Apprehension about inflation and a potential recession, changing priorities for C-suite executives, and increased government and public scrutiny are three factors influencing executive compensation in 2023. While the future is always unwritten, and unexpected events (like a global pandemic) can lead to dramatic shifts in the compensation landscape, here are six trends likely to impact how high-level executives are paid in the year ahead.
- Increases in Base Compensation
Given the economy’s volatility, executives are warier of high-risk/high-reward compensation structures than last year and are increasingly interested in upfront cash compensation rather than deferred or equity compensation.
Recently released data from executive compensation consultancy Pearl Meyer found that more than one-third of responding organizations gave their executives higher-than-normal merit increases in 2022, and almost 20 percent of respondents made off-cycle salary adjustments. Most respondents to the Pearl Meyer survey expected to increase base salaries in 2023, with median projections equal to 4% across all employee categories and 40% of companies planning to provide higher percentages than in 2022.
- Geographic Location/Remote Work
Like most workers, C-suite executives are prioritizing flexibility regarding remote work more than they did in pre-pandemic days and making choices about opportunities with that priority in mind. They also want their employers to cover the costs of setting up a home office, as well as required business travel. If, on the other hand, an executive relocates to take a job, there is a greater expectation than before that the employer will foot the bill for the cost of relocating the executive and their family. Finally, employers continue to consider how to account for differing costs of living among employees. We expect to see new approaches to all of these issues in 2023.
- Retention-Based Compensation
Replacing high-level executives is costly, burdensome, and disruptive for any business. At the same time, the slowdown in the market is leading to longer trajectories for M&A exits. Accordingly, paying executives who demonstrate their commitment to the long haul is a growing trend. Given the preference for up-front cash compensation, as discussed above, companies are considering offering more retention-based cash bonuses (e.g., stay or sign-on bonuses).
- P4P Requirements for Public Companies
On August 25, 2022, the SEC adopted final rules requiring public companies to disclose the relationship between compensation paid to the company’s named executive officers (NEOs) and the company’s financial performance. The final rules became effective on October 11, 2022, and implement the “Pay Versus Performance” disclosure requirements established by Section 953(a) of the Dodd-Frank Act.
These new disclosure requirements will undoubtedly impact executive compensation structures for NEOs and say-on-pay voting outcomes as shareholders obtain greater transparency about pay practices, pay and performance relationships, and special awards.
- Environmental, Social, and Governance (ESG) Prioritization, Integration, and Disclosure
Performance metrics are no longer based solely on a company’s financial performance, as the attainment of ESG goals becomes an increasing priority for investors and consumers. Increasing diversity and promoting inclusion in the C-suite and on the board are the most high-profile ESG considerations. How well executives perform in this respect will likely become a more significant factor in compensation evaluation. While this has increasingly been the case for public companies for many years, privately held companies are also following the ESG trend.
- Increased Pay Transparency Laws
States and cities across the country are attempting to address issues related to pay equity by requiring employers to disclose the minimum and maximum pay ranges for any advertised position. Pay transparency laws in California, New York, and elsewhere do not exclude salaried executives, meaning these individuals will likely have access to more information when they evaluate proposed compensation packages.
- Increased Executive Mobility and its effect on Executive Compensation
The Federal Trade Commission has proposed a rule that would broadly prohibit non-compete agreements. This new rule will likely have an impact on Executive Compensation in 2023 as employers look for ways to retain valuable talent. For now, it is too soon to say what those effects will be. However, we will be following these trends as they develop.
At Outten & Golden, the attorneys in our Executives and Professionals Practice Group stay on top of executive compensation trends so we can help C-suite executives and other high-level individuals negotiate the best possible compensation, benefits, and bonuses. If you have executive compensation questions or concerns, please contact us.