Trends U.S. Corporate Boards Should Prepare for in 2025

Trends U.S. Corporate Boards Should Prepare for in 2025
November 13, 2024 7 mins

Trends U.S. Corporate Boards Should Prepare for in 2025

Trends U.S. Corporate Boards Should Prepare for in 2025

As corporate boards meet to discuss strategy, including any changes to executive compensation, there are key trends to consider for the year ahead.

Key Takeaways
  1. Modifying the performance periods of long-term incentive programs can provide flexibility to adapt to changing conditions and demonstrate a long-term vision to investors.
  2. With constantly evolving trends and stakeholder expectations, companies must thoughtfully evaluate what level of ESG-related metrics in incentives is reasonable.
  3. Engaging and aligning with investors versus focusing solely on proxy advisory firms is critical to gain approval for new share plans.

Corporate boards have an important role as they head into 2025 planning. There is increasing scrutiny from investors, regulators and the public on transparency, fairness and accountability in executive compensation and human capital management. To adapt to these changes, boards need to stay informed on the latest trends and pending regulatory changes. They must also be flexible and proactive in adjusting compensation plans to reflect these changes. Here are three action items that corporate boards, and compensation committees in particular, should consider for the year ahead.

1. Consider Adjustments to Long-Term Incentive Programs

Typical long-term incentive program designs span at least three years. But amid economic instability and heightened scrutiny from shareholders regarding positive discretion, it might be time to reevaluate that approach as it relates to performance periods. Some compensation committees are revising three-year performance schemes to incorporate averages derived from three distinct one-year performance periods. This hybrid approach demonstrates to investors that the board has a long-term vision, while providing the flexibility to adapt to changing conditions and adjust metrics and goals as needed. Advantages include:

  1. Flexibility: Shorter performance periods enable boards to adjust to shifting market conditions and macroeconomic uncertainties, making goals more precise and achievable.
  2. Enhanced performance tracking: With realistic and timely internal and external financial data, incentive targets can be set appropriately. The averaging approach requires sustained achievement of long-term performance objectives.

Among Aon clients, we have observed a notable rise in adopting the three-year averaging method for performance shares. Boards and committees should continuously assess the confidence level in multi-year financial targets, especially when incentive compensation is tied to meeting these goals. Both investors and executives must believe that financial goals are realistic, achievable and suitably challenging. If companies are considering a shift from a three-year cumulative to a three-year average performance model in 2025, then discussions and committee interaction should start immediately for companies with a fiscal year that follows the calendar. For non-calendar year-end companies, these discussions should begin during the third and fourth quarters.

The Bottom Line

Securing investor support and thoroughly communicating the reasoning behind the board's long-term vision is crucial. Proxy advisors generally favor cumulative long-term performance metrics within a long-term performance plan. However, they often note that averaging three one-year performance periods helps address their concerns about adopting shorter-term performance periods in the plan.

Quote icon

Being adaptable in executive compensation planning is crucial. Maintain flexibility to make the best choices based on the present circumstances.

Amy Jennings
Partner, Executive and Board Advisory, North America

2. Assess Current use of ESG and DEI Metrics

It has become more common over the past few years to incorporate environmental, social and governance (ESG) metrics — which include diversity, equity and inclusion (DEI) initiatives — in plans in the U.S. and worldwide. This recent trend has mirrored the larger societal demand for businesses to operate responsibly and sustainably.

While the most recent proxy data indicates there is still a meaningful percentage of companies with ESG-related metrics in their incentive programs, this likely reflects a delay in timing. Most proxy statements filed in 2024 are describing 2023 compensation, which is based on decisions made in 2022. This period was at the height of focus from investors and other stakeholders on ESG and its inclusion in executive compensation. Since 2022, the U.S. market has seen a backlash with some anti-ESG legislation and activism. Now companies are deciding whether to even include or potentially modify the use of ESG metrics in incentives. They must also then determine how to best communicate ongoing publicly stated ESG goals and commitments.

