Preparing for 2025: Ten tips for compensation committees and HR teams 

Former SEC commissioner Paul Atkins has been nominated to replace SEC chair Gary Gensler, which will give the agency a republican majority. During Gensler’s tenure, he spearheaded rules targeting executive pay and corporate governance, such as clawback policies, Rule 10b5-1 trading plans, and pay-versus-performance disclosures. But he didn’t finish all the items on the SEC’s current agenda and Atkins isn’t expected to continue to pursue the following rulemaking activities: 

• Human capital management: The SEC is unlikely to propose a rule to enhance principles-based human capital management (HCM) disclosures in the annual report on Form 10-K by requiring companies to also report on specified, objective measures.
• Board diversity disclosure: The SEC isn’t expected to propose a rule that would require proxy disclosure of directors’ gender, race and ethnicity details.
• Shareholder proposals: Under a more business-friendly administration, the SEC is likely to abandon or modify a proposed rule that would have made it harder for companies to exclude shareholder proposals from proxy statements.

Atkins could bolster rules to curb the influence of proxy advisors after court cases play out. Originally adopted under Trump in 2020, the rules were dialed back by the Biden SEC in 2022 and have since been tied up in litigation from both sides of the aisle ― those saying the rules exceed the SEC’s authority and those challenging the 2022 reversals.

Going forward, the SEC is likely to issue fewer new rules and may simplify executive pay disclosures, such as by eliminating the CEO pay ratio disclosure, scaling back detailed narratives and tables and possibly applying the emerging growth company scaled disclosure to all companies. Also, a decrease in SEC funding and staffing could result in less informal guidance (e.g., staff interpretations), and fewer comment letters, leaving a vacuum for law firms to fill. Lastly, the agency may have different enforcement priorities.

Key action steps

• Follow speeches and presentations of the new SEC chair and commissioners to anticipate rule retractions and new rulemaking initiatives.
• Prepare for less interpretive guidance from the SEC given the likelihood of decreased funding and elimination of Chevron deference to agency interpretations of laws (see Tip 2).
• Track state laws to see if states step into the breach left by the SEC and other federal agencies.
• Prepare to walk a fine line as shareholders increase pressure for or against disclosure on HCM, board diversity and other E&S issues.

Recent Supreme Court decisions are increasing the number of legal challenges to federal agency action and the likelihood the challenges will succeed. They may also have a chilling effect on future rulemaking and hamper agency enforcement authority.

The court:

• Overturned the Chevron doctrine, which had required courts to defer to federal agency interpretations of ambiguous laws (Loper Bright Enterprises v. Raimondo)
• Made it easier for plaintiffs to challenge past and future agency actions by expanding the time frame to sue federal agencies (Corner Post v. Board of Governors of the Federal Reserve System)
• Raised the bar for how agencies must explain and address public comments during rulemaking notice-and-comment periods (Ohio v. EPA)

Following these rulings, a federal district court in Texas blocked a Federal Trade Commission (FTC) ban on noncompete agreements from taking effect nationwide, finding the FTC exceeded its statutory authority in issuing the ban. The new administration is unlikely to challenge the court’s ruling, leaving the federal ban dead. However, state bans remain in effect and more states are considering similar bans. So far, the bulk of the challenges have come from red states but blue states are planning to use the same legal tactics to defend E&S and DEI initiatives from attacks by the new administration (see Tip 7).

Key action steps

• Review recent court decisions and assess their impact on agency rules.
• Anticipate uncertainty in interpretation of federal laws and prepare to turn to outside advisors to assist in understanding and complying with federal law.
• Track state laws on noncompete agreements and other topics the courts may determine are beyond the statutory authority of federal agencies.
• Prepare for shareholders to scrutinize executive pay and governance and to raise concerns with companies in the engagement process given the potential for lax SEC enforcement.

