Changes to CEO and employee pay get a lot of attention during the runup to an IPO. But with board composition being an important factor in public company success, it’s also important to understand how (and when) to add qualified independent directors.
This Semler Brossy article gives a helpful overview of how director compensation changes as a company approaches its public debut – based on awards granted by high-profile tech companies to independent directors in the 12 months prior to their IPO. Here’s an excerpt:
Compensation packages for incoming directors at private companies generally consist of Restricted Stock Units (RSUs), stock options, or some combination of the two. They are frequently front-loaded equity grants meant to cover multiple years, as opposed to the annual grants common in public companies.
In general, we found that these grants are usually coupled with a 3–4-year vesting period, and more than half of them also require an actual IPO for vesting (known as an “IPO Trigger”). Compensation is almost entirely equity based — of the 20 pre-IPO companies studied, only two offered any direct cash pay — which is typical for pre-IPO companies.
Here’s more detail about how pay structures tend to shift as the IPO approaches:
– When the IPO is 36+ months away, pay is typically in the form of RSUs or stock options, intended to cover multiple years, 3-4 year vesting schedule, no cash compensation, and shares are granted as a percentage of the company. An example median grant is 20-50bps stake in the company with a 4-year vesting period.
– When the IPO is 18-36 months away, the compensation shifts towards RSUs, still with 3-4 year vesting schedules and intended to cover multiple years. The equity portion of awards frequently matches employee awards, compensation may include a cash component, and awards are often expressed as a dollar value instead of a percentage of the company. An example median grant is an up-front grant valued at $300k-$750k, in the form of RSUs, options, or a mix.
– When the IPO is less than 18 months away, director compensation mimics a traditional public company model – mostly in the form of RSUs with annual awards and 1-year vesting periods. Cash compensation is more likely, and awards are expressed as a dollar value. An example median grant is $250k–$350k in annual total compensation, comprised of a mix of cash and equity.
Last fall, over on the Proxy Season Blog on TheCorporateCounsel.net, I shared observations on how US and European investors (and asset managers) are diverging in terms of what they expect from their portfolio companies. This also holds true with say-on-pay, but I didn’t realize how large the delta is in support levels of US asset managers compared to their European counterparts:
2025 proxy voting research reveals that Vanguard, State Street, Fidelity and BlackRock are among the most likely to vote in favor of Say-on-Pay proposals, with Vanguard topping the list by voting in support more than any other asset manager in the report — 97.6% of the time. State Street came in second, with Fidelity and BlackRock following close behind.
The voting results of American asset managers studied contrast sharply with two European managers, Legal & General (LGIM) and UBS. LGIM America, the U.S. arm of London-based LGIM, reported $1.53 trillion in assets under management (AUM) and only voted in favor of executive compensation packages 9% of the time. UBS — based in Geneva, Switzerland, and reporting $6.6 trillion of AUM —only supported these packages 29% of the time.
That’s according to a recent report from United Church Funds, based on NP-X filings made in August 2025. The report identifies a few areas that European asset managers deem problematic. Paraphrasing:
– Setting vesting or holding periods of less than 3-5 years, and/or having too few metrics, may be viewed as too short-term and lead to against votes. The US asset managers apply a more case-by-case analysis and don’t apply specific yardsticks.
– Increasing compensation purely based on peer benchmarking is not acceptable, and heavy reliance on peer groups as a pay-matching mechanism is discouraged.
– High pay ratios may lead to an against vote, especially when companies are underperforming.
As I mentioned yesterday, the fragmented voting landscape means it’s more important than ever to know your investors and their expectations. If you have international institutions as stockholders, don’t be surprised if they take a different approach than the big US asset managers.
It’s wild to think this year will be the 15th year of say-on-pay votes. In that time, the ecosystem of frameworks and modeling has grown into something advisors track each year – because many compensation committees want to understand how their company’s programs will fare under the models. In some cases, it even seems like the goal of truly motivating executives to perform takes a back seat to designing and disclosing pay in a way that will get the blessing of proxy advisors, whose recommendations many institutions follow.
Or at least, that was the case for 10+ years! Now, we may be entering a new era with institutions moving towards their own customized voting policies – and we’re in the early stages of seeing AI models that will apply those policies, instead of an army of proxy advisor and/or stewardship employees. While some companies are happy about that, the fragmentation actually means that votes could get harder to predict. This Pay Governance memo summarizes the state of play – and offers a few predictions for 2026:
The above said, it is likely that mid-size and smaller institutional investors will continue to rely on the proxy advisor firms for voting recommendations in the near-term due to the extensive amount of time and resources necessary to review and responsibly vote on a multitude of proxy voting decisions across a wide range of holdings. Regardless, we also expect institutional investors of all sizes to harness the power of AI for data collection and the development of preliminary voting recommendations, which could further erode proxy advisor influence barring meaningful evolutions in proxy advisor offerings.
