Preparing for 2026: Ten tips for compensation committees and HR teams 

The SEC has indicated it will be advancing the administration’s goal of adjusting executive compensation regulations, including reducing proxy disclosures. The agency kicked off this initiative with a June roundtable and, in a December speech, SEC Chair Atkins said there was universal agreement among the roundtable panelists that the length and complexity of executive compensation disclosure have limited its usefulness and insight to investors and that the rules need a “re-set.” While the SEC’s most recent regulatory agenda doesn’t specifically enumerate potential changes to executive compensation regulations, one item ― rationalization of disclosure practices ― will likely tackle many of the topics covered at the roundtable, including:

• Principles-based vs prescriptive rules. SEC commissioners noted that disclosures have become unwieldy and costly for companies. The agency is likely to favor a principles-based approach over prescriptive rules.
• Dodd-Frank Act mandates. Three specific rules implementing Dodd-Frank Act mandates are under review by the SEC: CEO pay ratio disclosure, pay-versus-performance disclosure and clawback policies.
• Perks. Given renewed interest in personal security for executives, the SEC is likely to redefine what constitutes a perk to exclude personal security in certain situations and modify the required perk disclosure (see Tip #8).
• Incentive award disclosure. Investors asked that the tabular disclosure be modified to better track the lifecycle of individual cash and equity awards from grant to settlement. They also urged the SEC to revamp the proxy’s Compensation Discussion and Analysis rules to better explain how the compensation committee sets target pay and how actual pay reflects performance outcomes.
• Named executive officers (NEOs). Panelists discussed the possibility of limiting NEOs to the CEO, CFO and one additional executive officer (as is the case for emerging growth companies and smaller reporting companies).
• XBRL tagging. Investors observed they would rely less on proxy advisors if compensation tables were tagged using XBRL, which makes financial data machine-readable.

The panelists also discussed the influence of proxy advisors on executive pay, particularly in the area of performance-based awards (see Tips #2 and #7). The SEC’s agenda currently targets April for proposed rule changes. Changes are not likely to be effective for the 2026 proxy season.

Action steps

• Track SEC commissioners’ speeches, agency guidance and proposed and final rules.
• Provide feedback to the SEC on proposed rules.
• Ensure 2026 proxy disclosures tell the company’s compensation story and explain the rationale for pay decisions and how pay relates to performance outcomes.
• Consider eliminating repetitive or boilerplate language even if it has been disclosed in past proxy statements.  

Mercer resources

SEC regulatory agenda: What’s next for executive pay disclosure?

SEC roundtable: SEC lays the groundwork for significant changes to executive pay disclosure

Tariffs, inflation, market volatility, and economic and political instability are affecting company performance, incentive plan outcomes, the holding power of awards, and 2026 grant strategies.

In-flight performance awards. For annual or long-term performance-based awards that vest in 2025 and include automatic adjustment provisions that either specifically address regulatory changes like the imposition of tariffs or are broad enough to encompass these types of events, compensation committees need to calculate the adjustments. If the awards don’t include these types of automatic adjustments, companies need to decide whether to exercise positive discretion to see that awards continue to be retentive, or negative discretion to guard against windfalls.

For long-term incentives with ongoing performance periods and no automatic adjustments, committees need to assess the value of outstanding grants and how performance is tracking against goals to consider making in-flight adjustments before the end of the performance period. If incentives have lost their holding power, companies should assess the impact of modifying goals or exercising positive discretion as well as the impact of doing nothing or waiting until the end of the performance period to consider changes.

Discretionary adjustments have tax, accounting, disclosure and governance implications. Proxy advisors and investors may view upward adjustments with skepticism, particularly if an adjustment does not have a compelling rationale.

Holding power of equity awards. If projected financial results or share price performance have been negatively impacted by recent market volatility, the holding power of unvested equity awards and unexercised stock options may be significantly diminished, posing potential retention challenges for some companies.

2026 grant strategies. Compensation committees and HR teams should discuss the impact of market volatility and economic instability on 2026 grants, including:

• The difficulties of setting goals when the company can’t project business conditions;
• What items and events should trigger automatic adjustments to goals or results; and
• How to determine the number of shares to grant when stock prices are volatile.
• Companies struggling with goal setting for annual and long-term incentive plans may want to consider:
• Using shorter performance periods with additional service-based vesting requirements;
• Setting wider ranges for performance around target — e.g., instead of setting threshold and maximum goals at -/+10% of target, using -/+15%;
• Defining target performance using a performance range instead of a specific figure;
• Building in greater compensation committee discretion to adjust goals; and
• Modifying the long-term incentive (LTI) mix to grant more stock options or time-based full value awards (see Tip #7).

