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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 over 400 companies annually, are a team of nearly 70 professionals in the U.S. 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

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Featured Viewpoints

SEC Reopens Comment Period Prospective Clawback Rules

Introduction and Background

The U.S. Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. One of Dodd-Frank’s key executive compensation provisions requires that all listed companies adopt and disclose a policy for the recoupment of incentive compensation, from its current and former executive officers, in the event a company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities law (colloquially referred to as a “clawback” policy). The amount subject to clawback is “equal to any incentive compensation received during the three-year period preceding the restatement in excess of what would have been paid the executive officers under the accounting restatement.”

In July 2015, the Securities and Exchange Commission (SEC) issued proposed rules requiring that listed companies adopt and disclose a clawback policy as required under Dodd-Frank. The proposed rules lay dormant, however, until October 2021, when the SEC reopened the comment period for the original rules along with 10 new policy questions — the most significant of which was the extension of clawbacks to corrections of errors in prior financial statements that are not material enough to require the reissuance of those statements.

On June 9, 2022, the SEC reopened a new 30-day comment period along with a memorandum prepared by the SEC’s Department of Economic and Risk Analysis (DERA). DERA’s memorandum provided detailed information on (1) the increase in voluntary adoption of compensation recovery policies by companies and (2) estimates of the number of additional restatements that would be subject to the clawback rules if the proposed rules were to include restatements due to material noncompliance (“Big R” restatements) and corrections of errors (“little r” restatements). The memorandum opines that many existing clawback policies do not comply with the Dodd-Frank requirements and most “little r” restatements do not affect net income; therefore, they are unlikely to result in a sharp increase in clawback activity. The memorandum also states that extending clawbacks to “little r” restatements will help improve the accuracy of financial reporting, especially among smaller issuers.

The SEC released an updated regulatory agenda on June 22, 2022, and it expects to issue final clawback regulations by October 2022, which makes it highly likely the rules will be effective in 2023.

Recap of the Rules

The key provisions of the original and updated proposed clawback rules include the following:

  • The rules are applicable to both current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date of the accounting restatement;
  • The recovery of incentive compensation must be made on the basis of “no-fault” on the part of an executive officer regardless of their responsibility or lack of responsibility;
  • The amount of the recovered incentive compensation, calculated on a pre-tax basis, is the amount that exceeds what the executive officer would have received based on the financial restatement;
  • Incentive-based compensation is defined as any compensation that is granted, earned, or vested based upon the attainment of a financial reporting measure, including stock price and total shareholder return (TSR); and
  • The proposed rules do not apply to time-vested stock options; time-vested restricted stock; or restricted stock units (RSUs), discretionary bonuses, or base salaries.

The clawback policy must be disclosed as an exhibit to a company’s annual report, proxy statement, or other annual disclosure. The October 21 release strongly suggests companies will be required to disclose the detailed calculations used in determining the amount of the clawback. This could be especially troubling for companies with a stock price hurdle or relative TSR metric, where such calculations are not nearly as clear as quantifying the effect of a restated revenue or profit amount.

It also remains to be seen if the SEC includes “little r” restatements in a final rule, which could significantly increase the number of companies that will have to determine and disclose a clawback event.

SEC Clawback Rules-Implications and Considerations

The SEC’s October 2022 target to finalize the rules is not binding and, like many past regulatory agenda dates, may turn out to be aspirational. However, the June 9, 2022 reopening of the clawback rules for public comment and the inclusion of the DERA memorandum suggests the SEC is determined to push through the rule-making process this year. While an effective date has not been proposed, it is likely to take effect for fiscal years beginning after December 31, 2022. Once finalized, companies subject to the new policy requirement will need to review their existing clawback policies and/or adopt a new policy that complies with the rules.

Some example changes to existing policies might include:

  • The inclusion of all active and former executive officers — not just the executive officer(s) whose misconduct led to the restatement.
  • The removal of Compensation Committee or Board discretion to pursue a clawback (unless the “impractical to do so” exemption applies) or determine the amount of clawback.
  • Assuming “little r” restatements are included in the final rule, policies will need to cover both “big R” and “little r” restatements.

Some commentators have suggested that the finalization of the clawback rules and inclusion of “little r” restatements could have an impact on the selection of future long-term incentive vehicles (time-vested stock options and RSUs are exempt from the rules). In addition, given the difficulty in quantifying the impact of a restatement on stock price and the potential requirement to disclose the calculation, finalization could reduce the use of stock price metrics, such as relative TSR or specific stock price hurdles, for fear of future litigation over such calculations.

Pay Governance will continue to monitor the SEC rule-making process for this item and will provide an update when the new rules are finalized.

