Here’s something Dave shared earlier this month on TheCorporateCounsel.net:
Yesterday, the White House finally issued the Executive Order that we had all been expecting which specifically targets the proxy advisory firms ISS and Glass Lewis. The Executive Order states:
Section 1. Purpose. Unbeknownst to many Americans, two foreign-owned proxy advisors, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, play a significant role in shaping the policies and priorities of America’s largest companies through the shareholder voting process. These firms, which control more than 90 percent of the proxy advisor market, advise their clients about how to vote the enormous numbers of shares their clients hold and manage on behalf of millions of Americans in mutual funds and exchange traded funds. Their clients’ holdings often constitute a significant ownership stake in the United States’ largest publicly traded companies, and their clients often follow the proxy advisors’ advice.
As a result, these proxy advisors wield enormous influence over corporate governance matters, including shareholder proposals, board composition, and executive compensation, as well as capital markets and the value of Americans’ investments more generally, including 401(k)s, IRAs, and other retirement investment vehicles. These proxy advisors regularly use their substantial power to advance and prioritize radical politically-motivated agendas — like “diversity, equity, and inclusion” and “environmental, social, and governance” — even though investor returns should be the only priority. For example, these proxy advisors have supported shareholder proposals requiring American companies to conduct racial equity audits and significantly reduce greenhouse gas emissions, and one continues to provide guidance based on the racial or ethnic diversity of corporate boards. Their practices also raise significant concerns about conflicts of interest and the quality of their recommendations, among other concerns. The United States must therefore increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.
The Executive Order goes on to direct the Chairman of the SEC, the Chairman of the FTC and the Secretary of Labor to take a number of rulemaking and investigative actions.
The Executive Order specifically directs the SEC Chairman to:
– Consistent with the APA, “consider revising or rescinding those rules, regulations, guidance, bulletins, and memoranda that are inconsistent with the purpose of this order, especially to the extent that they implicate ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ policies;”
– Consistent with the APA, “consider revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to shareholder proposals, including Rule 14a-8 (17 CFR 240.14a-8), that are inconsistent with the purpose of this order;”
– Enforce the antifraud provisions of the federal securities laws with respect to material misstatements or omissions contained in proxy advisors’ proxy voting recommendations;
– Assess whether to require proxy advisors whose activities fall within the scope of the Investment Advisers Act of 1940 to register as registered investment advisers;
– Consider requiring proxy advisors to provide increased transparency on their recommendations, methodology, and conflicts of interest, “especially regarding ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ factors;”
– Analyze whether, and under what circumstances, a proxy advisor serves as a vehicle for investment advisers to coordinate and augment their voting decisions with respect to a company’s securities and, through such coordination and augmentation, form a group for purposes of sections 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934; and
– Direct the SEC staff to examine whether the practice of registered investment advisers engaging proxy advisors to advise on (and following the recommendations of such proxy advisors with respect to) non-pecuniary factors in investing, including, as appropriate, “diversity, equity, and inclusion” and “environmental, social, and governance” factors, is inconsistent with their fiduciary duties.
The Executive Order directs the FTC Chairman to “review ongoing State antitrust investigations into proxy advisors and determine if there is a probable link between conduct underlying those investigations and violations of Federal antitrust law,” as well as to “investigate whether proxy advisors engage in unfair methods of competition or unfair or deceptive acts or practices that harm United States consumers.”
The Executive Order also directs the Secretary of Labor to “take steps to revise all regulations and guidance regarding the fiduciary status of individuals who manage, or, like proxy advisors, advise those who manage, the rights appurtenant to shares held by plans covered under the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1001 et seq.), including proxy votes and corporate engagement, consistent with the policy of this order.” Further, the Secretary of Labor is directed to “take all appropriate action to enhance transparency concerning the use of proxy advisors, particularly regarding “diversity, equity, and inclusion” and “environmental, social, and governance” investment practices.”