Action steps

• For in-flight awards with no automatic adjustment provisions, assess the impacts of modifying goals or exercising positive or negative discretion, as well as the impact of doing nothing.
• Review holding power of unvested awards and unexercised options by analyzing awards at various share prices to see the impact and, if appropriate, consider retention grants.
• Confirm that proxy disclosures and shareholder engagements effectively explain in-flight adjustments and retention awards.
• Review share needs for ordinary course 2026 and 2027 grants and for expected new hires, promotions and special situations and plan to request more shares, if necessary.
• For 2026 awards, assess LTI mix and methodologies for setting goals and determining the number of shares to grant, and provide for automatic adjustments for regulatory events, as appropriate.

Mercer resources

Uncertain times: Tips for compensation committees and HR teams in the second half of 2025

Uncertain times: Will trade wars and market volatility upend incentive plans?

The courts have dealt some setbacks to SEC attempts to regulate proxy advisors, but 2025 developments are keeping the pressure on ISS and Glass Lewis, and both proxy advisors are adjusting the services they offer. Also, some institutional investors are restructuring their proxy voting operations into separate stewardship divisions to provide more customized voting policies. These changes could be particularly significant for companies facing an activist investor, with voting results shaped by a variety of sometimes conflicting investor and proxy advisor policies.

Challenges to proxy advisor practices. The Trump administration, FTC, business groups and some states continue to try to reduce the impact of proxy advisors, particularly on ESG and DEI matters:

• President Trump signed an executive order directing: (i) the SEC to review methods for addressing the influence of proxy advisors, (ii) the FTC to investigate antitrust violations, and (iii) the Department of Labor to strengthen rules on how retirement plan fiduciaries can use proxy advisors.
• The FTC is already investigating ISS and Glass Lewis for possible violations of antitrust laws relating to shareholder vote recommendations on climate and ESG issues.
• The Business Roundtable issued a white paper urging the SEC to enhance its oversight of proxy advisors and enforce standards for transparency and accountability. And the US Chamber of Commerce submitted a letter in September to the House Financial Services Committee expressing concerns about the proxy process and shareholder proposal system.
• Texas passed a law that would require proxy advisors to make detailed disclosures if they provide voting advice regarding Texas companies that isn’t based solely on shareholders’ financial interests (e.g., advice on ESG and DEI matters). In August, a judge temporarily blocked the law and a trial is currently scheduled for February 2026.I
• Florida filed a lawsuit against ISS and Glass Lewis for violating consumer protection and state antitrust laws by deceiving investors, coordinating their services, and steering corporate governance in ways disconnected from financial performance. Texas announced it would investigate ISS and Glass Lewis for potential violations of consumer protection laws relating to their issuance of voting recommendations that advance political agendas. In July, Missouri launched an investigation into alleged promotion by ISS and Glass Lewis of ESG and DEI agendas and filed lawsuits to enforce its demands for information.

Changes in proxy advisor offerings. The challenges to their influence, the political climate and variances in investor priorities are prompting proxy advisors to change their business offerings:

• Glass Lewis. Glass Lewis announced that, beginning in 2027, it will stop offering its standard benchmark proxy voting guidelines and begin transitioning clients to differentiated, client-specific voting frameworks reflecting the clients’ individual investment philosophies and stewardship priorities. Meanwhile, it notes in its 2026 voting policy guidelines that its benchmark policy represents just one of its policy offerings. Separately, the proxy advisor is considering registering as an investment advisor, which would subject it to increased SEC oversight.
• ISS. ISS has indicated it will maintain its benchmark policies but has announced new products for investors that don’t include voting recommendations. These products will allow institutional investors to access governance data from its research and technology solutions arm (ISS STOXX) to inform their independent vote decisions.

These shifts present both opportunities and challenges for companies. While proxy advisors may have lesser influence, companies will be less able to rely on historical shareholder voting patterns and cannot be as confident that aligning compensation programs with the proxy advisors’ standard benchmark policies will signal shareholder support.

Institutional investors. The Trump administration is considering an executive order that would limit how index-fund managers are allowed to vote. Also, some institutional investors are restructuring their proxy voting operations into separate stewardship divisions and adapting voting choice programs:

• Fund manager stewardship. BlackRock, Vanguard, and State Street are restructuring their proxy voting operations into separate stewardship divisions, each governed by distinct decision-makers, policies, and methodologies that could accommodate differing priorities on issues such as ESG. Consequently, a single asset manager might cast different votes on the same issue across various funds, requiring companies to engage with multiple teams.
• Fund manager pass-through voting programs. For clients directing their own votes, fund managers have launched “voting choice” or pass-through voting initiatives that enable investors to choose among multiple voting policies, including those from third-party advisors like ISS or Glass Lewis, or to specify their own voting preferences.

