Gauging the Impact of the Next U.S. President—And an Early Preview of Compensation Issues in 2025

January 20, 2025

On the eve of one of the most divisive and important elections in U.S. history, what lies ahead in the sphere of executive compensation looms large for boards of directors at all companies. Pay is among the most personal and potentially contentious issues for business, with repercussions for society and the executive next door.

Helping to make these pivotal decisions at companies that lead their sector or aim to is Robin A. Ferracone, the founder and CEO of Farient Advisors. Robin has been an advisor on compensation, governance, and talent management for over 30 years. The last year has seen significant change at her now 17-year-old firm. Farient expanded its geographic footprint and deepened its bench by adding a London office and seasoned consultants and analysts at its three U.S. offices.

Fresh from recognition as a 2024 Directorship 100 honoree, Farient Briefings scheduled time with Robin to gauge how she’s thinking about the impact of the election and, beyond presidential politics, the compensation issues she anticipates in 2025.

 

Given next week’s extraordinary U.S. election, how do you expect a Democrat or Republican presidency to impact compensation specifically?

Certainly, our clients have been asking about the different scenarios. Although we are not economists or political advisors, we do know the landscape for executive compensation.

Let’s begin with what’s likely. Both Republicans and Democrats have plans to cut taxes on specific items, such as social security, tip income, and overtime pay. Passage of these tax cuts is highly uncertain, suggesting a “wait-and-see” approach. Republicans have proposed reducing the corporate tax rate from 21 percent to 20 percent (and 15% for companies making products in the U.S.). Taxes will almost certainly go up under a Democrat administration. The Democrats have proposed increasing the corporate tax rate from 21 percent to 28 percent, the corporate alternative minimum tax (AMT) from 15 percent to 21 percent, and tax on stock buybacks from 1 percent to 4 percent. These moves could emphasize cost reductions and profits normalized for taxes in incentive plans. Increased corporate tax rates will also likely drag the economy, which could slow hiring. On the other hand, the Democrats are pushing for a higher minimum wage and greater support for labor unions, which could cause wage inflation at lower levels.

Rules, such as those in the U.K., requiring companies to disclose pay gaps between men and women or across racial groups may be more likely with a Democratic administration. In contrast, the status quo on pay transparency is expected to prevail under Republican leadership, given a lack of proposals.

For compensation, the rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, have largely been implemented. While implementation of these rules slowed under the Republican administration from 2016 to 2020, I don’t see the Dodd-Frank provisions being repealed under either administration. A Democrat administration would likely continue the focus of the current SEC and may finalize the Dodd-Frank rule imposing incentive compensation restrictions at large financial institutions.

Any way you cut it, change is afoot, and we must prepare for whatever happens.

 

You have been speaking at various events this fall. A common question is, what trends do you see forthcoming for compensation committees?

I would prioritize the trends in the following order: (1) the “collision course,” which is the challenge to incentivize, attract, and retain top talent within the confines of good governance; (2) the intensifying debate over performance share units (PSUs) versus restricted share units (RSUs); and (3) stakeholder incentives amid disagreement on the value of any environmental, social, or governance (ESG) initiative.

 

Let’s take them one at a time and start with the collision course—what is it, and why does it matter?

The competition for top talent has put compensation on a collision course with good governance practices. This led to a rise in the use of special-purpose awards and other pay actions to facilitate succession planning, recruitment, and retention. We analyzed S&P 500 companies over the last three years, and more than a third of them have granted special awards to at least one of their Named Executive Officers (i.e., NEOs) at least once, indicating the widespread use of “specials.” Proxy advisors and investors generally do not favor special awards because they weaken the alignment between pay and performance. We did a recent survey with Corporate Board Member, and responding board directors generally stated that while they felt the need to pay attention to shareholder interests, they still would make special awards, if needed, to attract and retain the right talent to, in turn, drive shareholder value. So, the collision course remains alive and well.

 

Please tell me about the intensifying debate between the use of PSUs versus RSUs.

Proxy advisors, on behalf of many investors, have long argued that at least half of executive long-term incentives (LTI) should be performance-based to maintain a strong link between pay and performance. However, certain investors like Norges Bank, Norway’s sovereign wealth fund, have argued that it is much simpler and more transparent to issue Restricted Stock Units (RSUs), which are time-based, i.e., earned based on service, with longer vesting periods, e.g., 5 years or more. Using the last 15 years of experience and data, Farient conducted a study, and Norges replicated that study, showing that companies emphasizing performance-based stock in their executive LTI pay mix: (1) did not perform better than those which did not; and (2) paid more in both target LTI. So, the debate centers around whether PSUs have their intended impact and whether investors should evaluate companies’ LTI mix on a case-by-case basis rather than prescribe a minimum performance-based mix. This issue will not be resolved in the coming year; we will hear more debate on the topic.

 

Each year, Farient studies global compensation matters in conjunction with the Global Governance and Executive Compensation (GECN) Group. Farient has tracked trends in ESG incentives globally for the past four years, focusing this year on climate-related incentives. What are you finding?

Despite the recent pushback, ESG incentives continue to gain prevalence globally. Among S&P 100 companies in the U.S., 80 percent have an ESG component in at least one of their incentive plans. Among the FTSE 100 companies in the U.K., 90 percent use ESG incentive measures. The significant trends among ESG incentives are: (1) social (i.e., “S”) measures are still the most prevalent; however, environmental (i.e., “E”) measures are catching up quickly, growing from 8% to 51% prevalence in the U.S. and from 22% to 79% in the U.K. between 2020 to 2024; (2) the nature of social measures is changing. Social measures are migrating away from representation and more toward engagement and inclusion; and (3) environmental measures are gaining prevalence in long-term incentive plans, going from 9% to 10% prevalence in the U.S. and from 47% to 56% prevalence in the U.K. from last year to this year. There also is pressure from regulators and other stakeholders to enhance disclosures around the “E” and the “S” to include GHG emissions and pay equity statistics.

Most large investors have softened their stance on ESG incentives, with most now deferring to companies to determine whether ESG incentives are appropriate. Ultimately, most companies want to do the right thing. They all want to have a solid ESG strategy and put elements of that strategy into their incentive plans, if appropriate, regardless of external pressures.

 

How should compensation committees balance shareholder and management interests in their approach to compensation?

The best compensation committees are collaborative and independent. No one has a monopoly on good ideas. The consultant, the compensation committee, and management will all have ideas. Distilling those to get the best answers for any given company is an art form. The ultimate responsibility lies on the shoulders of the compensation committee chair because the chair orchestrates the process. The consultant and the committee need a backbone to have a strong process. The committee must explain and defend its decisions to the executives and stakeholders. Directors need to ask themselves: “How do we assess the issues? What are our independent thoughts on the issues? Can we reach a consensus, or must we agree to disagree?” At the end of the day, the compensation committee and board have decision rights over executive compensation, although we all will acknowledge that the CEO carries tremendous weight.

 

What items would the discussion focus on if you had a crystal ball and could look into a boardroom two or three years from now?

I hope we discuss more predictive models in two to three years. What are the most effective programmatic approaches if the stock price is down? Which employees are most vulnerable to departures? What are the most effective methods for pre-empting those departures? Right now, compensation committees have a playbook and react to various scenarios. Still, we also need predictive models to help us allocate our resources more wisely to pre-empt unwanted outcomes. There’s a lot of talk about artificial intelligence (AI), but we still have more questions than answers. Farient is working on finding those answers.

 

Thanks, Robin. We’ll be watching.

 

 

 

 

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