The White House also issued a Fact Sheet regarding the Executive Order. Clearly, the SEC now has a lot to do on the topic of proxy advisory firms!
Programming Note: We’re starting our holiday blogging schedule tomorrow, which means that, absent some earth-shattering developments, this blog won’t be back until after January 1, 2026. Happy holidays, and best wishes to all of our readers for the new year!
Here it is! The Delaware Supreme Court’s decision on Musk’s compensation we’ve been waiting for.
On Friday, the Court issued its decision in In re Tesla, Inc. Derivative Litigation. The case was heard en Banc (all the justices) and it was issued per curium (not authored by or attributed to a specific judge). The decision was 49 pages. Not short, necessarily, but also not a novel, so it won’t take too much of your time to read the whole thing. The comparative brevity may not be surprising given this:
Although the Justices have varying views on the liability determination, we agree that rescission was an improper remedy and therefore choose that narrower path to resolve this appeal.
As Law Prof Ann Lipton notes on the Business Law Prof Blog:
[T]he Delaware Supreme Court did not question any of Chancellor McCormick’s actual findings regarding how Musk’s 2018 pay package was negotiated, the control and interference that Musk exercised over the process, or even the unfairness of the award itself. Instead, the sole basis for the holding is a kind of Rumpelstiltskin argument: the plaintiffs used the word “rescission” when requesting a remedy, but this case does not meet the technical requirements for rescission – because rescission requires that both parties be restored to the status quo ante, and there’s no way to give Musk back his years working for Tesla after 2018. “It is undisputed,” said the Court, “that Musk fully performed under the 2018 Grant, and Tesla and its stockholders were rewarded for his work.” [Links added by me]
Since rescission was not the appropriate remedy, and the plaintiff “did not offer another form of appropriate relief, the most he can receive is an ‘assessment of nominal damages.’” The Court ultimately awarded $1 to Tornetta.
Various media outlets reported that the compensation package is now worth $139 billion. The WSJ says that amount is “more than the combined compensation realized by the CEOs of all other S&P 500 companies over the decade ending last year, according to Equilar, a pay data firm.” They also note that, while this outcome likely means that the $23.7 billion interim award Tesla announced in August – which was intended to make up for the 2018 option award and structured to avoid “double dipping” if he ended up being entitled to his original 2018 award as he now is (I guess that $0 accounting value was a good guess) – the same is not true of the most recently approved space station of a pay package.
Over on TheCorporateCounsel.net, we’ve been sharinga few “blocking & tackling” reminders for our members who are beginning to think about their Form 10-K and proxy statement. This blog from Winston & Strawn (soon to be Winston Taylor) shares reminders specific to executive compensation. Here’s an excerpt:
– Pay vs. Performance – The 2025 proxy season marked the third year that companies provided pay versus performance (PVP) disclosures under Item 402(v) of Regulation S-K. Large accelerated filers, which first became subject to the rule at its effective date, have now completed the phase-in period and, for the first time, are providing a full five years of PVP disclosure. [… Even though PVP as we know it may be withdrawn,] companies should be prepared to include the usual disclosure in their 2026 proxy statements and take note of any phased-in requirements to which they are newly subject. The SEC continues to require inline XBRL tagging for PVP disclosures, but SRCs are exempt from this requirement until their third filing of PVP disclosures. Therefore, some SRCs may still be exempt for the 2026 proxy season, depending on their individual filing history.
– CEO Pay Ratio Disclosure – Companies are likely familiar with the requirement to disclose in their proxy statements a ratio comparing their CEO’s total compensation (which covers all the components of total compensation disclosed in proxy statements, including base salary, bonus, and equity and non-equity incentives) to the total compensation of a median employee. Although companies may refer to the same median employee for up to three years, those that have undergone significant changes to their workforces or their employees’ compensation may need to redetermine a median employee sooner. Companies making significant workforce adjustments in 2025 should prepare for any required adjustments to their pay ratio disclosures as early as possible.