New disclosures target “spring-loaded awards” (awards granted shortly before announcing material nonpublic information (MNPI)) that can significantly affect stock prices, such as an earnings release with better-than-expected results. Beginning with 2025 proxy statements, companies must describe their policies on the timing of option grants in relation to the release of MNPI, including how the board determines when to grant awards (e.g., on a predetermined schedule), whether and how the board or compensation committee considers MNPI when determining the timing and terms of awards, and whether the company timed the disclosure of MNPI to affect the value of executive pay. The proxy must also include a table showing options granted in the last fiscal year to named executive officers within four business days before or one business day after the filing of a Form 8-K with MNPI or the filing of any Form 10-Q or 10-K. The 2025 table covers 2024 grants.

While the new disclosures apply only to stock options, two existing requirements apply to all equity awards: 2006 Compensation Discussion & Analysis grant timing disclosures and a 2021 SEC staff accounting bulletin that requires companies to consider the impact of the release of MNPI on the value of spring-loaded awards, reflect any additional value in compensation cost, and disclose the additional value in the Summary Compensation Table and Grants of Plan-based Awards Table.

Key action steps

• Reduce the likelihood of needing the new table (or be able to justify the grant timing) and incurring accounting costs by:
  • Granting awards only during open window periods (and, in the case of options, not during one of the five days that would trigger the option table) or setting fixed grant dates.
  • Requiring preclearance by legal and finance of off-cycle grants to confirm there’s no planned release of MNPI that could impact an award’s grant date value.
• Document practices in a formal policy, describe the policy in the 2025 proxy statement and ensure actual practices are consistent with the policy and disclosures.

New disclosures will spotlight insider trading policies and use of Rule 10b5-1 trading plans. Rule 10b5-1 amendments adopted in 2022 added conditions to the affirmative defense to insider trading for transactions under pre-established trading plans (e.g., a cooling off period between plan adoption or modification and the first trade) to prevent opportunistic trading. If executives and directors use 10b5-1 trading plans, Forms 10-Q and 10-K must disclose the adoption, modification or termination of these plans and their terms (e.g., duration and number of shares purchased or sold). Also, Section 16 checkbox disclosures (e.g., on Forms 4 and 5) must indicate if officer and director trades were under a trading plan.

Beginning with 2025 filings, companies must describe their insider trading policies in their Form 10-K or proxy statement and discuss the trading procedures and policy rationale. Also, they must file the policy as an exhibit to Form 10-K. This disclosure is mandated even if individuals don’t use trading plans.

Key action steps

• Implement preclearance procedures or other controls sufficient to prevent opportunistic trading.
• Weigh the pros and cons of requiring insiders to trade only through Rule 10b5-1 plans against the strict new conditions.
• Assess the adequacy of the company’s controls and procedures for tracking the use of Rule 10b5-1 trading plans and insider transactions.
• Update the company’s insider trading policy for alignment with best practices and ensure actual practices are consistent with the policy and disclosures.
• Describe the policy in the 2025 Form 10-K or proxy statement.

In 2024, the SOP failure rate fell to its lowest level (about 1%) since the adoption of SOP in 2011. Compared to 2023, average support increased, favorable votes of at least 90% were up, and “Against” recommendations from proxy advisor Institutional Shareholder Services (ISS) and failures where ISS issued an “Against” recommendation were down. These results are largely attributable to strong stock price performance and the end of special compensation actions to address COVID challenges.

But companies shouldn’t be complacent. The most common concerns raised by shareholders and proxy advisors (besides egregious practices like repricings, gross-ups and excessive severance) included:

• Performance metrics that are changed, canceled, or replaced during the performance period without adequate explanation of the action and the link to performance.
• Payouts or discretionary awards made despite failure to achieve pre-established threshold short- or long-term incentive plan performance criteria.
• Mega grants and retention awards without adequate justification.
• Severance payments when a termination isn’t clearly disclosed as involuntary.
• Inadequate response to a low SOP result in a prior year.

In addition to reviewing proxy advisors’ reports to see what concerns they raised, companies can now access annual SOP vote results of institutional investment managers on Forms N-PX. This will make it easier to understand which institutional investors to target for shareholder engagement.