Action steps

• Stay abreast of SEC, FTC and DOL actions, executive orders, and federal and state laws regulating proxy advisors and track court proceedings in federal and state courts.
• Consider the potential impact on vote results of proxy advisor and institutional investor customized frameworks, recognizing past voting patterns may no longer reliably predict future results.
• Engage with investors to build strong relationships to gain insight into their evolving decision-making criteria and priorities, and to reduce the risk of unexpected outcomes.

Mercer resources

New executive order targets proxy advisors and their impact on DEI and ESG initiatives

Evolving rules on proxy advisors, engagements and proposals shake up 2026 proxy season playbook

The SEC is revisiting how companies engage with shareholders and making it easier for companies to omit shareholder proxy proposals, particularly in the areas of ESG and DEI. As with proxy advisor regulation, there are pros and cons to this development for companies.

Shareholder engagement. SEC staff guidance has made 5% shareholders more reticent to engage with companies because these shareholders could lose their status as “passive” investors and be required to file more detailed “active” investor reports. Under the guidance, investors can be viewed as active if they “exert pressure” on management to make specific changes to, among other things, executive pay or a social, environmental or political policy, or if they indicate that support for director nominees will be withheld unless the company makes changes the investor desires. The guidance has resulted in less shareholder engagement overall. For example, BlackRock and Vanguard temporarily paused engagements and ultimately each pursued about 1,000 fewer engagements during the 2025 proxy season, according to their stewardship reports.

Law firm commentary has generally concluded that the following activities shouldn’t present significant risk to investors under the guidance: engagement on non-binding proposals like SOP and responding to company-initiated inquiries regarding the investors’ views on particular issues (rather than raising the issue on their own). But if investors won’t take the initiative, companies must be more proactive in requesting engagements and asking questions on key topics during those engagements. Finally, investors may to be less candid with their voting intentions, which could lead to unexpected negative votes on director elections, SOP, etc.

Shareholder proposals. According to the SEC’s regulatory agenda, the agency will propose rules by April 2026 that will modernize the shareholder proposal regime and make it easier for companies to exclude proposals. This might include raising the eligibility thresholds, which currently allow investors holding shares worth $2,000 for at least three years to submit proposals. While the rulemaking process will take time to play out, several agency actions and other developments already have significant implications for ESG and DEI proposals:

• The SEC announced it will allow companies to exclude most proposals, and will not be issuing no-action letters. The announcement applies to requests received from Oct. 1, 2025 to Sept. 30, 2026, and requests received before Oct. 1 to which the SEC staff hasn’t yet responded. As has always been the case, companies must notify the SEC and the proposal proponent if they plan to exclude a proposal and state its grounds for exclusion. (Earlier in the year, the staff issued guidance that makes it easier for companies to exclude proposals with societal impact that, among other things, don’t have economic relevance to the company’s business.)
• SEC Chair Atkins said, in a recent speech, that the SEC would respect Texas corporations that opt into a recent state law provision placing ownership and procedural conditions on the ability to introduce a proposal. He also encouraged Delaware corporations to question whether shareholders have the right to introduce nonbinding shareholder proposals under Delaware law and indicated the SEC would not challenge a submitted opinion of counsel that a proposal is not a “proper subject” for shareholder action.

It's not all good news for companies if the shareholder proposal process is scaled back and/or if the SEC Chair’s reading of Delaware law is correct. Companies will likely see fewer shareholder proposals and have an easier time excluding the ones they receive, but they need to consider the risks: the SEC might disagree with a company’s basis for exclusion and bring an enforcement action; proponents might bring a lawsuit to get a proposal included, and investors might employ more aggressive tactics to express their concerns. Tactics could include voting against board members, submitting binding proposals, seeking bylaw amendments, bringing floor proposals at meetings, or engaging in “vote-no” or social media campaigns. In a vote-no campaign, shareholders are urged to vote against, or abstain from voting for, directors. It can be a powerful tool, particularly against companies with a policy that requires directors to tender their resignation if they fail to receive a majority of votes. According to data from Diligent, an AI platform for governance, risk and compliance cited in The Informed Board, vote-no campaigns were up about 40% from 2024 to 2025 for the 12-month periods ending in June.

Separately, if any ESG proposals related to diversity, political contributions, human rights and climate change make it onto the ballot, under ISS’s policy updates, the proxy advisor will assess them on a case-by-case basis rather than generally supporting such proposals. Glass Lewis’s  approach is generally that shareholders should be given an opportunity to vote on matters of material importance, but it may update its guidelines as the proxy season unfolds.