Given this dynamic situation, many companies are taking a more tactical approach to using ESG metrics in their incentive programs. Examples include moving from formally weighted ESG metrics to adding them to the subjective part of the annual bonus (often in a scorecard approach). Additionally, we are seeing companies collect and report non-financial ESG data to the board or key committees tasked with overseeing related strategy.

“Many of my board clients are getting a lot of dashboards and information on ESG-related topics, including DEI. But it’s often not as thoughtfully curated to helping them understand how it ties to the business and evolving stakeholder expectations, including those of regulators,” says Laura Wanlass, the corporate governance leader for Aon’s Executive and Board Advisory practice in North America.

Collecting data is only the first step in the process; the real value comes from how compensation committee and management use and refine this data over time to make better decisions. Committees overseeing ESG need more tailored information and qualitative context to make timely decisions on risks and opportunities, and the relevance of linking goals to executive compensation in the current environment.

Over the past four years, there has been a significant focus on human capital, DEI and the use of dashboards. But the volume of information can overwhelm the board, hindering effective oversight.

Overall, companies face challenges with outdated data and require more curated, future-oriented data. “While tracking data is crucial for progress, many firms haven't adopted metrics-driven practices and a proper governance approach to monitoring the results of such data,” says Wanlass.

The Bottom Line

Board members should evaluate if the company’s policies are adequate and relevant and whether they are prepared to connect DEI or ESG initiatives to executive compensation. Such considerations necessitate precise goal setting and openness in explaining the rationale for payouts.

3. Focus on Institutional Investors for Equity Plan Approval

Investors are increasingly moving away from strictly following the voting recommendations of the large proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, on equity plan proposals. This change indicates a shift in investor perception and approval of equity plans, and a willingness to approve what they deem a reasonable number of shares as part of a broader human capital management strategy.

Despite ISS and Glass Lewis recommending against anywhere from 20 percent to 50 percent of proposals, depending on size and industry, only six companies out of 639 proposals in the Russell 3000 index failed to obtain shareholder approval in 2024.

Institutional shareholders are focusing more on company specifics versus defaulting to policy voting guidelines. Investors are often willing to support proposals for at least one annual grant cycle worth of shares, unless there are egregious plan features or an excessive use of equity. But it isn’t as simple as just asking for a reasonable number of shares. To obtain approval of equity shares that a proxy advisory firm is against, companies should proactively develop a strategy to effectively communicate the need and rationale for the share pool. This can take the form of enhanced disclosure and shareholder engagement. This context is incredibly helpful in prompting institutional investors to support equity proposals. However, it’s unlikely to sway the proxy advisory firms, which tend to follow pass/fail scoring methodologies on whether to support a proposal.

The Bottom Line

Start the share modeling process by focusing inward before looking outward, even when facing stock price or other performance-related issues. Once you’ve determined your needs over the next one to three years, look outward to see what the proxy advisory firms and your top investors are likely to support. It’s a healthier exercise not to start with the proxy advisory firms’ policies when companies can almost always get an annual allotment of shares approved by shareholders despite proxy advisors’ recommendations.

6

Only six companies out of 639 proposals in the Russell 3000 index failed to obtain shareholder approval in 2024.

Source: Aon research of public filings

Quote icon

Boards should focus on establishing strong oversight mechanisms, receiving the right data and proactively interacting with investors, while ensuring they’re prepared to modify executive pay policies in the year ahead.

Laura Wanlass
Partner and Practice Leader, Global Corporate Governance and ESG Advisory
Aon’s Thought Leaders
  • Amy Jennings
    Partner, Executive and Board Advisory, North America
  • Jack Moran
    Partner & SE Market Leader, Executive Compensation Practice, North America
  • Laura Wanlass
    Partner and Practice Leader, Global Corporate Governance and ESG Advisory

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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