Key action steps

• Review the company’s 2024 proxy advisor reports from ISS and Glass Lewis and Forms N-PX of top investors to identify and address concerns.
• Respond to a low SOP vote (less than 70% for ISS and less than 80% for Glass Lewis) to avoid a negative result next year by engaging with top investors and, where applicable, changing pay programs.
• Disclose engagement efforts (e.g., percentage of shareholders contacted), types of engagement activities (e.g., calls, emails, in-person meetings), management and board members involved (e.g., compensation committee chair), and the company’s actions taken in response to any feedback (e.g., “what we heard/what we did” table).

Updates to ISS and Glass Lewis proxy voting guidelines for 2025 are modest and don’t include changes to their pay-for-performance quantitative assessments. Of note, both explored whether to change their shared stance that a failure to apply performance conditions to a majority of an executive’s equity awards could trigger a negative SOP recommendation. For example, should it be a mitigating factor if time-based awards are subject to longer vesting periods (e.g., five or seven years) or post-vesting holding periods. Neither made a formal policy change (ISS says it’s on the table for future updates) but both clarified how they will qualitatively review equity awards:

• ISS: According to a new FAQ, ISS will assign greater weight in its qualitative analysis to the design of performance-based awards and how they are disclosed, particularly for companies that exhibit a quantitative pay-for-performance misalignment. The following could raise concerns: goals that are not sufficiently rigorous, overly complex performance equity structures, non-disclosure of forward-looking goals (disclosure at the end of the performance period will carry less mitigating weight); poor disclosure of actual vesting results; and unusually large pay opportunities, including maximum vesting opportunities.
• Glass Lewis: Glass Lewis clarified that, under its holistic approach (which is essentially a black box), it doesn’t use a scorecard approach when considering features such as equity mix, and that few program features on their own will lead to an unfavorable SOP recommendation.

Other ISS FAQs provide the following:

• Clawback policies won’t be viewed as robust unless they apply to time-based as well as performance-based awards (Glass Lewis already requires this and more (see Tip 8)).
• Proxy reports won’t display a realizable pay chart for companies that have experienced two or more CEO changes within the applicable three-year window. Realizable pay includes non-incentive compensation paid, the value of equity or cash incentive awards earned or, if the award is in progress, the target value as of the end of the measurement period.
• ISS doesn’t prefer the use of TSR or any specific metric in executive incentive plans, but recognizes that shareholders prefer objective metrics that increase the transparency of pay decisions. Factors ISS may consider in evaluating metrics include: whether awards emphasize objective metrics linked to quantifiable goals (as opposed to subjective or discretionary metrics); the rationale for metric selection (including the link to company strategy and shareholder value); the rationale for atypical metrics or significant changes from the prior year; and/or the clarity of disclosure around adjustments for non-GAAP, including the impact on payouts.
• Mid-cycle incentive plan changes (such as to metrics, targets or measurement periods) are generally viewed negatively. Companies should disclose a clear and compelling rationale for these actions and explain how the actions don’t circumvent pay-for-performance outcomes.

Other clarifications from Glass Lewis include statements that:

• The top reason for an adverse SOP recommendation is if there's a "misalignment between incentive payouts and the shareholder experience."
• If committees have discretion in the treatment of unvested awards on a change in control, companies should commit to providing a clear rationale for how the awards are treated on a change in control.
• If a shareholder proposal receives significant support (i.e., 30%-50%), the company should engage with shareholders and disclose their concerns and the company’s outreach initiatives.

Key action steps

• Get up to speed on proxy advisor and key investor policy updates and prepare for changes that may impact 2025 voting recommendations on the company’s pay and governance proposals.
• Review current pay and governance policies and practices to ensure alignment with the new guidelines.
• Grant a majority of equity in the form of performance-based awards with objective, quantifiable goals. If goals can’t be set or there are other special circumstances, include longer vesting provisions in time-based awards and disclose a compelling rationale.
• Beware of mid-cycle changes to incentive awards. If adjustments are made, disclose a clear and compelling rationale.
• Use the CD&A to tell the company’s pay-for-performance story, including how incentive plan metrics align with the company’s strategy and shareholder value. Be transparent about non-GAAP adjustments and the impact on payouts and explain atypical actions taken during the year.

