Crucial Conversations for CHROs and Compensation Committees in 2024

From goal setting and pay for performance alignment to plan design and corporate governance concerns, Compensation Committees have a lot on their minds. A new Pay Governance piece, based on hundreds of Compensation Committee meetings, summarizes burning issues for 2024.

Why it matters: There has never been more pressure to strike a balance between executive compensation plans that attract and inspire talent and the increasingly high expectations of shareholders.

1. Goal Setting and Performance Management
   • Performance plan ranges. An oft-recommended strategy during times of uncertainty is to widen performance ranges, which reduces the likelihood of either zero payouts or unexpected maximum payouts due to poor target-setting. However, investors will scrutinize changes that increase pay or set targets below the previous year, along with use of discretion without compelling rationale.
     
     
   • Non-GAAP plan metrics. Regulators and investors are pushing back on excluding items from non-GAAP metrics – especially if it could be argued that the items are within management’s control. Pay Governance reports companies are implementing guiding principles for adjustments and modeling the impact of the adjustment in context of shareholder outcomes. Some committees are enhancing disclosure about non-GAAP adjustments in the CD&A or adding a reconciliation of GAAP to non-GAAP results in the proxy.
     
     
2. LTI Design
   • Re-thinking the 3-year performance period.  Although controversial, certain companies have “adopted the use of three 1-year goals within the 3-year performance period.” To avoid criticism of short-termism, some have added a 3-year TSR modifier on the entire award. However, committees making this choice should prepare for accusations of “de-risking” the performance plan by setting goals over such short timeframes.
     
     
   • Revisiting Relative TSR. The use of relative TSR is certainly prevalent (60-70% of large cap companies) but Pay Governance wonders whether it may now have capped out. Many companies feel TSR is too susceptible to economic uncertainty, lacks line of sight to management, or requires a better peer group than the company has available.
     
     
3. Corporate Governance
   • Activist investor agenda. Committees need to be keenly aware of shareholder interests and developments within their industry. Activists will use CEO pay as a tactic to advance their agenda which may include obtaining board seats and removal of C-suite officers in order to pursue change.
     
     
   • Organized labor. The recent UAW strike used CEO pay as a rallying cry In order to win support for pay raise negotiations. Committees should understand the risks and have a plan for how to explain the connection between executive pay and the workforce.

Additionally, SEC rules around clawbacks, 10b5-1 plans and year two of Pay Versus Performance should be on the committee’s radar in the coming year.