– Pay Adjustments – In addition to companies dealing with low say-on-pay vote results from last year, any company that has made adjustments to 2025 compensation will need to address these matters in this year’s CD&A. Clear and effective narrative explanation of the rationale for such adjustments, including how they align with company goals, performance outcomes, and board oversight, will be increasingly important to demonstrate responsiveness to shareholder feedback and governance best practices in the 2026 proxy season.
– GAAP Reconciliation – Companies are not required to provide a GAAP reconciliation when disclosing non-GAAP performance targets or results compared to performance targets in the CD&A, provided that they explain how these figures were calculated from their financial statements. However, for all other purposes, companies must include a GAAP reconciliation when disclosing non-GAAP financial measures. Companies may provide this reconciliation in an annex to the proxy statement with a conspicuous cross-reference or by conspicuous cross-reference to a reconciliation in their Form 10-K.
The blog also urges companies to plan ahead for any new or amended equity compensation plans – in particular, now is the time to start modeling overhang:
As a reminder, when determining whether to recommend “for” or “against” an equity compensation plan proposal, ISS applies its own “equity plan scorecard.” Specifically, the ISS scorecard evaluates three key pillars: (i) plan cost, (ii) plan features, and (iii) the company’s historical grant practices.
Companies should review their equity compensation plan proposals with their independent compensation consultants and assess whether such proposals are likely to receive a positive scorecard result and favorable ISS recommendation when considering issues like the size of the plan’s share pool and the company’s overhang and burn rate. Given increasing investor focus on dilution and overhang, companies should engage with compensation consultants early to model share utilization scenarios under different plan proposals.
Of course, this isn’t just the season for proxy disclosure – we’re also heading into the time of year when many compensation committees will be considering executive pay structures for 2026. The blog points out that AI-related responsibilities and goals may factor into this year’s plans:
Additionally, as artificial intelligence (AI) becomes a strategic priority for an increasing number of businesses, companies have begun to expand the responsibilities of their executives or even added new executive-level roles focused exclusively on AI. Expanding the responsibilities of existing executives may justify increased compensation, while new hires may command high sign-on bonuses in the current competitive talent market. Companies should be ready to justify these compensation decisions, especially while benchmarking data is limited. Since companies will vary greatly in how critical AI is to their business, an individualized assessment and explanation is key. If companies choose to use performance awards with metrics based on the successful adoption of AI, they should also consider how they will measure and disclose performance achievement of those metrics.
Altogether, these are good reminders that a little upfront work can go a long way toward a smoother 2026 proxy season.
I always look forward to the annual Corporate Governance & Executive Compensation Survey from A&O Shearman. With some wondering whether the newish disclosure requirement about equity awards in relation to MNPI will end up on the cutting room floor as part of the SEC’s disclosure reform initiative, I was curious whether there’s much variation in Item 402(x) disclosure practices to-date. Here’s what the survey found:
– Top 100 companies
– 14% disclosed an equity grant proximate to the release of material non-public information
– 10% said they expressly prohibit in their insider trading or other policy the grant of awards when the company is in possession of MNPI
– 27% do not disclose a written policy, but do disclose a practice of not granting awards when the company is in possession of MNPI
– 53% of companies have pre-determined grant dates that do not factor in MNPI
– 10% have no policies or practices related to grants in proximity to MNPI
– S&P 500 companies
– 10% disclosed an equity grant proximate to the release of MNPI
– 10% said they expressly prohibit in their insider trading or other policy the grant of awards when the company is in possession of MNPI
– 35% do not disclose a written policy, but do disclose a practice of not granting awards when the company is in possession of MNPI
– 42% of companies have pre-determined grant dates that do not factor in MNPI
– 14% have no policies or practices related to grants in proximity to MNPI
– Russell 3000 companies
– 9% disclosed an equity grant proximate to the release of MNPI
– 10% said they expressly prohibit in their insider trading or other policy the grant of awards when the company is in possession of MNPI
– 40% do not disclose a written policy, but do disclose a practice of not granting awards when the company is in possession of MNPI
– 33% of companies have pre-determined grant dates that do not factor in MNPI
– 17% have no policies or practices related to grants in proximity to MNPI
Other compensation topics covered this year include perks, pay versus performance, human capital management, and say-on-pay.
