The Executive Remuneration Review: USA


Government regulation of private sector executive compensation practices, particularly at US public companies, has been a visible focus of public policy for the past few decades. Regulation has principally taken the form of special tax, corporate disclosure and securities listing rules under federal law, many of which are technical and non-intuitive and have had unintended consequences. The most important recent developments include comprehensive tax reform legislation enacted in 2017, an advisory say on pay regime and a complex regulatory regime for deferred compensation that subjects employees to the risk of punitive taxes for certain payments of compensation that are made after the compensation has been earned. The covid-19 pandemic has also presented new challenges for companies and resulted in renewed scrutiny on executive compensation. For example, federal legislation enacted in the wake of the pandemic provided for financial assistance for impacted businesses, but such assistance was subject to certain conditions, including significant restrictions on executive compensation.2 In addition, following the 2008 financial crisis, US regulators focused special attention on compensation in the financial services industry, in accordance with global mandates, resulting in the adoption and proposal of several executive compensation-related regulations pursuant to the DoddFrank Wall Street Reform and Consumer Protection Act (the DoddFrank Act).

In particular, as a result of the US Securities and Exchange Commission's (SEC) finalised regulations under the Dodd–Frank Act, public companies are not only required to provide shareholders with a non-binding, advisory say on pay vote, but are also required to disclose the ratio of chief executive officer (CEO) to median employee pay,3 as well as any company practices or policies regarding the ability of employees, officers or directors, or their respective designees, to engage in hedging transactions.4 In recent years, the SEC has also proposed rules pursuant to the Dodd–Frank Act covering the recoupment of incentive-based compensation from current and former executive officers that had been awarded erroneously, and disclosure of the relationship between compensation actually paid to executive officers and the financial performance of a company. In 2016, rules were proposed that would prohibit incentive-based payment arrangements that US regulators determine might encourage inappropriate risks by certain financial institutions by reason of providing for excessive compensation or that could lead to material financial loss; and require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate US regulator.5 Although none of the proposed rules described above have been adopted, they have been included on the SEC's rule-making agenda for 2021. Whether the SEC will issue final or re-proposed rules this year, and the substance of any such rules, remains unclear.

Additionally, there has been an enhanced focus in recent years on environmental, social and cultural concerns, including linking executive compensation to environmental, social and governance goals, gender pay equity, harassment and other issues raised by the #MeToo movement. Legislatures have responded to these concerns in various ways. For example, in connection with 2017 tax reform, legislators disallowed deductions for certain settlements related to sexual harassment if such settlements are subject to nondisclosure agreements, and more recently, certain states have adopted legislation aimed at addressing diversity in the boardroom. Environmental, social and governance concerns continue to be a significant focus even in the wake of the covid-19 pandemic.

Furthermore, the structuring of executive compensation in the United States is significantly affected by state, rather than federal, rules that govern the fiduciary responsibilities of corporate directors and agreements not to compete. Neither federal nor state law imposes generally applicable statutory requirements governing the basics of employment relationships or the structure, type or amount of incentive arrangements. Rather, employment relationships in all states are governed by contractual commitments made between the employer and the executive and, in the absence of such commitments, employment is at will, which means generally that either party can terminate the employment relationship at any time, for any or no reason.

As a result, executive compensation arrangements in the United States include a very diverse range of practices and approaches. However, particularly among public companies, best practices have substantially influenced approaches to certain issues.


US citizens and resident aliens are taxed on their worldwide income. Non-resident aliens are taxed on income from US sources, which generally includes all compensation attributable to the performance of services by an executive in the United States. This section describes the US federal income tax rules generally applicable to US citizens and resident aliens, and to non-resident aliens in connection with services performed in the United States (hereinafter, collectively, US executives). Special allocation rules may be applicable to incentive and deferred compensation allocable to services performed both within and outside the United States.6 This chapter does not extend to describing state and local tax rules, which vary considerably.

Except as described below, US corporations are generally entitled to deduct compensation paid to US executives at the same time as the compensation is required to be taken into account by the executives as ordinary income (as described below), and in the same amounts. No deduction is available for income taxable at capital gains rates.

In 2017, the US enacted comprehensive tax reform legislation pursuant to the Tax Cuts and Jobs Act (TCJA), which included certain executive compensation reforms, described in greater detail below.7

i Ordinary income and capital gains tax rates

Compensation income for US executives – including, for example, salary, bonuses, taxable employment benefits (such as the use of a company car for personal purposes) and income from the exercise of employee stock options – is generally taxed as ordinary income at graduated rates, with a maximum rate of 37 per cent, which for the 2021 tax year starts at taxable income in excess of US$628,300 for married individuals filing jointly. Married individuals filing separately are currently subject to a maximum rate of 37 per cent on all ordinary income in excess of US$314,150, and the 37 per cent rate is applicable to income of single taxpayers above US$523,600. Capital gains are subject to income tax at a maximum rate of 20 per cent if the property has been held for more than a year.

ii Income tax withholding and reporting

Employers are required to withhold income taxes from compensation paid to US executives and remit the withheld amounts to the US Internal Revenue Service (IRS). Employers are also required to report annually to the IRS the amount of compensation paid. The withholding rules apply to non-US employers, but practical and jurisdictional issues make it difficult for the IRS to monitor and enforce these requirements, particularly for non-US companies that have no business presence in the United States. US executives who have insufficient amounts withheld from their compensation may be required to make quarterly payments directly to the IRS to avoid penalties.

