As we step into 2024, the corporate landscape is anticipated to be influenced by persistent global instability, swiftly evolving technology, and the unfolding United States presidential campaign.
Companies equipped with robust leadership are poised to navigate the forthcoming challenges effectively. Below are the key themes that may play a pivotal role in shaping companies' compensation decisions in the upcoming year.
Non-compete agreements still under discussion
- Historical Context in the US: The skepticism surrounding non-compete agreements from courts and legislatures has been a longstanding issue
- 2023 witnessed significant challenges to the existence of non-compete agreements, with the Federal Trade Commission proposing a national prohibition. New York state narrowly avoided implementing a non-compete ban, pending potential revisions for highly compensated employees
- However, regulatory restraint is essential, recognizing the importance of non-competes in specific contexts like research, development, and intellectual property protection. Also, they are there to protect specific investment in the employment relationship by the employer
- In the EU and Switzerland, non-competes are also widespread. Their validity and enforceability in some countries depend on the form, the wording, the reasons for termination of the employment relationship and other requirements. For 2024, one can still expect significant dynamic in legislation and in rulings
Pay versus Performance (PvP)
- In 2023, the SEC issued guidance regarding Pay versus Performance (PvP) disclosure requirements
- Noteworthy points include a) the exclusion of unvested equity awards from average compensation calculations; b) a statement ?regarding the dividends paid prior to a stock vesting; and c) the need for reconciliation of non-GAAP measures to GAAP financial statements
- Given the complexity, companies are urged to start preparing PvP disclosure for their 2024 proxy statements promptly, involving relevant functional experts such as legal and accounting personnel
- Listed U.S. issuers must now file their compensation recovery policy as an exhibit to the Form 10-K, with additional disclosure requirements in the annual proxy statement after certain triggering events
- These disclosures include names and amounts due from individuals with outstanding excess incentive-based compensation for 180 days or longer and those from whom recovery was declined, along with reasons for the refusal
- Implications for Companies: growing need for comprehensive recovery policies – companies must pay attention to disclosure obligations to comply
- In Europe, the picture is still heterogeneous: in many EU member states a claw back clause is not only lawful but mandatory. For example, Italy and Belgium provide for specific regulation of variable pay, including mandatory claw back provisions for key employees in the banking and insurance sector. Spain, e.g., requires the employee’s expressed consent for a claw back provision to be enforceable
A deliberate, principles-based, approach to ESG
- There's a growing acknowledgment that ESG-related goals can be appropriately integrated into executive compensation programs. The responsibility of determining the nature and impact of these goals lies within the purview of the compensation committee, necessitating an annual review of all performance goals, including those linked to ESG objectives
- Goals should be meaningful, measurable, challenging, and transparent. If not, there will be increasing pressure from proxy-advisors and investors
- ISS policy updates: a) ISS introduces a roadmap for companies seeking to change an ISS say-on-pay voting recommendation. At least five business days before its annual meeting date, a company must disclose in a public filing any remedial actions that it has taken in order for ISS to consider a change in its recommendation b) If a company adjusts non-GAAP performance goals in a manner that materially increases incentive payouts, the company needs to explain in its proxy statement the nature of the adjustment, its impact on payouts, and the board’s rationale for the adjustment
- Glass Lewis policy update: Glass Lewis urges companies to extend the reach of compensation clawbacks, covering a broad range of scenarios beyond stock exchange listing standards, potentially leading to unintended negative consequences
- Section 162(m) of the Internal Revenue Code will disallow a federal income tax deduction to public companies for certain compensation in excess of $1 million during a company’s taxable year to “covered employees” which is generally defined to include the company’s named executive officers as of 2027
- Companies might consider structuring long-term incentive awards to individuals who might be covered by the expanded definition to vest and be paid in 2026 in order to avoid a lost tax deduction
In the past two decades, there has been a significant expansion in the rules and regulations governing executive compensation. The extensive requirements for compliance and disclosure place a substantial burden on company boards and management teams, particularly as compensation-related disclosure occupies a disproportionately large portion of proxy statement space compared to areas of similar significance.
The increased regulation, encroaching upon matters traditionally within the discretion of directors, hampers the flexibility and creative input that directors bring to the board. This situation is further aggravated by the imposition of stringent policies from proxy advisory firms.
However, effective boards are resilient in the face of these challenges, persistently working to develop and implement compensation plans and programs that not only attract and retain key talent but also align with the long-term interests of company stockholders.
Based on an article by Adam Shapiro, David Kahan and Michael Schobel of Wachtell, Lipton, Rosen & Katz