Taking a company public is a big milestone – and it can have a big impact on how the business manages talent, incentives and performance. This FW Cook blog dives into trends in long-term incentive programs for companies that IPOed during 2020 and 2021 – specifically, in the tech industry. This data can be helpful to see if you’re on the verge of an IPO or if you recently went public. Here’s an excerpt:
When companies are newly public, they often focus on rapid growth, with equity awards designed to encourage and reward large scale increases to stock price over a short time horizon. Companies at this stage also typically have difficulty projecting multi-year performance, which makes granting performance-based equity challenging and risky. However, as companies mature in the public market, there is a clear shift toward performance-based LTI structures.
At newly public technology companies, it is more common to grant time-based LTI only, with 77% using stock options, RSUs, or a mix of the two, and only 23% issuing performance-based LTI. After two to three years as a public company, however, 39% of the companies studied included some performance-based component.
The blog goes on to analyze the rationale for different LTI mix combinations – from use of simple one-vehicle LTI awards to using options, RSUs and performance equity to encourage operational excellence in addition to revenue growth. The FW Cook team notes that market volatility and changing business conditions can also influence award design as a company matures.
Heads up! For sign-on and retention bonuses that are memorialized on or after this upcoming January 1st, you may need to consider a new California law – California Assembly Bill 692. Here’s an excerpt from a recent Cooley alert:
For employment contracts entered into on or after January 1, 2026, the new law generally prohibits inclusion of (or requiring a worker to execute as a condition of employment or work relationship a contract that includes) any provision:
– Requiring the worker to pay an employer, training provider or debt collector for a debt if the worker’s employment or work relationship with a specific employer terminates.
– Authorizing the employer, training provider or debt collector to resume or initiate collection of or end forbearance on a debt if the worker’s employment or work relationship with a specific employer terminates.
– Imposing any penalty, fee or cost on a worker if the worker’s employment or work relationship with a specific employer terminates.
There are exceptions to these general prohibitions, but the new law may dramatically restrict many currently common employment practices. For example, it appears that it will be impermissible to require repayment of a sign-on bonus without compliance with one of the specific exceptions.
This Greenberg Traurig blog explains that a sign-on bonus must meet all of the following conditions for its repayment obligation to comply with AB 692:
– Separate Agreement: The repayment obligation terms are set forth in a separate agreement from the primary employment contract (e.g., offer letter or employment agreement);
– Five Day Review Period with Attorney: The employee is notified that they have the right to consult an attorney regarding the agreement and provided at least five business days to do so before signing;
– Two Year Maximum: The retention date may be no longer than two years from the date the sign-on bonus is paid;
– No Interest: The repayment obligation is not subject to interest accrual;
– Prorated Repayment: The repayment obligation must be prorated based on the date of employment separation in relation to the original payment date and the retention date (for example, if the retention date is two years from the date of payment, and the employee voluntarily resigns after exactly one year, the repayment obligation cannot exceed 50% of the sign-on bonus);
– Option to Defer Payment: The employee has an option to defer receipt of the sign-on bonus until the retention date without any repayment obligation; and
– Only Repayable for Certain Separations: The separation from employment triggering the repayment obligation must be due solely to the election of the employee (i.e., voluntary resignation) or at the election of the employer based on the employee’s misconduct. In other words, a layoff or other non-misconduct related involuntary resignation may not trigger a repayment obligation.
