As the new year begins, Compensation Committees are preparing for another year of challenges in today’s business landscape. ClearBridge Compensation Group outlines five key priorities for 2025 to help Committees navigate these challenges and support them in their pivotal role in shaping executive pay and adhering to strong governance standards.
1. Managing Risk and Uncertainty
In recent years we’ve experienced meaningful global uncertainty, requiring businesses to proactively address risk and uncertainty in their compensation strategies. While all elements of compensation should be assessed through this lens, particular areas of focus include incentive plan goals and share pool management.
Incentive Plan Goal Setting. Setting goals is challenging even in the best of times. To help mitigate uncertainty and avoid the potential need for one-time adjustments, CompensationCommittees should critically assess the effectiveness of the current goal-setting process.Conventional approaches such as setting target goals equal to budget or setting ranges around target consistent year-over-year may no longer achieve desired pay-and-performance alignment objectives. Other less traditional approaches such as measuring financial performance on a relative basis could help smooth out performance volatility.
Share Pool Management. Stock price volatility has put pressure on stock plan share reserves, and strategies to effectively manage annual share usage have become a topic of discussion at many Compensation Committee meetings. In addition to regularly monitoring share pools,Committees could consider alternative approaches to proactively address potential share constraints such as modifying the share determination approach, limiting equity participation, and shifting to less dilutive long-term incentive vehicles. In addition, when making meaningful equity grants to new executives, consider granting awards under an inducement pool.
2. Keeping Up with Shareholder Expectations
Understanding shareholder perspectives and expectations is essential for making informed decisions, particularly in a dynamic environment where viewpoints can vary and evolve rapidly.While advisory firms like ISS and Glass Lewis may influence shareholder opinions, not all investors follow their recommendations. Additionally, activist investors may use executive compensation to highlight broader corporate governance concerns.
To navigate this complexity, Compensation Committees should actively identify and stay apprised of differences in perspectives to ensure their programs are effectively aligned with shareholder priorities. Recent examples of shifting viewpoints include the use of time-vested RSUs and the role of ESG in compensation.
Time-Vested RSUs. Time-vested awards have traditionally been criticized, with shareholders and advisory firms pushing for a greater emphasis on performance-based equity structures. However, perspectives on time-vested RSUs, especially those with extended vesting periods, have begun to evolve, recognizing their potential role in a balanced long-term incentive (LTI) program. This shift was highlighted by ISS's recent announcement of a possible policy update (effective in 2026 or later), indicating that LTI predominantly composed of time-vested awards may no longer automatically raise significant concerns during qualitative reviews.
ESG. A key area of focus the past couple years, the sentiment around ESG among certain shareholders has shifted recently and there is growing debate as to whether ESG metrics should be tied to executive pay. Institutional investors such as BlackRock and Vanguard do not take a position on whether sustainability-related metrics should be integrated in incentive plans, but, when they are included, it is important to clearly explain the connection between what is being measured and rewarded and the company’s strategic priorities in support of shareholder value creation.
3. Creating Sustainable Compensation Programs
An important objective of any Compensation Committee is to create a sustainable compensation program that avoids the need for frequent overhauls or one-off actions. When Committees frequently make pay decisions that are outside of the standard program design, it can send a signal to investors that something is amiss with the program and trigger greater scrutiny. Recognizing that one-off decisions may be unavoidable on occasion, Committees should take care to ensure these are the exceptions and not the rule. If Committees find that the pay program is no longer able to sustain the volatility inherent in a company’s business, it may be time to critically assess the company’s compensation philosophy and approach to setting pay. Outlined below are some approaches to consider for more resilient programs.
Annual Bonus. While it makes sense for many to tie the majority of an annual bonus to financial performance, it may be worth considering the inclusion of strategic and/or non financial components as well. Strategic metrics often focus on priorities that drive long-term success, such as innovation and market expansion, ensuring executives work toward broader organizational goals beyond short-term financial results. Strategic metrics can also provide the ability to adjust for evolving business priorities, enabling Committees to incentivize actions critical to addressing emerging challenges or opportunities.
Long-Term Incentives. While there’s been a push for long-term incentives to be primarily performance-based, time-based awards play an important role in a sustainable program. If the mix is overweighted towards performance awards, it can increase the perceived need for special awards or modifications, particularly in tumultuous times when performance awards may not pay out.
4. Adapting to an Evolving Regulatory & Legislative Environment
Over the past decade, companies have navigated numerous regulatory and legislative changes, most recently the final clawback rules under Dodd-Frank. As the environment continues to evolve rapidly - with developments like the FTC’s proposed non-compete ban (initially blocked by federal court) and potential shifts under the new presidential administration - staying informed is crucial.
Compensation Committees must stay apprised of these changes and evaluate their implications, including evolving shareholder and advisory firm expectations. For instance, the new clawback rules have already prompted more companies to address potential clawbacks given the broader scope of the policies, including those now triggered by “little r” restatements(corrections to financial statements that do not require full reissuance). Additionally, some shareholders and proxy advisory firms are advocating for clawback policies that go beyond the minimum requirements set by Dodd-Frank, further raising the bar for compliance and governance practices.
5. Preparing for the Future
To remain agile, Compensation Committees should keep a keen eye on emerging trends and future-proof their strategies. Succession planning and the evolving role of the Compensation Committee are two key areas of focus to ensure Committees are ready for what is yet to come.
Succession Planning. This is a crucial element of ensuring long-term organizational stability and fostering leadership continuity. By taking a proactive approach, companies can anticipate and address potential challenges associated with leadership transitions, reducing the risk of disruptions to strategic objectives, operational efficiency, and shareholder confidence.
Expanding Compensation Committee Scope. Over the last several years, the role of the Compensation Committee has been expanding to encompass a broader focus on human capital management, going beyond executive pay to include oversight of talent management, pay equity, employee engagement and overall company culture. As a result, many Committees have broadened their charters to include human capital management matters, and some have adopted new Committee names (e.g., Human Capital and Compensation Committee) to memorialize their new responsibilities.
Conclusion
As Compensation Committees navigate the complexities of 2025, staying ahead of key compensation trends is vital to managing risk, aligning with shareholder expectations, and building sustainable programs. ClearBridge Compensation Group is here to help you address these challenges with tailored strategies and expert guidance. For personalized support or to learn more, please don’t hesitate to reach out or visit our website.
