1. Pay changes greater than what the numbers might suggest on the surface:
We've all seen the press reports suggesting that it's the most dismal year for CEO pay raises since the financial crisis. For many companies the story isn't that bleak. Median large-cap CEOs saw flat total disclosed pay from 2014 to 2015; decreases in pension adjustments were offset for the most part by increases in equity payments.
2. Focus on metrics and goals challenges conventional wisdom:
Metrics and goals remain a challenge for many companies. Simple first-generation relative TSR metrics may not be the panacea once claimed, and activist shareholders are increasingly weighing in on appropriate metrics. As institutional investors and proxy advisors become more adept at evaluating metrics and goals, we expect to see companies using more rigor in incentive program performance measures.
3. Increasing scrutiny on non-GAAP measures:
Companies commonly use non-GAAP metrics as part of compensation programs, usually for some very good reasons, but academics and the media report a widening divide between GAAP and non-GAAP measures. This is spilling over into compensation-related metrics, with investors paying attention to non-GAAP to GAAP adjustments being made for compensation purposes. With the growing distance between reported GAAP and non-GAAP metrics, we expect progressive institutions to begin taking a harder look at the adjustments, and how they impact executive payouts.
4. Energy gives lessons on how to prepare for troubled times for any industry:
Oil companies have had some serious challenges over the last 20 months, and their compensation programs haven't escaped scrutiny. Some firms have risen to the challenge, modifying short-term incentive programs to take into account shareholder outcomes and financial metrics and aggressively using negative discretion.
5. Shareholder engagement on compensation continuing to gain traction and pays dividends:
More and more firms are seeing the benefits of engagement. Some energy companies sharply impacted by the commodity downturn called upon shareholder relationships to gain support for equity plan proposals during the midst of their crisis.
6. In equity compensation plans, award treatment in change-in-control situations in focus:
It used to be that, as long as a company didn't have a liberal definition of change-in-control, and the awards weren't automatically accelerated or contingent upon a single trigger, companies generally didn't face much scrutiny on their change-in-control provisions. The prevalence of performance awards is making shareholders question what happens to those awards upon a change-in-control.
7. Equity plans evolving to meet emerging needs:
Perhaps the biggest change to equity plans in 2016 has been the rapid inclusion of director-specific award limits. With the recent changes to ASC Topic 718, many companies are also considering changing withholding clauses to permit it at the maximum individual rate.
