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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with nearly 400 companies annually, are a team of nearly 60 professionals in 13 U.S. locations with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Current Issues in Executive Compensation

Pay Governance understands that times remain uncertain. Our domain expertise remains executive compensation consulting. Therefore, each week we will continue to provide you with a short newsletter to keep you abreast of developments in the executive remuneration world.

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Featured Viewpoints

SEC Revisits New Regulations Applicable to Proxy Advisory Firms

Last year, the Securities and Exchange Commission (“SEC”) issued new regulations applicable to proxy advisory firms, including Institutional Shareholder Services (“ISS”) and Glass Lewis, that codified earlier guidance that proxy advisory firms should be deemed proxy solicitors. The new regulations stipulated, among other items, that any reports from the proxy advisors should be free from material errors and omissions, the methodologies used by the proxy advisors must be disclosed and transparent, that any conflicts of interest within the proxy advisors must be disclosed, and any non-public information relied upon for vote recommendations must be disclosed and identified. The new regulations are scheduled to become effective on December 1 of this year.

However, on June 1, 2021, new SEC Chair Gensler asked Commission staff to revisit the regulations and the classification of proxy advisors as proxy solicitors in particular. This action has the potential to overturn the regulations adopted by the SEC last year, freeing the proxy advisors from having to comply with the anti-fraud provisions of the proxy rules that were used to support the regulations summarized above. The text of Chair Gensler’s brief statement is below:

June 1, 2021

“In September 2019, the Commission issued an interpretation and guidance addressing the application of the proxy rules to proxy voting advice businesses. [1] Last July, the Commission adopted amendments to Rules 14a-1(l), 14a-2(b), and 14a-9 concerning proxy voting advice. [2]

I am now directing the staff to consider whether to recommend further regulatory action regarding proxy voting advice. In particular, the staff should consider whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.”

We will continue to monitor this topic and will keep our readers apprised of further SEC guidance or actions on this important matter.

General questions about this Viewpoint can be directed to Jon Weinstein at or John Ellerman at

[1] Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice , 84 Fed. Reg. 47,416 (Sept. 10, 2019) (“2019 Interpretation and Guidance”).
[2] See Exemptions from the Proxy Rules for Proxy Voting Advice , 85 Fed. Reg. 55,082 (Sept. 3, 2020) (“2020 Rule Amendments”)

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Featured Viewpoint

Do UK and EU Companies Lead US Companies in ESG Measurements in Incentive Compensation Plans?


In January 2021, Pay Governance conducted a comprehensive survey of the use of Environmental, Social, and Governance (ESG) metrics in incentive compensation as reported by 95 participating US companies. The survey documented the prevalence of this emerging trend and explored the types of metrics used, the ways in which they were measured, the types of incentive plans incorporating such metrics, and other important incentive design details. The survey revealed that only 22% of the US companies included ESG metrics in their 2020 incentive plans, whereas 29% of the same companies reported they were planning on including ESG measurements in their 2021 incentive plans. In summarizing the data and citing our conclusions about the survey results, Pay Governance stated that there appeared to be significant hesitancy among US companies to adopt such metrics, as companies considered which metrics and goals would be the most meaningful and consistent with their business objectives. Despite the reluctance on the part of many US companies in moving forward on this issue, we noted that “the inclusion of ESG in incentive plans is perhaps one of the most significant changes in executive compensation in over a decade.” [1]

In our desire to further study this issue, Pay Governance examined the use of ESG metrics in the incentive compensation plans of a select sample of companies in the United Kingdom (UK) and European Union (EU). Our research confirmed that UK and EU companies are well ahead of the US in the inclusion of ESG metrics in incentive plans, and their approach to measuring and rewarding ESG achievements could be a harbinger of strategies used by US companies over the next several years.

Pay Governance selected 30 companies from the UK’s FTSE 100 and EU’s STOXX 50 indices. Our research was based on public filings through April 2021. The companies selected reflect a broad spectrum of industry sectors and, in the case of the EU companies, a number of different countries. The 30 companies reported median 2020 revenues of $27B and a current median market capitalization of $73B.

Our Findings – UK/EU Versus US

Our survey of US companies earlier this year reported that 21 of the 95 participating companies (22%) included ESG metrics in their 2020 incentive compensation plans. Of the companies including ESG metrics in incentive plans, 95% included them in the annual incentive and 5% included them in the long-term incentive. By contrast, 90% of the UK and EU companies included ESG metrics in their incentive compensation plans. One UK/EU company that did not include ESG metrics in their 2020 incentives disclosed to its shareholders that ESG metrics would be included in both the 2021 annual and long-term incentives. The research revealed that 89% of the UK/EU companies included ESG metrics in the annual incentive and 41% in the long-term incentive. Thus, in addition to a much higher prevalence rate, UK/EU companies also had a much higher rate of inclusion in long-term incentive plans.