Finally, we note that proxy advisory firms have shown tremendous resilience over the years to adapt their business models to changing governance landscapes. For example, the current proxy advisor pivot toward voting recommendations that are more customized/customizable is likely to ensure a degree of relevance and help to respond to regulatory scrutiny in the face of multiple challenges. Although the decline in proxy advisor influence among the largest investors may not fully extend to smaller and mid-size investors, the Say on Pay and governance landscapes are increasing in complexity, thereby creating a more uncertain (but potentially less adverse) U.S. Say on Pay environment.
Even though we’re in a time of change, it sounds like age-old advice of understanding who your investors are – and what they want – is still the best way to predict how your say-on-pay resolution will land. Of course, delivering strong company performance usually helps too.
I blogged recently about best practices for designing performance awards. If you want to stay in the good graces of your compensation committees and executives, it’s also helpful to have a few creative ideas up your sleeve – especially during times of business uncertainty, which seems to be pretty much all of the time right now. This Semler Brossy alert suggests five ways to “think outside the box” on performance award design:
1. Brutal simplification – Pick the one or two things that matter most right now that you can measure. Maybe it’s maintaining gross margin in the face of rising input costs. Maybe it’s the ramp-up speed of domestic manufacturing. Whatever it is, make it crystal clear and put serious money behind it.
2. The five to seven-year bet – Cancel next year’s standard equity grant cycle. Instead, make a single, multi-year grant that vests based on where the company stands in 2030 or 2032. No annual refreshes, no short-term metrics. Just one big bet on long-term value creation.
3. The horse race – If you can’t tell what “good” looks like in absolute terms, measure relative position. Rank your company against a carefully selected peer set or the broad economy—”the market”—and pay only for outperformance. This isn’t just about stock price; it can include market share gains, margin protection, or other competitive metrics. You could even combine absolute and relative performance: “We did well, and we won.”
4. The conscious placeholder – Implement a one-year fully discretionary program with transparent guardrails. Tell executives, “We don’t know exactly what success looks like, but we’ll recognize it when we see it.” Then, document your reasoning meticulously. Apply that discretion in the bonus and give everyone a modest RSU grant to totally get out of the goal-setting business.
5. Business as usual, with consequences – Keep your existing program but accept the tradeoffs: you might end up with outcomes that don’t align with your actual assessment of performance. Goals may need to be set so widely that they lose meaning, and you may spend the year-end in complex adjustment debates.
The alert delves into the pros and cons of each approach. It also explains which business situations would be most likely to benefit from each approach.
With the increasing fragmentation of investor views and voting power becoming less concentrated on one or two leading perspectives — plus the struggle to get frank shareholder feedback on pay decisions — companies may be doubling their internal efforts to anticipate and address investor concerns with executive pay programs. This Glass Lewis report (available for download) gives a step-by-step guide that addresses analysis, disclosure and adjustments. On the analysis front, it recommends:
Leading companies generally assess alignment from multiple angles, examining how various definitions of total compensation, such as granted, realized, and realizable pay, compare to performance across multiple time horizons. This analysis could include financial, operational, and total shareholder return metrics, and account for both absolute performance and relative positioning. Consideration of these multiple views builds a stronger understanding of how executive pay might be viewed by a diverse group of investors.
For example, Glass Lewis’ own quantitative pay-for-performance (P4P) assessment uses a series
of five to six tests to provide a holistic analysis.These include tests of pay alignment using multiple calculations of granted and realized pay, integrating comparisons to peers identified by Glass Lewis as well as broader market benchmarks. From 2026, our quantitative analysis is expanded to include a five-year assessment window (previously three years), a longer-term view of pay alignment that reflects evolving investor practices
With this, companies will have “a deeper understanding of pay and performance alignment,” which can inform the “clear and compelling story” the company should ensure is coming through in its CD&A and in engagements with investors. When it seems that, despite analysis and disclosure, the compensation program needs to shift, it suggests scenario modeling to understand potential payouts in various scenarios.
Scenario modeling can be an especially helpful tool in this process. Companies can gain significant insights from assessing how pay outcomes would appear under different performance environments, including best-case, expected, and downside scenarios. For example, what would incentive payouts look like if the company underperforms its peer group, but still achieves internal targets? How might shareholders view high payouts during periods of share price volatility or underperformance relative to the broader market? These analyses can inform not just the quantitative aspects of plan design, but also qualitative assessments around risk-taking, rigor, and the likelihood of future say-on-pay support.
