The Advisors' Blog

Over on The Proxy Season blog on TheCorporateCounsel.net, I recently shared that investors are taking a range of approaches to engagement meetings following the February Corp Fin Staff guidance on Schedule 13G eligibility. Based on a recent episode of the “Timely Takes” podcast featuring Brian Breheny of Skadden, Rick Hansen of HP, and Allie Rutherford of PJT Camberview, Skadden’s memo and this FW Cook blog, those approaches include one or more of the following, which investors may apply to engagement with all their portfolio companies or only some portfolio companies (where they hold 5%):

– Not engaging at all (i.e., not taking meetings)

– Engaging but not participating (i.e., taking meetings but taking a “listen only” approach)

– Participating with a “listen first” approach, asking open-ended or less specific questions and not providing transparency around voting intentions

– Communicating that they prefer the company to do the outreach, set the agenda items and stick to the preset agenda topics

– Starting some or all meetings with a disclaimer

– Continuing as they always have (some smaller investors)

Here are some tips the above-mentioned resources shared for navigating the shifting dynamics of investor meetings this proxy season:

– Be prepared for many different styles of meetings, and know how each investor is approaching engagement meetings before you engage. HP’s Rick Hansen says this is exactly the type of information you should be leaning on your proxy solicitor to provide.

– Know that silence is not acceptance. FW Cook notes that no questions or comments from an investor doesn’t mean they are supportive of a practice.

– Address the “elephant in the room.” Both the podcast participants and the FW Cook blog stress the importance of knowing pain points (specific to your company and also specific to the investor based on their policies) and addressing them proactively since they’re still likely to impact their vote, given the bullet above. Skadden’s Brian Breheny stresses that companies need to be more proactive than ever — to get the meeting and set the agenda, already knowing the investor’s perspectives.

– The differing approaches might mean that some investor voices and positions are much “louder” than others. PJT Camberview’s Allie Rutherford reminded us that there are many perspectives you’re not hearing in meetings.

– Consider affirmatively responding to any investor disclaimer. Brian noted that saying something like, “we understand and we realize that’s not your intent” might make the investor more comfortable engaging.

– Make sure your proxy and communication materials preemptively address concerns, including those specific to certain investor’s policies.

Allie noted that investors are in “get-through season” mode, and there may be another pause before offseason engagement, during which investors will reassess and possibly make changes. In the meantime, keep calm and engage on. They also stressed that building long-term relationships through engagement remains very important.

– Meredith Ervine 

This alert from Meridian Compensation Partners discusses how to prepare executive compensation programs for a business transformation. First, it says you should be asking these questions to determine whether special retention awards will be necessary:

– Do our executives have sufficient unvested equity awards (“holding power” or “retention glue”)? There are a variety of circumstances that can lead to retention risks – insufficient “skin in the game,” recent business challenges, uncertainty and risk in the transformation itself, etc. Whatever the cause – insufficient equity holding power increases the risk of losing key personnel. Equity holdings also create an incentive for achieving company objectives and reward executives for the longer-term value created for shareholders from the transformation.

– Is our compensation competitive with (or better than) market? Ensuring that ongoing compensation is market-competitive reduces an executive’s incentive to look for alternative opportunities.

– Do we have the right severance and Change-in-Control termination protections? Business transformation may increase employee concern with loss of employment. Reasonable severance protections can mitigate these concerns, keep key leaders focused on the business and the transformation and reduce retention risk.

Once retention risk is addressed, focus should turn to incentivizing executives by asking this next set of questions:

– Are we paying for the right outcomes (i.e., correct performance metrics)?
– Are we setting the right performance goals?
– Does our payout curve provide adequate upside while balancing risk and uncertainty?

It concludes with this reminder:

Your compensation program should be tailored to your company’s unique circumstances, particularly in a transformation scenario. A business focused review of your pay program is a critical part of getting ready for a business transformation.

– Meredith Ervine 

This Zayla Partners post warns that 2025 is a high-risk year for compensation whiplash — i.e., massive and unpredictable swings in pay outcomes. It’s certainly not a new issue, but companies are again wondering what they can do proactively to ensure their incentive compensation programs still appropriately reward executives, even if unanticipated, non-recurring events outside the company’s control threaten to disrupt the company’s carefully thought-out goal-setting process.