We did find a number of similarities in the use of ESG metrics between US companies and UK/EU companies as well, and the following text and charts highlight our main findings:

  • Both US and UK/EU companies prefer using a combination of quantitative and qualitative metrics in measuring ESG

How Companies Measured ESG Metrics in their 2020 Incentive Plans

Approaches Used in 2020 Incentive Plans with ESG Metrics

  • The scorecard approach is the most common method for measuring ESG among US and UK/EU companies, although both use a number of different incentive plan designs when measuring ESG

  • Both US and UK/EU companies prefer using a weighted ESG metric rather than a modifier or discretionary adjustment when determining annual incentive plan payouts, and weighted metrics were exclusively used in long-term incentive plans

Influence of ESG in Annual Incentive Plan: Component Weight or Use of Discretionary Adjustment or Modifier

  • When ESG metrics were implemented into the annual and/or long-term incentive plan, the weighting of such metrics was generally below 25% in both the US and UK/EU, with 10%-15% as the most common weighting
  • UK/EU companies overwhelmingly included Environmental and Social metrics in their 2020 incentives. Based on our January 2021 US survey, companies reported a sharp increase (from 44% to 61%) in the use of Environmental metrics in 2021
  • Governance metrics were far less common among UK/EU companies compared to the US

Type of Metrics Used in 2020 Incentive Plans

2020 Incentive Plans: Selected Environmental Metrics

  • With respect to Environmental metrics, reduced carbon emissions / greenhouse gas was the number one metric selected by UK/EU companies followed by waste reduction. Among US companies, energy efficiency / renewable energy was the top metric followed by reduced carbon emissions / greenhouse gas. About 25% of UK/EU companies also included sustainability metrics

2020 Incentive Plans: Selected Social Metrics

  • Diversity was the top Social metric among UK/EU and US companies, although US companies also selected a companion metric, inclusion and belonging, at a much higher rate (i.e., 43% compared to 19%)

What We Have Learned and Key Takeaways

Based on our January 2021 survey of US companies and UK/EU company research, we have a number of observations and key takeaways that may benefit US companies considering the inclusion of ESG metrics in their incentive plans:

  • The prevalence of ESG metrics in incentive plans is much higher in the UK and EU compared to the US, and it is likely the US will close the gap within the next 2-3 years based on past trends (for example, Say on Pay was first adopted in the UK and EU) as well as potential enhanced regulatory requirements (current S.E.C. review of 2010 interpretative release) and investor and societal pressures to prioritize ESG;
  • Both UK/EU and US companies will increase the inclusion of ESG metrics in their respective long-term incentive plans as investors and regulators focus on how companies intend on achieving their long-term sustainability goals;
  • The types of ESG metrics and plan designs used by both UK/EU and US companies are largely the same, including the use of scorecards, quantitative and qualitative goals, and relatively modest weightings; and
  • Once adopted, it will be difficult to turn back, and many US companies are conducting their materiality assessments to select the metrics and goals that will have the greatest impact on the company’s long-term performance. Thus, as noted in our previous Viewpoint, we continue to believe “many [US] companies will use 2021 as a ‘launching pad’ for finalizing and rolling out ESG metrics” in 2022 incentive plans. 1

General questions about this Viewpoint can be directed to John Ellerman (, Mike Kesner (, or Lane Ringlee (

[1] John Ellerman, Mike Kesner, and Lane Ringlee. “Inclusion of ESG Metrics in Incentive Plans: Evolution or Revolution?” Pay Governance. March 16, 2021.

Featured Viewpoint

COVID-19 Stimulus Bill Expands Covered Employees Subject to Section 162(m) Tax Limits


Section 162(m) of the Internal Revenue Code (IRC) became effective in 1994. The intent of Section 162(m) was to limit the tax deductibility of compensation paid to the “covered employees” of publicly traded companies that was in excess of $1 million per year. Section 162(m) initially provided for an exemption for qualified performance-based compensation such as performance-based incentive plans that received shareholder approval and satisfied other performance criteria.[1]

In December 2017, Congress passed — and President Donald Trump signed — the Tax Cuts and Jobs Act of 2017, which included certain amendments to Section 162(m). These amendments eliminated the exemption for performance-based compensation and expanded the scope of individuals who may qualify as covered employees subject to the $1 million annual compensation limitation deductibility. The covered-employees provision of the IRC Section 162(m) was expanded to include the CFO position in addition to the CEO and the three other highest-compensated executive officers during the applicable year.[2] On December 18, 2020, the Treasury Department and Internal Revenue Service issued final regulations regarding the amendments made to Section 162(m) created by the Tax Cuts and Jobs Act of 2017.

COVID-19 Stimulus Legislation Expands Section 162(m) Coverage

In early March 2021, Congress passed — and President Joe Biden signed — the American Rescue Plan Act of 2021 (the “Act”), which is a $1.9 trillion economic stimulus bill. Designed to provide economic relief to the American people during the COVID-19 pandemic, primarily through the tax code in the form of stimulus payments, expanded employment benefits, and expansion of the child tax credit.

One of the lesser-known provisions of the Act is an expansion of the number of covered employees subject to the Section 162(m) compensation deduction limits. The Act specifies that for any taxable year beginning after December 31, 2026, the covered employees will include the company’s five highest-compensated employees for that year in addition to the CEO, CFO, and three other highest-compensated officers. As a result, the company will only be able to deduct $1 million in annual compensation expense for each of its ten highest-paid employees for the applicable fiscal year beginning in 2027. However, the five additional employees will not be treated as covered employees for all years thereafter and must be redetermined each year.[3]

Because the impact of this tax law change is five years into the future, most U.S. companies have not yet fully assessed the economic consequences of its potential impact.


1. Jean M. McLoughlin and Ron M. Aizen. “IRS Guidance on Section 162(m) Tax Reform. Harvard Law School Forum on Corporate Governance. September 26, 2018. .
2. Regina Olshan et al. “IRS Issues Final Regulations Under Section 162(m).” Skadden. December 23, 2020. .
3. Ira M. Golub et al. “New COVID-19 Stimulus Bill Includes Significant Pension Reforms and Expands Scope of 162(m) Compensation Deduction Limit.” The National Law Review. March 10, 2021.

General questions about this Viewpoint can be directed to John Ellerman at


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