Action steps

• Be proactive with shareholder engagement, as investors are less likely to initiate a dialogue, and come to meetings with an agenda because investors may hesitate to raise topics for discussion.
• Research investor voting policies and preferences and historical voting patterns because investors may not disclose their voting intentions.
• Ensure disclosure adequately explains pay and governance decisions because there may be fewer opportunities to meet with investors.
• Weigh the pros and cons of omitting shareholder proposals, including undermining investor trust.
• Be on the lookout for new activist investor strategies and be prepared to respond.

Mercer resources

Evolving rules on proxy advisors, engagements and proposals shake up 2026 proxy season playbook

After a strong 2024, support for executive pay programs was almost as high in 2025. Average support continues to be just over 90%, the failure rate remains low at about 1.5% and ISS recommended against a similar (albeit slightly higher) percentage of proposals. The most common concerns raised by shareholders and proxy advisors (in addition to practices like repricings, gross-ups and excessive severance) continue to be:

• 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.
• Large grants and retention awards without adequate justification.
• Severance payments when a termination isn’t clearly disclosed as involuntary without cause.
• Inadequate response to a low SOP result in a prior year.

Failure to respond to low SOP support (less than 70% for ISS or less than or equal to 80% for Glass Lewis) can trigger a negative SOP vote recommendation the following year. A company can demonstrate compensation committee responsiveness by disclosing shareholder engagement efforts (or why it was unable to engage with shareholders), including the feedback received and how the company responded (e.g., pay program changes). Disclosure could include the percentage of shareholders contacted and percentage that engaged; types of engagement (calls, emails, in-person meetings); management and board members involved (e.g., compensation committee chair); and the company’s response to any feedback (e.g., “what we heard/what we did” table).

Of note, while 2025 SOP results were generally positive, some companies may face headwinds next proxy season, particularly if the shifting regulatory environment, economic uncertainty or market volatility has negatively impacted their 2025 pay programs or performance results.

Action steps

• Review the company’s 2025 proxy advisor reports from ISS and Glass Lewis and institutional investor voting reports on Forms N-PX of top investors to identify concerns.
• Engage with key shareholders, within the limits set by the SEC (see Tip #5), and make changes to pay programs to address investor concerns.
• Disclose engagement efforts or why the company was unable to engage.

Mercer resources

Companies see strong support for executive pay programs during 2025

It’s a good time for companies to assess the effectiveness of their long-term incentive strategy, particularly if the company has a history of repeatedly underperforming (or overperforming) goals or is finding it difficult to set meaningful goals. Many companies grant a majority of LTI awards in the form of performance shares ― the design historically favored by proxy advisors to obtain a favorable SOP recommendation. Companies have long objected to this and to ISS’s stance that fair market value stock options don’t count as performance-based awards. And now there’s growing sentiment among investors that performance-based awards have become overly complex and sometimes not sufficiently rigorous.

At the SEC’s June roundtable discussed above, some investors expressed concerns that long-term incentive plans had become too “one-size-fits-all,” with companies adopting performance-based pay plans with relative total shareholder return (TSR) metrics even where these plans might not be the most effective. They noted that time-based full value awards and stock options offer several advantages ― including enhanced retention and/or simpler incentive plan structure ― particularly when performance targets are difficult to set.

Acknowledging this shift, ISS’s 2026 voting updates will adopt a more flexible, case-by-case evaluation of equity pay mix, where both well-designed performance plans and time-based awards with extended vesting periods will be viewed positively (vs requiring a majority of executive officer grants to be performance-based), as discussed in Tip #3. It’s unclear if ISS will issue guidance or FAQs to provide specifics regarding acceptable extended vesting periods supporting a case-by-case analysis. The most popular investor response to its survey (31%) was "three-year vesting plus at least a two-year post-vesting retention requirement." Glass Lewis included questions in its policy survey about LTI mix, but its policy changes don’t address this topic.

Action steps

• Assess the potential benefits (e.g., employee retention, rewarding long-term service) of shifting from performance-based awards to time-based full value awards and/or stock options.
• Analyze the impact of a shift in equity vehicles on participant motivation to achieve or exceed business goals.
• If deciding to pivot away from performance shares, ensure time-based awards have vesting and holding provisions that align with updated proxy advisor and investor voting policies

Companies are reviewing their executive security policies in response to increased threats stemming from social media and the current political climate and recent high-profile incidents. A September Mercer spot poll revealed the following: 11% of companies reported security incidents affecting executives within the past three years; 44% currently provide personal security to their executives; and 35% expect to conduct annual reviews of their executive personal security programs in the future.