Here are a few things compensation committees might consider:

– Broadening performance ranges between threshold, target and maximum 

– Shortening performance periods

– Diversifying metrics

– Adding relative metrics

– Adding strategic metrics

– Incorporating more time-vested equity

Companies also sometimes delay setting performance goals or identify certain unanticipated events that the compensation committee will adjust for during or after the performance period. 

For a deep dive on this, head to the landing page for our upcoming webcast “The Top Compensation Consultants Speak” to add it to your calendar and then tune in on May 21st at 2 pm ET. I always love hearing from Semler Brossy’s Blair Jones, Pay Governance’s Ira Kay, and Pearl Meyer’s Jan Koors, and they have lots to talk about this year — including plan design and goal setting amid uncertainty and volatility.

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.

– Meredith Ervine 

The HR Policy Association recently released the results of its 2025 CHRO Survey. The announcement summarized some of the results, but the full report is only available to members. I was interested to see the following data on DEI disclosures and practices in the summary.

Few CHROs reported that they expect their companies to decrease the following:

– Employee resource group programs (4%)

– Mentorship programs (10%)

– Training (23%)

However, over half reported that they expect their companies to decrease these things:

– Participation in outside culture surveys (51%)

– Tying DEI metrics to executive pay (53%)

– Setting public quantitative goals (64%)

With respect to DEI metrics, this is consistent with trends we’ve seen in 2025 proxy statements so far. Liz recently shared that the prevalence of diversity measures dropped from 65% in 2023 to 35% in 2024 in the first 100 proxies filed by S&P 500 companies and several others disclosed their planned discontinuation for 2025 compensation programs.

– Meredith Ervine 

Earlier this month, I shared a reminder that ISS wants companies to start disclosing performance goals that will apply to long-term incentive awards for the upcoming performance period – not just the completed year that the proxy statement primarily discusses. This is most relevant when there’s a quantitative pay-for-performance misalignment.

Is anyone doing this? Compensation Advisory Partners reviewed recent disclosures of the 100 largest U.S. public companies and found:

Most companies do not disclose forward-looking financial targets that cover future years. Companies often determine that disclosure of forward-looking business plan targets exposes the company to competitive harm. Disclosing forward-looking goals can also put companies in a precarious position when there is a disconnect between internal budget scenarios built on non-GAAP metrics and accounting scenarios that are reported externally under GAAP.

CAP found that the degree of disclosure varies based on whether the performance targets are relative or absolute:

– 30% of companies with absolute performance metrics in the LTI plan disclose forward-looking goals

– 68% of companies with relative performance metrics disclose forward-looking goals – e.g., 50th percentile rTSR achievement will result in payout at target levels

The CAP team predicts that the prevalence of these disclosures may increase over time – especially for relative metrics with non-sensitive performance-payout structures. Companies will have to balance competitive concerns with say-on-pay expectations and may have a more difficult decision if they’re already under the “pay disconnect” microscope for other reasons.

– Liz Dunshee

It appears that if there’s one thing we can count on in 2025, it’s uncertainty. Market swings and unpredictable business conditions complicate things for compensation committees. But as Dave recently wrote on TheCorporateCounsel.net, “we’ve seen this movie before” – and fortunately, we’ve got a solid playbook to pull from.

One great addition to that toolkit is this Gibson Dunn blog – which revisits “lessons learned” from the 2008 financial crisis and the COVID-19 pandemic and applies them to today’s rocky road. Here’s an excerpt:

The Road to a 409A Issue is Paved with Good Intentions

An executive or other service provider may elect to forego current compensation to conserve free cash flow, for internal or external optics, or other reasons relevant to the company. Salary and perquisites tend to be the first looked to for adjustment, with bonuses and long-term compensation trailing. Regardless of the bucket of compensation reduced or eliminated, a service provider who agrees to a reduction may ask for a “make-whole” or similar commitment from the company.