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

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Featured Viewpoint

ESG Incentives: Intended to Improve Corporate and Societal, Environmental, and Social Outcomes


Early indications are that the inclusion of environmental, social, and governance (ESG) metrics in corporate incentive plans — primarily annual incentives currently — is becoming common, with 69% of S&P 500 companies (207 of 301) reporting the inclusion of such metrics in their 2022 proxies.[1] If this level of inclusion holds for all of 2022, it would represent a significant increase from 2021 when 52% of the S&P 500 reported ESG metrics. It is apparent that large corporations and their executives have undertaken a good faith effort in using incentives to address ESG issues at the company level, with possible beneficial societal implications.

This unprecedented movement in incentive metric usage — much faster even than the relative total shareholder return (TSR) transition — is caused by many factors: from boards’/executives’ desire to help improve the social footprint of their companies and society to responding to shareholder pressures. This shift is viewed by most audiences as a positive response from the corporate sector, but it has its critics and challenges: measuring real impact; interpreting limited data; navigating the lack of uniform measurement standards; choosing metrics; setting goals; and balancing shareholder, societal, and employee priorities, among others. Most, but not all, companies that have added ESG metrics to an incentive plan have included them in a holistic/qualitative scorecard that may include a combination of quantifiable and qualitative goals. There are many valid reasons for this including measurement difficulty, litigation risk, and motivational challenges. There are several companies that have purely quantitative goals, and there is governmental, institutional, proxy advisor, and media pressure to adopt this approach.

Bebchuk/Tallarita (BT) [2], major critics of the ESG/stakeholder movement, have challenged the suitability and utility of incorporating these metrics/goals into corporate incentive plans . BT raised several valid criticisms/questions of the ESG/stakeholder incentive movement, [3] including the narrowness of the metrics, the limited use of quantitative metrics, and the possibility that executives are implementing these metrics to improve their incentive payouts at the expense of shareholders. Their view is that ESG metrics will likely not improve the desired corporate and societal goals and might distract the executives from focusing on shareholder value.

Tom Gosling, another expert in this field, agrees with the BT view: “One of my big fears about this sort of stampede towards including ESG targets in executive pay is that it’s likely just to lead to more pay and not more ESG. [4]

However, despite these criticisms, the ESG incentive metrics movement has significant, and arguably irreversible, momentum to address the private and public issues due to substantial pressure on large corporations to move rapidly into ESG/stakeholder incentive commitments. Therefore, it is essential that this movement be based upon financial and economic validity and facts.

One important criticism from BT remains empirically unresolved: “ it is difficult if not impossible for outside observers to assess whether this use provides valuable incentives or rather merely lines CEO’s pockets with performance-insensitive pay.” They worry that these incentives will motivate executives to increase their pay without benefiting other stakeholders and “indeed might dilute executives’ incentives to deliver value to shareholders.” Pay Governance has conducted unique research to try to address this issue. We find the usage of ESG metrics, thus far, does not appear to have significantly diluted other incentives or distracted executives from creating shareholder as well as stakeholder value.

Here are the hypotheses we thought should be tested:

1. Is the ESG payout multiplier in incentive plans higher than the payout multiplier for financial metrics?

   a. If there is validity to the criticism that ESG metrics are a distraction and being added to increase executive pay, there would be some indication that ESG metrics are in fact diluting attention from creating shareholder value relative to other stakeholders.

   b. It is also too early in the ESG incentive movement to test whether they have a positive impact on TSR or other performance metrics.

   c. However, we can test whether the ESG incentive payouts are higher than the payouts for financial metrics .

2. What conclusions can be drawn from companies that use a weighted ESG factor versus a modifier?

   a. We note that 77% of companies with an explicit ESG metric use a “weighted” structure versus 24% of companies with an unweighted modifier (the total adds to 101%, as one company uses a weighted metric and modifier).

   b. See below for additional information regarding weighted metrics and modifiers.

3. Are there any indications that Compensation Committees may be hesitant to provide payouts above or below target based upon the achievement of ESG metrics if such metrics are measured based on a combination of quantitative and qualitative goals and/or when financial and operational goals are not attained?

We utilized the following methodology to test for the answers:

1. Scanned 100 S&P 500 companies’ proxies using ESGAUGE to identify companies with ESG metrics that provided clear disclosure of both the financial and ESG metrics included in their annual incentive plan, even if the ESG metrics were part of a holistic scorecard of other strategic metrics.

2. Segregated the data into two different groups based on the method used to include ESG in the incentive plan: either a weighted ESG factor, which reduces the weight of the financial metrics, or a modifier that is used to increase or decrease the financial payout.

3. Collected the 2021 payouts for:

    a. Financial/operational metrics

    b. ESG metrics

    c. Overall payout after incorporating the ESG impact

We found 62 large companies that met these criteria.