For companies considering enhancing personal security benefits, there may be less pushback from the SEC, shareholders and proxy advisors than in the past, as suggested by the following developments:

• At the SEC’s June roundtable, the agency and most panelists agreed that personal security should be categorized as a necessary business expense and not a perk. However, some investors continued to support treating it as a perk, noting that excessive amounts (e.g., providing personal security at multiple vacation homes) can indicate poor governance and problematic pay practices.
• In its annual survey, Glass Lewis asked investors their opinion on how executive security costs should be reported, but didn’t address this in its final policy updates.

Action steps

• Review security assessment procedures and perform regular reviews, including evaluating whether the current policies are sufficient to provide executives protection.
• Solicit detailed disclosures for all perks on D&O questionnaires, track executives’ use of company aircraft, and train employees on how to appropriately classify expenses for disclosure purposes.

Review proxy disclosure of personal security arrangements and personal benefits. 

Noncompetition covenants did not become subject to a nationwide ban but companies that use them aren’t out of the woods. Although the FTC opted not to appeal district court decisions that voided the ban, the agency put employers on notice that it’s taking a case-by-case approach to assessing unlawfulness and pursuing enforcement, as indicated by several actions it took in 2025, including:

• Launching a joint labor taskforce to focus on enforcing federal antitrust laws;
• Initiating a public inquiry to better understand noncompete agreements and inform possible enforcement actions;
• Entering into a proposed consent order with a pet cremation company to stop the company from enforcing noncompete agreements; and
• Sending letters to large healthcare employers and staffing firms urging them to review their restrictive covenants.

At the same time, some states continue to impose stricter limits on noncompetes while others are moving in the opposite direction.

Action steps

• Stay informed about FTC enforcement actions that may shed light on what the agency views as subject to challenge.
• Review applicable state and local laws regularly, as enforceability of noncompete agreements varies widely by jurisdiction and is subject to frequent legislative changes.
• Ensure noncompete agreements have clearly defined geographic, temporal, and activity restrictions that are reasonable and necessary to protect legitimate business interests.
• Customize noncompete clauses based on the employee’s role, access to sensitive information, and potential competitive impact rather than using a one-size-fits-all approach.
• Evaluate other protective measures such as nondisclosure agreements, nonsolicitation agreements, and confidentiality clauses that may be less restrictive and have a greater likelihood of enforceability.

Mercer resources

Noncompete agreements under the spotlight

Roundup: US employer resources on recent noncompete restrictions

Pending tax and accounting developments will change how much compensation companies can deduct for executives and other employees and how they report compensation expense. And the SEC could shift from quarterly to biannual financial reporting.

Section 162(m) deduction cap. Beginning in 2027, IRC Section 162(m) $1 million deduction cap will cover an additional five most highly compensated employees (whether or not they are executives). Additional covered employees aren’t subject to the “once a covered employee, always a covered employee” rule. On Jan. 16, 2025, the IRS proposed rules on how to determine the additional five employees. Also, the Big Beautiful Bill added an aggregation rule so that compensation paid by all entities within a company’s “controlled group” counts toward the cap.

Shift to biannual reporting. SEC Chair Atkins is requesting public comment on a shift from quarterly financial reporting to semiannual reporting, which would likely result in a longer-term focus and reduced compliance costs for companies but also less information for investors. As with anticipated executive pay disclosure changes, the SEC may tackle this under its rationalization of disclosure practices agenda item. Many companies support this move due to potential cost savings, but some may continue to file quarterly since investors tend to prefer more frequent reporting.

Employee compensation expense reporting. For annual reporting periods beginning after Dec. 15, 2026, and interim periods within annual periods beginning after Dec. 15, 2027, companies must provide footnote disclosure in quarterly reports of employee compensation spending for each line item on the income statement, including how much is allocated to salaries, bonuses, share-based payments and medical and pension benefits. (Note: companies would report their financial results every six months instead of every quarter if the SEC’s plan to end quarterly reporting takes effect.)

Action steps

• Review the proposed rule and be on the lookout for a final rule on how to identify additional covered employees for IRC Section 162(m) compliance.
• Update payroll and accounting systems for aggregation rule compliance and to account for compensation to ensure the deduction cap is applied correctly.
• Keep an eye out for a proposed rule moving from quarterly to semi-annual financial reporting.
• Create reporting templates for the new executive compensation expense reporting requirement.

Mercer resources

IRS proposes rules for determining additional 162(m) “covered employees” beginning in 2027