This can raise the specter of Internal Revenue Code Section 409A in two key ways: (1) creating new deferred compensation, and (2) impermissibly deferring compensation from one year to the next. The former impacts how the compensation can be structured, can limit flexibility to amend or terminate the arrangement in the future, and can result in payroll tax being incurred in an earlier year than the compensation is delivered. Impermissibly deferring compensation from one year to the next can come with accelerated income inclusion, a hefty 20% additional tax to the service provider, and potential reporting and withholding consequences to the employer.

In any case where a service provider forgoes compensation otherwise promised, and especially if there is an element of a “make-whole” or similar commitment, this should be structured carefully and in coordination with counsel.

The blog also raises these points:

1. Be mindful of how declining stock prices affect equity award sizing and award values. For more suggestions on handling those issues, check out my 2022 blog on managing your burn rate and Emily’s review of equity grant practices during volatile times.

2. Tread carefully on any modifications to in-flight awards – they’re a “third rail” for investors.

3. For committees in the process of establishing new programs or goals, build in flexibility and set goals and metrics that can withstand continued uncertainty. Emily’s blog on pandemic-era compensation practices is worth revisiting for ideas.

The Gibson Dunn team recommends a “learn-and-see” approach right now – consistent review of relevant data sets, coordinating with external advisers, and leaving aside one-size-fits-all programs in favor of understanding practices specific to the industry.

– Liz Dunshee

Here’s an update about Dodd-Frank clawbacks that Meredith shared on TheCorporateCounsel.net: On Friday, Corp Fin posted a handful of new CDIs, including six new Exchange Act Forms CDIs that address clawbacks-related checkboxes on the Form 10-K cover page and the timing of required Item 402(w)(2) disclosure and one new Exchange Act Rules CDI that addresses co-registrants in a de-SPAC transaction. Below, I’ve paraphrased the Form 10-K CDIs, and I addressed the de-SPAC CDI in a DealLawyers.com blog.

We’ve been playing our part in the annual ritual of blogging about voting policy updates from big asset managers. They made very few updates to executive compensation policies – and that trend also held true with voting policies that were published in March. Here are a few (incremental) changes that may apply to your company:

– Fidelity – consistent with policy clarifications that Fidelity isn’t intending to influence control of any portfolio company, Fidelity’s policy that it will vote against compensation committee members if the company hasn’t addressed say-on-pay concerns now refers to “concerns raised by shareholders” instead of “concerns communicated by Fidelity”

– T. Rowe Price – clarifying that T. Rowe has flexibility in deciding to vote against compensation committee members in the event of poor compensation practices or option repricings

– Goldman Sachs Asset Management – eliminated internal pay disparity as a factor in say-on-pay

Check out our “Investor Voting Policies” Practice Area for voting guidelines of other investors and asset managers. We’re blogging on TheCorporporateCounsel.net about changes to policies that are unrelated to executive compensation.

– Liz Dunshee

ESG metrics have been under the microscope for some time now, with investors concerned about “ESG overperformance” and companies setting “softball” goals, causing outsized payouts compared to company financial performance. Now, as Liz shared last week, the use of ESG measures seems to be reversing course with a renewed focus on financial measures.

For anyone still tinkering with proxy disclosures describing the continued use of ESG measures in 2024 plans, WTW recently sought to better understand what investors are looking for when they consider pay proposals at companies that use ESG metrics. While many investors reported that they consider the use of ESG metrics on a case-by-case basis, WTW shared some common pitfalls that were identified by surveyed investors.

– Lack of clear connection to business strategy and value creation. This includes the use of metrics that overly rely on subjective judgment, or the use of ESG metrics that are not clearly defined or do not clearly align with the company’s strategy, competitive strengths or material business risks.

– Use of broad ESG indices or compliance-related metrics. Investors do not favor ESG indices as an incentive metric because they are too broad and lack focus. The use of ESG indices also goes against the overarching theme of business materiality. In addition, investors cautioned against the use of compliance-related metrics, as they consider compliance a baseline expectation of executive performance.

– Too many metrics. Too many metrics over-complicate incentive plans and dilute the impact of individual metrics. This weakens the alignment between pay and performance and makes it less meaningful for incentive plan participants. For similar reasons, investors also cautioned the use of less measurable ESG scorecards with undefined weighting of each scorecard element. Additionally, the optics is that the company is building in flexibility to selectively choose which metrics they would add weight to retrospectively when assessing performance and deciding associated pay outcomes.