When modeling changes, companies might also consider whether structural elements, such as caps on payouts, minimum performance thresholds, or clawback provisions, are sufficient to guard against risks.
After a significant increase in 2023, this Pay Governance alert analyzing historical trends in CEO actual total direct compensation (TDC) shows that CEO pay moderated a bit in 2024, increasing by 5%, at median, over the prior year, which the alert describes as modest given TSR performance during the year.
TSR performance remained exceptionally strong for the second consecutive year. This sustained TSR performance reflects a robust equity market environment and reinforces the continued recovery from the volatility and negative TSR experienced in 2022. While CEO actual TDC increases were positive, this level of growth is more modest than the increases typically observed during periods of elevated TSR performance. One likely contributor to the pace of pay growth in 2024 is the substantial +14% increase in CEO actual TDC in 2023, which followed the rebound in market performance after 2022. The compensation actions taken in 2024 reflect a shift back towards more normalized year-over-year adjustments after a year of significant upward adjustment.
Here’s the alert’s description of longer-term trend data:
From 2010 through 2023, S&P 500 CEO actual TDC increased steadily, generally in line with TSR cycles. Actual TDC growth was modest in the early 2010s, accelerated during strong equity markets from 2017 to 2019, remained flat in 2020 amid COVID-related disruption, and increased more meaningfully from 2021 to 2023 as TSR and company performance rebounded.
CEO actual TDC outcomes have historically tracked S&P 500 TSR performance. Median CEO actual TDC reached approximately $16.1M in 2023, reflecting a 14% year-over-year increase supported by strong S&P 500 TSR of approximately 26%. In 2024, median CEO actual TDC grew at a more moderate pace, rising by only 5%, from $16.1M to approximately $17M (Figure 1).
In terms of LTI, while Pay Governance expects performance shares to continue to dominate CEO pay, they also anticipate that use of PSUs has peaked, given ISS’s recent policy change that looks more favorably on extended time-vested equity.
In mid-January, ISS-Corporate announced the release of a report on CEO perks covering fiscal 2024, which represented a five-year high in terms of the number of S&P 500 companies reporting at least one perk (70%). The number of Russell 3000 companies providing at least one perk stayed steady at 43%. The announcement gives more detail on personal use of corporate jets and personal security services.
Personal use of corporate aircraft remains among the most common perquisites provided to CEOs, the study found. In Fiscal Year 2024, more than 41 percent of S&P 500 CEOs were provided this benefit, reaching a new peak and continuing a positive trend exhibited in recent years; median value of the perquisite of use of corporate aircraft decreased slightly from the previous year to $149,379. For Russell 3000 companies (excluding companies included in the S&P 500), corporate aircraft usage began to stall in 2024, experiencing a minor drop in prevalence to 7.9 percent.
The prevalence of security perquisites continues to increase for the S&P 500 and Russell 3000, with the largest annual increases in prevalence seen in 2024 for both indexes. The prevalence of security benefits among S&P 500 companies now stands at a five-year high, with 22.5 percent of companies offering the perk. Adoption rates in the remaining Russell 3000 companies remain low at just 2.7 percent of the index but nevertheless increased significantly in 2024.
The report notes that security spend has definitely increased again in fiscal 2025. While the report found that greater perks correlated with lower say-on-pay outcomes, investors seemed focused on outliers that fail to provide supporting disclosure. As Liz recently shared, ISS’s FAQ updates clarify that ISS is unlikely to raise significant concerns for relatively high executive security-related perks, as long as the company discloses a reasonable rationale (like an internal or third-party assessment) and a broad description of the security program and its connection to shareholder interests.
On Friday, Corp Fin Staff released updated Regulation S-K CDI 217.01. The update provides additional clarity on the need for historical compensation information for a spun-off registrant. The CDI now reads:
217.01 In the context of a spin-off transaction and in subsequent filings, historical Item 402 compensation information for a spun-off registrant may not always be required. A spun-off registrant should focus its analysis on whether, before the spin-off, it operated as a separate division or standalone business of the parent and, if so, whether there was continuity of management. For example, where a spun-off registrant consists of portions of different parts of the parent’s business or has new management who will be named executive officers after the spin-off, compensation information for the named executive officers for periods before the spin-off would not be required. In contrast, if the parent spun off a subsidiary that conducted one line of its business, and, before and after the spin-off, the executive officers of the subsidiary: (1) were the same; (2) provided the same type of services to the subsidiary; and (3) provided no services to the parent, historical compensation disclosure likely would be required. When historical compensation is not required, the registrant need only report compensation awarded to, earned by, or paid to the spun-off registrant’s named executive officers in connection with and following the spin-off. [Jan. 23, 2026]
It’s not even February, but it’s fair to say that 2026 has already been full of surprises for me – and most of those surprises are being delivered by our federal government. In the executive compensation sphere, one thing that wasn’t on my bingo card was a January 7th executive order that calls on defense contractors to ramp up production – “or else.” I’m paraphrasing, but as you can see from the fact sheet, the threatened consequences include limiting buybacks – which Dave blogged about last week on TheCorporateCounsel.net – as well as stepping in on executive pay. Here’s an excerpt:
The Secretary shall further take steps to ensure that future contracts permit the Secretary to, upon determining that a contractor is experiencing such issues, cap executive base salaries at current levels (with inflation adjustments permitted) while scrutinizing executive incentives to ensure they are directly, fairly, and tightly tied to prioritizing the needs of the warfighter.