The GT blog goes on to say that the law is even tougher on retention bonuses – employment agreements may not include a repayment obligation, regardless of the specific terms. So, if you envision retention bonuses in the near future, and want them to be repayable if the person later leaves, it looks like you should call your employment lawyer and try to get those contracts executed before year-end! If you can’t get that done, though, all is not lost. The blog offers ideas on alternative structures once the law goes into effect.
The law appears to be broadly drafted to apply to any company employing workers in California – and some commentary out there says that an agreement signed in California will continue to be subject to the restriction even if the employee later moves out of state. But as this Akin Gump memo points out, AB 692 leaves a lot of questions unanswered – so again, it’ll be important to work with counsel on your specific circumstances.
Thanks to speakers Jeff Joyce of Pay Governance and Sheri Adler and David Kaplan of Troutman Pepper Locke for reminding me of a 2024 development in last week’s webcast “Equity Award Approvals: From Governance to Disclosure” (replay available for on-demand viewing) and sharing a great reminder for 2026 proxy statements. During the program, David raised the 2024 lawsuit against Apple alleging that Apple’s proxy disclosure was misleading because the target value disclosed in the CD&A did not match the compensation expense. The two values didn’t match because Apple determines the number of PSUs to be granted by dividing the target value by the closing stock price on the date of grant, rather than using a Monte Carlo simulation, which is what is required to determine accounting expense and reported in the Summary Compensation Table.
If you’re thinking, “wait, tons of companies do this,” that’s true. (David, Jeff and Sheri discussed why this method is sometimes used instead of a Monte-Carlo model.) And, as Liz shared at the time, the court ultimately dismissed the complaint with prejudice. But, as David noted during the program, Apple had clear disclosure explaining the method used by the compensation committee and the difference in the accounting valuation. Many other companies are not as explicit. So I pulled up Apple’s 2025 proxy, and I completely agree. If this is applicable to your company, the relevant footnote from Apple’s Summary Compensation Table is below. You may want to compare your disclosure and consider improvements. I particularly like that Apple repeats the target values from the CD&A in the footnote.
The target grant value of Mr. Cook’s long-term equity award was $50 million for 2024, $40 million for 2023, and $75 million for 2022. The target grant value of our other named executive officers’ long-term equity awards was $20 million for each of 2024, 2023, and 2022. This column shows the grant date fair value for accounting purposes of the long-term equity awards granted to our named executive officers. The grant date fair value for time-based RSUs is measured in accordance with FASB ASC 718 and based on the closing price of Apple’s common stock on the date of grant. The grant date fair value for performance-based RSUs is calculated using a Monte-Carlo model for each award on the date of grant, as determined under FASB ASC 718, based on the probable outcome of the performance condition as of the grant date. The grant date fair value for each award may differ based on the applicable data, assumptions, and estimates used in the model. See footnote 1 to the table entitled “Grants of Plan-Based Awards 2024.”
While you’re at it, you might as well check your disclosure about equity award valuations & assumptions against Instruction 1 to Item 402(c)(2)(v) and (vi) of the Summary Compensation Tables rules.
In our blogs on the recent big announcements by the proxy advisors — Glass Lewis moving away from “singularly-focused research and vote recommendations based on its house policy” and ISS now offering two new research services meant to support institutional investor proprietary investment stewardship programs — we’ve focused on the increasing uncertainty for companies. As this Compensia alert puts it, this “broad reorientation of the proxy advisor landscape centered on investor-specific customization” and the “resulting fragmentation of viewpoints and voting behavior will require more proactive, data-informed strategies.”
But, as the alert points out, there is also a silver lining for companies and compensation committees that feel like they’ve been constrained in their compensation program design by the proxy advisors’ historically standardized benchmark voting recommendations.
Increased Flexibility in Pay Design. With proxy advisor benchmark policies becoming less influential, companies have greater flexibility to tailor incentive plan designs to meet their individual needs. However, this flexibility increases the importance of understanding and considering the specific priorities and policies of key investors when making and communicating design decisions.