Several developments are empowering the rising backlash against E&S and DEI in corporate America, including expectations that the Supreme Court decision ending affirmative action in college admissions (Students for Fair Admissions v. President and Fellows of Harvard College) will be extended to the workplace. Also, anti-E&S/DEI advocacy groups anticipate having the support of the new administration. For example, Project 2025 (Republicans’ blueprint for governing) recommends forming an “E&S/DEI collusion task force” at the FTC and prohibiting the SEC from requiring companies to disclose certain information about their workforces. Against this backdrop:

• The SEC is likely to shelve rules that would have required board diversity and enhanced HCM disclosures (see Tip 1). Also, the SEC and Nasdaq aren’t likely to appeal a Fifth Circuit Court of Appeals decision striking down the listing standard requiring company boards to have diverse directors and include a diversity matrix in the proxy and some investors are softening their stance (e.g., BlackRock will no longer request that boards aspire to 30% diverse members). That said, many companies already provide detailed information on board diversity and aren’t likely to back away from this disclosure.
• Companies facing E&S and DEI shareholder proposals ― either those calling for implementing initiatives or those claiming the initiatives negatively impact shareholder value ― may see some relief. That’s because a more business-friendly SEC is likely to roll back a proposed rule that would have made it easier for activist investors to get shareholder proposals on the ballot (see Tip 1). On top of this, the SEC is likely to make it easier for companies to exclude these proposals after a panel of the Fifth Circuit Court of Appeals affirmed the SEC’s authority to continue to rule on “no-action letter” requests from companies seeking to exclude them (National Center for Public Policy Research v. SEC). The case could still be appealed to the full court.
• The use of E&S and DEI metrics in incentive plans has plateaued after a meteoric rise starting in 2020 and several companies have moved from quantitative to qualitative DEI goals. Companies should be prepared for challenges from anti-E&S/DEI investors and advocacy groups. On the flip side, companies not using E&S and DEI metrics might receive shareholder proposals from pro-E&S/DEI investors. And shareholders on both sides of the issue may challenge companies they believe are setting “gimme” goals given the typically high level of achievement.

In response to the E&S/DEI backlash and the fact that several high-profile companies are scaling back their commitments, blue state attorneys general are preparing to use the Loper decision (see Tip 2) to defend against federal agency efforts to curtail E&S and DEI initiatives in the workplace.

Key action steps

• Consider how to respond to pressure from shareholders and other stakeholders to strengthen or pull back from a commitment to E&S and DEI and manage litigation and other anti-E&S/DEI risks.
• Work with counsel to review disclosures in SEC filings, corporate websites, marketing materials, investor presentations and sustainability reports for materiality, consistency and legal compliance.
• Consider reframing messaging on E&S (to focus on sustainability) and DEI (to focus on inclusion) to strike a balance between competing views and to mitigate business and legal risks.
• Determine the best way to incorporate E&S and DEI metrics into incentive plans (e.g., as stand-alone metrics, as part of a scorecard or otherwise).
• Clearly articulate how E&S and DEI metrics align with the company’s business strategy and are sufficiently rigorous; plan metrics shouldn’t be a cover for discretionary payouts.

Surveys show many companies go beyond SEC and stock exchange clawback mandates to cover more types of compensation (e.g., time-based pay) and more triggers (e.g., misconduct or reputational harm). These more robust policies are consistent with ISS and Glass Lewis voting guidelines. ISS gives a company credit for a clawback policy only if it covers time-based awards and performance-based awards (see Tip 6). And Glass Lewis’s guidelines state the clawback policy should allow companies to recoup incentive compensation (whether time-based or performance-based) in cases of problematic decisions or actions (e.g., material misconduct, reputational failure, risk management failure or operational failure).

In 2025 disclosures, if a company’s financial statements include a correction of an error, the company must check boxes on the cover page of its Form 10-K and indicate whether any error corrections are restatements that require a clawback recovery analysis. Also, if the clawback policy was applied during the year, the company must disclose details about the clawback in the proxy statement.