Here are our key findings:

1. ESG reduced the overall payout at 75% of the companies using a weighted metric, (Figure 1) with the median reduction equal to 9%. (Figure 2)

2. Most ESG-weighted metric companies (56%) used a 20% weighting or less. (Figure 2)

   a. In some cases, the company used a scorecard approach and did not provide sufficient detail to determine the portion of the weighted metric attributable to ESG; in those cases, we included the entire weighting.

   b. Many of the companies with a >20% weighting included ESG and other strategic metrics.

3. Of the companies that incorporated ESG metrics as part of a modifier, 33% increased payouts and the remaining 67% had no effect or reduced payouts. (Figure 3)

4, The average impact on payouts for companies using a modifier on the financial performance metrics ranged from +35% to -14% and averaged +2%. (Figure 4)

5. These findings indicate that the compensation committee members are acting conservatively in setting and scoring ESG goals — thus the narrow band around target for most companies.

Figure 1.

We ranked the 48 companies from largest (negative) impact to smallest (positive).

Figure 2.

Figure 3.

Figure 4.


The ESG movement has made substantial progress in encouraging U.S. companies to incorporate ESG metrics into their incentive plans. It is early in this process, and we need to wait for information about the impact of these corporate programs on companies’ long-term performance and sustainability as well as the effect on societal problems. However, it does appear that the ESG incentive criticism, that executives are using these metrics inappropriately to increase their compensation, is not empirically supported.

General questions about this Viewpoint can be directed to Ira Kay  (, Mike Kesner (, or Joadi Oglesby (


[1] Data provided by ESGAUGE.
[2] Lucian A. Bebchuk and Roberto Tallarita. “The Perils and Questionable Promise of ESG-Based Compensation.” Journal of Corporation Law. March 4, 2022.
[3] Ira Kay. “The Perils and Promise of ESG-Based Compensation: A Response to Bebchuk and Tallarita.” Harvard Law School Forum on Corporate Governance. April 27, 2022.
[4] CJ Clouse. “Does Linking ESG Performance to Executive Pay Actually Make a Difference?” GreenBiz. February 2, 2022.

Featured Viewpoint

The COVID-19 Pandemic’s Fleeting and Lasting Impact on Executive Compensation

The 2021 proxy season was dominated by COVID-19. Close to half of Standard & Poor (S&P) 500 companies took some type of COVID-19-related action in 2020, including base salary reductions, modifications to incentive plan targets, and the grant of special awards.

Despite the significant upheaval in compensation, financial results, and stock price performance during 2020, shareholders supported 97.3% of Say on Pay votes among Russell 3000 companies through December 31, 2021, with strong average support of 92.2%. Sixty-four companies — or 2.8% — failed Say on Pay, including some large, “name-brand” companies. The reasons for these high-profile failures can be primarily attributed to several factors including the use of positive discretion in determining annual incentive payouts, modifications to in-flight long-term incentive (LTI) awards, grants of “out-sized” stock awards without a compelling rationale, and a disconnect between pay and performance.

Part of the strong showing in shareholder support can be attributed to Institutional Shareholder Services (ISS) recommending a vote for Say on Pay at 88.3% of Russell 3000 companies, which was only down 0.7% compared to the 2020 proxy season. While ISS approved most companies’ Say on Pay proposals, those companies that received an against recommendation from ISS were more likely to fail Say on Pay (24.1%) compared to prior years (for example, 18.4% in 2020, 18.8% in 2019, and 17.1% in 2018). Thus, ISS influence increased in 2021 and an against recommendation was more likely to result in a failed Say on Pay vote compared to prior years.

The 2021 compensation year has also been filled with continued uncertainty due to COVID-19, supply chain issues, workforce shortages, and — most recently — inflation fears and the Russia-Ukraine conflict, so what should we expect to see (or not see) during the 2022 proxy year compared to 2021?

The 2022 Proxy Season

Given strong shareholder support in the 2021 proxy season, it is unlikely companies will have significantly revamped their 2021 compensation programs. In some cases, compensation practices that were adopted in 2020 to address COVID-19-related uncertainty will have carried over to the 2021 compensation year, including:

Wider performance curves. Many companies widened their performance curves to minimize the chance of a zero or maximum payout given the uncertainty in setting performance targets. This uncertainty persisted at the beginning of 2021, and a widening of the performance curve allowed companies to retain the basic structure of existing plans but with far less pay/performance leverage.

Semi-annual short-term incentive performance periods. Companies in industries facing the greatest level of uncertainty continued or adopted a “1st half/2nd half” short-term incentive plan whereby 6-month goals are set at the beginning and the middle of the performance year to allow for a “resetting” of targets at mid-year
based on a more current financial outlook.

