EXECUTIVE COMPENSATION: SEC and Investors Turn Up the Heat

In the executive compensation realm, there will be two major points of pressure:

1. The SEC's forceful regulatory push on compensation and governance issues, and
   
   
2. Shareholders' skepticism of compensation adjustments in response to the pandemic while pushing companies on environmental and social concerns. Specifically, shareholders are calling for improvements in diversity, equity, and inclusion progress and disclosure and in reducing greenhouse gas emissions and overall exposure to climate risks.

The SEC closed out 2021 with several notable proposals. In the fourth quarter of 2021, the SEC submitted proposed changes to clawbacks, 10b5-1 plans and insider trading, stock buybacks, and valuing equity awards made prior to disclosure of material information (“spring-loaded awards”). The Commission also proposed to gut the 2020 finalized rules providing proxy advisor reforms.

Major new disclosure requirements in early 2022: The SEC is planning proposals mandating prescriptive disclosures on a range of human capital metrics as well as metrics related to climate risk exposure. Chair Gensler has specifically highlighted several proposed mandated metrics including: workforce composition, turnover, skills and development training investments, compensation and benefits (including CEO pay raise ratio), and workforce demographics including diversity and health & safety.

Shareholders to sharpen voting policies in 2022 proxy season. Shareholders showed little tolerance in 2021 for pay adjustments designed to mitigate pandemic impacts combined with negative returns. Further, several of the largest investment managers, most notably BlackRock, sharply increased their support for shareholder proposals related to environmental and social concerns. As companies have adjusted compensation programs and the market has performed well overall, shareholder pay-for-performance concerns may be reduced for 2022 annual meetings. Regardless, support for ESG proposals is likely to increase.

Ongoing experimentation with non-financial performance incentives. Companies are likely to continue adding diversity, equity, and inclusion performance considerations and/or metrics to annual- and long-term incentives. Particularly for carbon-intensive industries, companies may implement risk reduction metrics tied to transition away from fossil fuels or reducing and offsetting emissions. The Compensation Committee will be looking to CHROs, heads of total rewards and their teams to advise on the latest best practices as well as anticipate regulatory changes and provide legislative context.