Compensation & Cocktails: Performance, Pressure, and Pay

NACD Northern California Chapter members gathered in San Francisco for an evening of cocktails and candid conversation on executive compensation. The discussion with Elisa Steele, director at JFrog, Nextdoor, Procore, Alessandra Murata, partner at Cooley, and Michael Mencher, special counsel at Cooley explored how boards are recalibrating incentive design, navigating disclosure and litigation risk, and aligning pay with long-term value creation.

KEY TAKEAWAYS

Compensation Committee Mandate Expansion

• Scope of the compensation committee has broadened well beyond CEO/NEO pay
  • Now covers talent retention, culture, values, employee engagement
  • Some committees renamed e.g. "Compensation & Human Capital"
• Compensation chair now plays a central role in shareholder engagement
  
  • Best practice to partner with Nom/Gov chair and/or the Lead Director/Board Chair for joint outreach
  • Institutional investors want to meet with board members, not just management

ISS, Proxy Advisors, and the Shifting Landscape

• All key stakeholders in flux: proxy advisors, institutional investors, and the SEC
• ISS under political pressure; changing recommendation practices on shareholder proposals and governance
• Institutional investors facing accusations of bias and over-formalism, as well as business models that are viewed as a 'conflict of interest' (e.g., corporate research and corporate issuer consulting divisions)
• One notable trend is the declining reliance of large institutional investors on proxy advisor recommendations.
  • For example, among BlackRock, Vanguard, Fidelity, State Street, and JPMorgan Chase, the average overlap between their Say-on-Pay voting decisions and ISS opposition recommendations declined from approximately 45% in 2021 to 25% in 2025.
• In contrast, mid-sized and smaller investors with less than $1 trillion in assets under management remain much more closely aligned with proxy advisor recommendations, with overlap rates averaging approximately 80%.
• This divergence appears to be driven largely by resources. Large institutional investors have built sophisticated internal governance teams and increasingly utilize technology and AI-enabled tools to conduct independent analyses of executive compensation programs.

Special Awards and Say-on-Pay Strategy

• Median CEO compensation among S&P 500 companies has reached approximately $17M in 2025, while median CEO pay among the Russell 3000 is around $6M, and over the past five years CEO pay has continued to trend upward. Performance-based equity continues to be the dominant annual long-term incentive vehicle provided to CEOs among the Russell 3000. Over time, both performance-based awards and time-based restricted stock awards have increased in prevalence, while the use of stock options has steadily declined.
• There have also been some notable performance-based special and front-loaded awards granted in recent years. While these awards can carry the promise of significant payouts, they are inherently risky and are often criticized by both proxy advisors and investors (if not deemed sufficiently rigorous).
• To better understand their effectiveness, Pay Governance reviewed more than 20 of the largest performance-based special awards granted, including awards at companies such as Coty, DoorDash, and Rivian. The results were striking:
  • Approximately one-third produced no payout.
  • Nearly half were ultimately canceled.
  • In two cases, the CEO departed before realizing any value.
  • A handful only provided a fraction of their intended value.
  • Roughly 40% delivered full value or more due to all performance conditions achieved.
• When used appropriately, special awards can be effective tools for supporting transformational goals, retaining critical talent, and executing turnaround strategies.
• While there have been some noteworthy special awards made over the last 6 months, the majority of companies have generally preferred to recognize exceptional performance through larger annual grants tied to key performance objectives. Granting annual PSU awards can help diversify risk, maintain a more predictable pay-for-performance framework, and reduce the likelihood of investor criticism.
• Sometimes, the board may need to provide a CEO compensation package that might exceed the competitive norm (e.g., ISS compensation peer group, the company's compensation peer group). If the CEO new hire compensation package is above the market norms, and potentially could lead to scrutiny among proxy advisors and institutional investors, then the following should occur:
  • Prepare the full board and CEO in advance
  • Carry out proactive shareholder engagement before negative proxy advisor reports
  • Understand the consequences of receiving a Say on Pay vote result of between 51% to 70% and the narrative that will be used to convince shareholders the reasons behind the pay packages/decisions
  • Continue to demonstrate Board/Compensation Committee responsiveness when shareholders may be discontent with executive pay decisions
• Key principle: do the right thing for the business, but forecast and prepare for consequences
• Boards must stay unified when making strategic decisions proxy advisors/shareholders won't support

Shareholder Engagement Best Practices

• Engagement must happen in the Fall, not during proxy season, and not only when you've had a negative report
  • Many large investors now refuse meetings during proxy season to avoid appearing influenced
  • Relationships built over years are critical: investors take meetings from boards they know
• Board members must be involved, not just management/investor relations team
  • Shareholders want to hear from board members when issues arise, not the C-Suite, so the board needs to be engaged and have those relationships too
• Legal considerations for engagement:
  • No sharing of material non-public information
  • Proxy solicitation rules restrict written materials (slides) after proxy filing
  • Prepare directors thoroughly: talking points, investor priorities, past voting history
• Never ask shareholders a question you're not willing to act on
  • Unanswered feedback creates damaged relationships and credibility loss

Disclosure Rules and Potential SEC Rulemaking

• SEC executive compensation rules currently at the White House (OIRA review); up to 90-day window
• Final rules likely no earlier than late fall; effective date likely not before proxy season 2027
• Possible changes range from eliminating "trivial" disclosures (pay ratio, pay vs. performance) to more radical CD&A simplification
• If say-on-pay is eliminated for some companies, boards should still maintain investor relationships
  • Focus on process, governance principles, and trust rather than just required disclosures
  • "The pendulum always swings back": build relationships now for when rules tighten again
• Proxy as marketing material: format, narrative, and word choice matter more than ever
  • AI tools can't always read graphics: ensure all key data appears in plain text too

CEO Pay, Performance Goals, and Peer Groups

• Peer group selection is critical and contentious; CEO should be involved in approval
  • Triangulate on multiple criteria: revenue, headcount, market cap (now too volatile alone)
  • Some companies use a second "reference peer group" for talent competition assessment
• Goal-setting challenges:
  • Board should benchmark against industry, not just internal forecasts
  • Tech shift: incentive plans moving from "growth at all costs" to ~50/50 growth vs. profitability
  • Profitability goals are more controllable but can suppress growth if over-weighted
• PSU vs. RSU debate:
  • ISS now considers 5-year RSUs as performance-based (vs. standard 3-4 year); however, the majority of companies continue to use 3 to 4 year vesting periods or 3 year performance period for PSUs

CEO Succession Planning

• Consistent board evaluation finding: succession planning is almost always insufficient
• Best practice: start succession discussions from day one, even at hire
  • One example: made succession planning an explicit CEO goal at onboarding
  • Framed as legacy-building, not a vote of no-confidence
• Succession scope extends beyond CEO to full C-suite
  • Talent review process (separate from comp approvals) recommended annually
  • Post-IPO companies see near-universal C-suite turnover in years 5-10; data supports early planning
• Monthly chair-to-chair collaboration (comp, audit, nom/gov) is a best practice for staying ahead of cross-committee issues

Resources

• 10 Trends Shaping Compensation Committee Agendas for the 2026–2027 Proxy Season by Pay Governance 

Thank you to our partner, Beth Sasfai and Tara Tays, partner and NACD Northern California Leadership Council member, for making the event possible. And to our board members who opened and closed out the evening, Melinda Yee Franklin and Laurie Yoler.