Inclusion of qualitative metrics . After unprecedented levels of discretionary adjustments were applied in 2020, some companies added or increased the weighting of qualitative metrics to allow the Compensation Committee to exercise discretion within predefined guardrails (e.g., +/- 20%).

Above target annual incentive plan payouts. Given the limited visibility at the beginning of 2021 amid the continued impact of COVID-19 (e.g., supply chain pressures, “The Great Resignation,” etc.) and 2020 annual incentive plan payouts, the majority of which were below target or zero, many companies may have established relatively conservative financial targets for their 2021 annual incentive plans. Early indications are that above target (or maximum) annual incentive payouts are being reported by companies that were more resilient than forecasted and capitalized on better-than-expected market opportunities in 2021.

As of the writing of this Viewpoint, actual annual incentive payouts for 2021 at Russell 3000 companies are tracking between target and maximum (average of nearly 150% of target). Eighty percent of the companies in the sample are paying annual incentives above target (average of 160% of target), while the remaining 20% of companies have average payouts of 67% of target. Based on year-over-year comparisons for a subset of companies paying 2021 annual incentives above target, 2020 annual incentives were paid out at an average of about 90% of target.

Inclusion of relative total shareholder return (TSR) as a metric in performance share (PSU) plans. Many companies struggled to set annual financial targets, let alone multi-year goals for PSUs. To address this uncertainty, more companies may have added relative TSR to their PSU scorecards, thereby eliminating the need to establish absolute goals at the beginning of the performance cycle.

Replace multi-year goals with multiple annual goals in PSU plans. Another approach companies carried over or adopted is the use of annual goals within PSU programs, with performance measured each year and earned shares distributed on, for a 3-year plan, the third anniversary of the grant. This approach allows companies to maintain a performance-oriented plan while minimizing the risk with 20-20 hindsight of setting overly aggressive or conservative performance targets.

We do not expect to see, in the 2021 compensation year, some of the compensation practices that were originally adopted during the pandemic. These include:

Base salary reductions. All but the most severely-harmed companies by COVID-19 restored 2020 base salary reductions prior to the end of 2020. Thus, only a handful of companies have maintained reduced base salaries in the 2021 compensation year.

Exercise of upward discretion. Given the more conservative approach in setting performance goals as noted above and the most recent trend in 2021 annual incentive payouts, there will be far less need for compensation committees to exercise discretion to increase annual incentive payouts. It is possible some compensation committees will exercise negative discretion if the formulaic result does not fit with the overall health/performance of the company.

Modifications to in-flight LTI awards. Given the 2021 proxy season investor and proxy advisor backlash delivered to companies that modified to in-flight LTI awards in the 2021 proxy season, it is unlikely companies made similar changes during the 2021 compensation year.

The payout outcomes of LTI award cycles ending in 2021 are likely to be across the full spectrum — zero to maximum. Among companies that set multi-year goals pre-pandemic, payouts are likely to be at or below target in certain industries. Performance plans tied to relative TSR or based on 1-year performance metrics are more likely to be above target or at maximum.

Stock Price Performance

Stock price performance will continue to play a role in compensation decisions, with higher performing companies having significantly more flexibility when making compensation decisions than lower performing companies. After the “COVID dip” in stock prices in March of 2020, which impacted all major market indices and sectors, the rebound was almost as swift. However, the rate of recovery has varied by sector, which led to a broad spectrum of compensation actions. In summary, while the playbook for managing incentive plan actions due to the COVID dip was relatively consistent, the playbook for managing the recovery was more nuanced during 2021 depending on the strength of the company’s performance — a trend that we expect to continue during 2022.

The chart below shows the performance of a hypothetical $100 investment from December 31, 2019 through March 15, 2022 for the S&P 500, S&P 400, and S&P 600 as well as the highest and lowest performance sectors (during this measurement period) within each of these indices:

Looking Ahead to 2022 Proxy Season Outcomes

Two areas of potential concern could arise if shareholders and the proxy advisory firms consider the 2021 annual incentive goals lacked rigor or if companies significantly increased 2021 equity awards (either delivered through annual awards or through special, one-time arrangements) without a detailed explanation. Companies are likely to have addressed these concerns by providing fulsome disclosure of the degree of goal rigor, rationale for increased LTI awards, and the linkage to shareholder value creation in their 2022 proxies.

Given the compensation changes made in 2021 to adapt to an uncertain economic environment and likely avoidance of the “foot-faults” that occurred in the 2020 compensation year, it is highly likely shareholder support for Say on Pay in 2022 will be as good as, if not better than, 2021. While this could make for a far less exciting proxy season, it should be a welcome relief and allow companies more time to focus on what could be a challenging business environment.

For more information on this article, please contact Mike Kesner (, Ira Kay (, Linda Pappas ( or Joshua Bright (

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