Key action steps

• Consider whether to adopt a separate clawback policy that goes beyond the Dodd-Frank and stock exchange requirements to address proxy advisor policies on time-based awards and misconduct.
• File the clawback policy as an exhibit to the annual report on Form 10-K.
• Check clawback-related boxes on cover page of annual report on Form 10-K, if applicable.
• Provide additional disclosures about company actions if a clawback is triggered.

Equity awards are the largest component of most executive pay packages so securing shareholder approval of an equity plan is critical. Unlike SOP proposals, which are advisory and nonbinding on the company, proposals to adopt or amend an equity plan are binding. If the proposal fails to receive majority shareholder support, the company can’t issue equity awards. Few plans fail (generally around 1%), but given the stakes, companies facing proxy advisor opposition should engage with shareholders. 

A key step in obtaining approval of an equity plan or plan amendment is securing favorable recommendations from ISS and Glass Lewis. ISS uses a proprietary equity plan scorecard (EPSC) and qualitative assessments to evaluate equity plan proposals. The EPSC consists of three pillars: plan cost, plan features and grant practices. ISS generally recommends “For” plans that receive a passing score absent overriding negative factors such as excessive dilution or repricing stock options without shareholder approval. The only changes to the EPSC for 2025 are updated burn-rate benchmarks.

Glass Lewis’s Equity Compensation Model includes 11 quantitative and qualitative tests that gauge potential dilution and cost, including if the company already has enough shares for near-term granting, if the proposed reserve is excessively large (thereby decreasing the frequency of requests for more shares), and if the company’s actual share usage aligns with shareholders’ values. Additional tests measure how well the qualitative features of the proposed plan follow best practices in pay governance.

Key action steps

• Review share needs for ordinary course 2025 and 2026 grants and for expected new hires, promotions and special situations, and plan to request more shares if anticipated needs exceed available shares.
• Perform sensitivity analyses to assess whether there’s a sufficient buffer to cover grants through the 2026 annual meeting should the company’s share price decline (assuming grants are based on a specific target value versus a fixed number of shares).
• If new shares are needed:
  • Consider licensing the ISS EPSC model to determine whether a new share request will receive a favorable vote recommendation; evaluate whether giving up flexibility in the equity plan’s terms is worth the additional number of shares that can be requested.
  • In the proxy requesting shareholder approval, show prior and expected burn rates and highlight good governance plan features to make the case for the request.
• Prepare to engage with shareholders if “Against” recommendations from proxy advisors are expected.

Boards are reviewing their executive security policies, with many considering enhancing personal protection, home security and the use of corporate aircraft to protect their executives following the assassination of the CEO of UnitedHealthcare. Boards considering enhancing executive security protections should be aware of the following:

• When companies provide these protections for personal use, the SEC considers it a perk and, if named executive officers receive them, the incremental cost to the company must be disclosed in the proxy statement. This is the case even if the protections are mandated by the company following an independent security assessment.
• SEC enforcement actions target companies that fail to properly disclose executive perks, particularly the personal use of corporate aircraft (this could change under the new administration).
• IRS audits focus on the improper deduction of the cost of personal travel as a business expense, and there are always concerns about the favorable tax treatment executives receive if they must use the plane for security purposes (this could also change under the new administration).
• Shareholders and proxy advisors might scrutinize the costs. For example, ISS considers the cost of security arrangements in its qualitative review of executive pay plans.

Having effective disclosures, controls and procedures is critical to avoiding a disclosure or tax failure.

Key action steps

• Review security assessment procedures and perform regular reviews, including evaluating whether the current policies are sufficient to provide executives protection in light of recent events.
• Determine if certain services, such as personal security or private transportation, qualify as a "working condition fringe" under the Internal Revenue Code that can be excluded from an executive's gross income and deducted by the company as a necessary business expense.
• Develop effective disclosure controls and procedures to avoid a disclosure failure, including soliciting detailed perquisite disclosure on D&O questionnaires, tracking executives’ use of company aircraft, and training employees on how to appropriately classify expenses for disclosure purposes.
• To potentially avoid significant penalties if there’s a disclosure failure, inform the SEC and shareholders immediately and cooperate with the investigation.