announcements by the proxy advisors.
– Students for Fair Admissions v. Harvard and private sector cases involving Section 1981 and Title VII of the Civil Rights Act
– The recent Executive Orders including the directive to federal agencies to identify potential “compliance investigations” aimed at deterring DEI programs constituting “illegal” discrimination
– How companies are considering legal risk, political risk, talent risk and business risk in preparing disclosures
– Companies, especially government contractors, weighing changes to the use of DEI metrics in compensation programs
– Disclosures regarding DEI metrics in compensation programs
– Human capital management disclosures in Form 10-Ks
– Required and voluntary board diversity disclosures in proxy statements after vacatur of Nasdaq’s “disclose or comply” board diversity rule
– ISS’s announcement that it will indefinitely halt consideration of certain diversity factors in making vote recommendations on director elections
– Voluntary proxy disclosures on DEI policies and practices
– Looking at committee charters and corporate governance guidelines
– Weighing whether to maintain the timing or delay publishing voluntary ESG reports
– Setting metrics for 2025 compensation programs
As always, if you have a topic you’d like to discuss on a podcast, please reach out to me at mervine@ccrcorp.com!
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%)