The Order requires that executive incentive compensation under future contracts be tied to on-time delivery, increased production, and necessary operating improvements rather than short-term financial metrics.
As this article from the Federal News Network notes, the President also posted on social media that no executive should be allowed to make more than $5 million, but that didn’t make it into the EO. The article gives this color:
A cap on executive compensation already exists in some form — contractors can pay their executives whatever they choose, but the government only reimburses costs up to a certain limit.
The executive order, however, goes a step further — it’s shifting from how much the government will reimburse the contractor to limiting how much the company can pay its executives.
“Pretty significant difference, but maybe they’ll fall back on the same mechanisms. I don’t know that yet. Nobody in the department is talking yet about how they’re going to implement this. I’m sure they’re still trying to work that out,” Chvotkin said.
“It’s fine to debate executive compensation, in GovCon and across the economy, and whether it is aligned with long term performance. It’s not as simple as saying you can only make ‘X’. Compensation has multiple dimensions and the government’s role in controlling many of them is not at all clear. The EO does nothing to clarify how or by what measures, or even authority, the government plans to do so,” Soloway said.
This McDermott blog gives a bunch of practical suggestions for affected companies – here are a few that relate to executive pay:
Contractors should anticipate that future government contracts may include explicit provisions linking executive compensation to delivery and production outcomes and may also incorporate salary caps or other limits consistent with the administration’s stated priorities. Companies are advised to review current compensation structures and prepare to adjust incentive plans to align with these new requirements.
Review existing government contracts and evaluate those where EO‑driven clauses are likely.
Review past and current performance metrics, with a focus on production levels and on-time delivery rates.
Boards and management should assess whether the prohibition on stock repurchases affects previously issued earnings per share (EPS) guidance. Many companies’ EPS projections assume ongoing buybacks, which reduce the number of shares outstanding and can impact reported EPS. Management, the disclosure committee, and the board should evaluate whether current guidance remains accurate or if updates are needed.
Prepare to demonstrate performance using program‑specific metrics.
Distinguish government‑driven changes or delays from contractor‑controlled factors and document approved baseline changes.
If possible, prepare a narrative that shows month‑over‑month improvements to performance metrics.
If distributions occurred, explain the board’s capital allocation rationale and any simultaneous investments that increase capacity and performance.
The Executive Order could face litigation challenges on the ground that it proposes an unprecedented federal government intrusion upon traditional corporate governance matters such as executive compensation, capital allocation and return of capital for the defense industry. Companies in the defense and other industries will need to carefully monitor developments here to see how any such litigation plays out over time and how the Executive Order is ultimately administered and enforced. More broadly, companies will need to monitor whether the concepts established in this Executive Order expand into other areas of U.S. government contracting.
While the executive order is directed at companies in the defense industry, this administration seems to have zero qualms about involvement with Corporate America. So, companies in other industries may also want to keep an eye on what happens. If the government gets into the business of dictating executive pay arrangements, any excitement about pay-for-performance disclosures getting easier, and proxy advisors getting less powerful, may be short-lived.
As I noted in a blog last fall, the “conventional wisdom” for executive pay is that a high percentage should be “at risk” – i.e., keyed to performance objectives. With such a large portion of executive pay coming in the form of performance awards, it’s important to get the design right. This Meridian alert outlines three best practices that compensation committees should keep in mind:
1. Choose appropriate performance metrics – Metrics need to have the right blend and degree of emphasis on advancing profitability/efficiency vs. growth. This depends on where a company is along the profitability continuum.
2. Set Appropriate Performance Goals – Performance goals – whether for short- or long-term performance incentives, generally require both quantitative and qualitative assessments. It is important to consider not just “target” but the performance range around target (threshold and maximum). The alert shares five perspectives that, in combination, should lead to sound performance goals.
3. Maintain Good Governance and Oversight Process – Process and oversight matter. The alert explains the importance of benchmarking, implementing ownership, vesting and clawback features, communicating clearly, and regularly reviewing and (if needed) adjusting to reflect changes in business strategy and conditions.