– Non-financial metrics weighted more heavily than financial metrics. Investors generally shy away from a prescriptive guideline on a minimum or maximum weighting on ESG metrics. However, they noted that, in principle, a small weighting (e.g., lower than 10%) likely will not impact behaviors. A thoughtful approach to selection will naturally result in more meaningful weighting on each individual metric. There also was consensus among the investors that if ESG or non-financial metrics are weighted more heavily than financial or shareholder return metrics, it will draw closer examination. Some investors also expressed concern about high ESG scores offsetting lackluster financial performance in remuneration outcomes.

– Consistent above-target payout. This may signal a lack of rigor on performance goal setting, especially for qualitative measures that require judgment-based assessment.

– Lack of transparent disclosure. Like disclosures on financial metrics, investors expect transparency in the rationale behind metric selection (both retrospective and prospective), with acknowledgement that market norms vary by region), weighting for each metric and achievement against targets. While some companies may cite commercial sensitivity as an argument to omit disclosure of performance goals, investors are mostly unsympathetic to this argument. They assert that ESG targets are generally far less sensitive than financial targets and, if commercial sensitivity does come into play, companies should still be able to disclose the targets and achievement levels retrospectively, after the performance period concludes. Prospective disclosure of targets is encouraged and should clearly show how short- and long-term incentive targets (which often have a one- to three-year time horizon) connect to longer-term sustainability commitments, such as net-zero goals and their transition pathways.

In terms of institutional investor policies on this topic, unsurprisingly, many are still not looking for companies to incorporate ESG measures, but when they’re used, they want to see alignment, goal rigor and transparency.

– Meredith Ervine 

If late 2024 PvP comment letters are any indication, there seems to be confusion about what companies need to say about non-GAAP Company-Selected Measures (and additional PvP measures a company may elect to provide). Under Item 402(v)(2)(vi) of Regulation S-K, non-GAAP Company-Selected Measures will not be subject to Regulation G or Item 10(e) of Regulation S-K but companies must disclose how the number is calculated from the audited financial statements. (This requirement intentionally tracked the requirements related to disclosing target levels that are non-GAAP financial measures in CD&A under Instruction 5 to Item 402(b).)

The confusion might stem from the fact that Instruction 5 is limited to target compensation levels. Regulation S-K CDI 118.08 says the instruction does not extend to non-GAAP financial information that does not relate to the disclosure of target levels, so when non-GAAP measures are disclosed in the proxy for other purposes, those are subject to Reg. G and Item 10(e) requirements. But, per the CDI, the Staff will not object if the company provides the disclosure by prominent cross-reference to a proxy statement annex or pages in the Form 10-K. Many companies do this.

It appears that several companies attempted to comply with the requirement to disclose how their non-GAAP Company-Selected Measure in 2024 proxies is calculated from the audited financial statements by cross-referencing other disclosures — either internally in the proxy or to the Form 10-K. But incorporation by reference to a separate filing (even the 10-K) doesn’t work. Cross-referencing disclosure in another section of the proxy statement — like the disclosure intended to comply with Instruction 5 to Item 402(b) — would comply if that section included the full required explanation of how the Company-Selected Measure is calculated from the audited financial statements.

While that explanation will necessarily be tailored to the company and the measure, here’s an explanation provided to the Staff in a response letter from AdaptHealth Corp. of how a Company-Selected Measure — here, Adjusted EBITDA — is calculated from the audited financial statements:

In the 2024 Proxy Statement, the Company calculated Adjusted EBITDA for each year disclosed on the Pay Versus Performance Table as EBITDA, plus loss on extinguishment of debt, equity-based compensation expense, transaction costs, change in fair value of the warrant liability, goodwill impairment, change in fair value of the contingent consideration common shares liability, litigation settlement expense, and certain other nonrecurring items of expense or income. The Company calculated EBITDA as part of the calculation of Adjusted EBITDA for each year disclosed on the Pay Versus Performance Table as net income (loss) attributable to [the company], plus net income (loss) attributable to noncontrolling interests, interest expense, net, income tax expense (benefit), and depreciation and amortization, including patient equipment depreciation.

– Meredith Ervine