But, yes, that may mean more work for compensation committees. Compensia suggests that committees:
– Map your top investors’ voting policies and identify where views diverge (e.g., preferred metrics, performance periods, equity mix).
– Pressure-test incentive design decisions against those investor perspectives before finalizing awards.
– Engage early and often, before you file your 2026 proxy statement to understand how key shareholders’ policies may be evolving.
– Know which investors already follow in-house policies. Track how and when shareholders transition to new ISS and/or Glass Lewis frameworks.
– Reassess vote forecasting tools. Move away from reliance on benchmark-based models toward more tailored approaches informed by shareholder engagement.
– Refresh governance and compensation messaging. Ensure CD&A and proxy statement summaries clearly articulate the “why” behind key pay decisions and governance practices.
The key compensation-related change is that, as previewed, Glass Lewis has updated its pay-versus-performance model. Here’s more from Dave:
Enhanced Pay-for-Performance Evaluation: Glass Lewis has updated its pay-for-performance model to adopt a scorecard-based approach. Instead of assigning a single letter grade (A–F), the model now consists of up to six tests, each receiving an individual rating. These ratings are aggregated on a weighted basis to produce an overall score ranging from 0 to 100. This change is intended to provide a more nuanced and transparent assessment of executive compensation alignment with company performance.
In light of a recent announcement, the benchmark policy now includes this note:
For 2026, the language in this document has been updated to clarify that these guidelines contain the views of the Benchmark Policy. The Benchmark Policy reflects broad investor opinion and widely accepted governance principles and is intended to provide clients with nuanced analysis informed by market best practice, regulation, and prevailing investor sentiment.
This change better conveys Glass Lewis’ role as a service provider to a diverse, global client base with a wide spectrum of viewpoints and objectives. The Benchmark Policy represents just one of Glass Lewis’ policy offerings.
Companies are still finding goal-setting to be especially challenging in this uncertain environment. Pay Governance reports that some compensation committees are considering some more unique, and more flexible approaches to incentive design to reduce the risk of payouts that, on one end of the spectrum, demotivate employees and, on the other end, vex shareholders. One of those unique approaches is the use of relative metrics — that is, beyond rTSR. This latest Pay Governance piece says:
[R]elative TSR can be influenced by factors outside of management’s control and provides less direct line of sight to the financial/operational goals the management team may need to focus on. Relative financial metrics, on the other hand, can provide direct focus to the management team on core financial measures in the company’s business plan while also avoiding the need to set goals in an uncertain environment.
Pay Governance researched S&P 500 proxy disclosures and found that:
– Only 3% of utilized relative financial metrics in 2024 STI plans, while 13% used them in LTI plans. These figures have generally held steady since 2019.
– Relative financial metrics were more common at companies in Financial Services and Industrials with prevalence of 30% and 21% respectively in 2024.
– Return and profit metrics are the most prevalent, followed by revenue. Return metrics include metrics such as return on equity and return on capital. Profit metrics include metrics such as earnings per share, operating margin, and net income.
– For both relative profit and revenue metrics, performance is typically measured in terms of growth over a specified period, regardless if included in STI or LTI plans.
– Among LTI plans, the most common performance period is three years.
– The majority of companies using relative financial metrics incorporate them as weighted metrics as opposed to incorporating as a modifier on the overall results.
But relative metrics come with their own challenges. Pay Governance says that, while relative metrics have some clear pros — rewarding outperformance, alleviating the need to set absolute goals, easier performance curves, potentially less payout volatility and possibly favorable perception by investors — they also have some procedural cons — including potential delay and difficulty in calculating results for the comparator group, challenges with defining the comparator metric (“e.g. change over the period versus absolute results, safeguards for mergers and acquisitions, adjustments, etc.”) and challenges with comparing non-GAAP metrics. Nothing’s ever easy!