iii Employment tax and withholding

US executives employed by US entities are required to contribute to the US Social Security and Medicare systems, which provide retirement, disability and health insurance benefits to participants. Social Security tax contributions are made through payroll withholding by US executives at a rate of 6.2 per cent of income up to US$142,800 for 2021. In addition, employers are required to contribute 6.2 per cent of income up to US$142,800 on behalf of each of their US executives. For Medicare taxes, US executives and their employers each must contribute 1.45 per cent on all earnings. Unless an agreement with the government is implemented under Section 3121(l) of the US Internal Revenue Code of 1986 (Code),8 US executives employed by non-US entities are not required to contribute, and no benefit accrues for them under the system as a result of such employment. For most US executives, this circumstance will not be material because the maximum benefit is relatively small, and because many will in any case earn the maximum benefit by reason of other (prior or subsequent) employment. In addition, a supplementary 0.9 per cent Medicare tax is imposed on payroll income of US executives (but not employers). Although there have been several legislative efforts in recent years to repeal or replace the Patient Protection and Affordable Care Act, such efforts have been unsuccessful, and it appears that changes in these taxes are not likely.

iv Accounting for tax

US executives are required to account for their income on a calendar-year basis. Generally, income is accounted for on a cash basis (i.e., a US executive is generally not required to pay income taxes on compensation income until he or she has actually received the compensation in cash or other property). Notwithstanding the general cash-basis accounting rule referred to above, there are three important rules that effectively require accrual accounting. These are discussed below.

Deferred compensation

Section 409A of the Code imposes a complex tax regime in respect of deferred compensation. Compensation may be considered to be deferred compensation if a promise to pay compensation is made within a year and the payment may be made in any subsequent year. Conditional promises are within the scope of Section 409A. For example, an employer's promise in December 2020 to pay a US executive a bonus some time in 2022, unless profits for 2021 are below US$100 million and provided that the US taxpayer executive's employment continues until the end of 2021, is deferred compensation unless an exemption applies.

Generally, the purpose of Section 409A is to ensure that employers and employees cannot change the timing of payment of compensation in order to take advantage of changes in applicable tax rates or other circumstances. Section 409A applies, often in unexpected ways, to many routine compensation arrangements, including promises to pay severance, reimburse for housing costs or make future stock awards. Failure to comply with the rules may result in immediate taxation of the deferred compensation (even if the compensation is not then payable), and the imposition on an employee of a 20 per cent tax in addition to regular income taxes and an interest component calculated generally from the date that the deferred compensation was earned. The requirements of Section 409A apply to both the documentation of deferred compensation arrangements, which must reflect the many technical requirements of the rules, and the administration and operation of the arrangements. Virtually all employment and compensation agreements with US executives must reflect the rules under Section 409A.

Section 409A imposes three basic requirements in respect of deferred compensation. First, when a promise to pay deferred compensation is made, the timing of payment must be established. Any attempt to change the timing of payment by either an employer or an employee is subject to significant limitations. Second, a payment of deferred compensation may be made only at certain permitted times. Generally, there are six permissible payment events: death, disability, separation from employment, a change in control (CIC) (see Section IV.iii), a specific calendar date or employee hardship. Third, payments of deferred compensation to senior executives of public companies (including non-US companies) may not be made during the six-month period following termination of employment, subject to exceptions.

An exception from the requirements of Section 409A for short-term deferrals provides one of the more important opportunities to effectively avoid the Section 409A regime. Under the exception, if a promise to make a compensation payment is subject to a material condition (such as, for example, continued employment) and the payment will always be made within approximately 75 days of the end of the year in which the condition is satisfied, then the rules of Section 409A generally do not apply. There are also exceptions for limited payments of severance benefits, reimbursements of expenses that are made shortly after the expense is incurred and other types of payments that may be relevant in particular situations. Section 409A also prohibits an employer from setting aside amounts in a non-US account or other funding vehicle to provide for the payment of deferred compensation. In some jurisdictions, such funding arrangements are common and provide tax benefits, but they may give rise to substantial adverse tax consequences for US taxpayer executives.

Employers located in tax havens or subject to certain tax benefits

As with Section 409A of the Code, Section 457A of the Code also can result in accrual, rather than cash, accounting for deferred compensation in certain circumstances, and non-compliance with these rules can result in the imposition of an additional 20 per cent tax. However, the application of Section 457A is considerably narrower than that of Section 409A. Generally, the accrual rules of Section 457A apply to deferred compensation payable to a US executive for services rendered to an entity that is not organised in a jurisdiction that has entered into a tax treaty with the United States, or that is subject to a comprehensive income tax but benefits from a favourable tax regime or arrangement, or is otherwise entitled to exclude significant portions of its non-resident source gross income from tax. Very generally, the penalty provisions of Section 457A apply to deferred compensation payable by such entities that has an uncertain value when earned. Notably, as under Section 409A, there is a short-term deferral exception under Section 457A, but it is significantly more limited (notably, unlike under Section 409A, performance-based conditions, as opposed to service-based conditions, are not considered substantial risks of forfeiture for purposes of this exception).

The doctrine of constructive receipt

The third rule that effectively requires accrual basis accounting for compensation is commonly referred to as the doctrine of constructive receipt. When an employee uses a cash basis method of accounting, the employee only recognises compensation for tax purposes when the compensation is actually received. Under the doctrine of constructive receipt, compensation is treated as actually received – that is, it is constructively received – if the employee has the unrestricted current right to receive the compensation, even if the employee elects not to accept it.9 The doctrine of constructive receipt, the contours of which have largely been shaped by court decisions, requires that employers be cautious about offering US executives opportunities to receive compensation currently or in the future. Such offers often will also run afoul of the rules under Section 409A.

Acceleration of income recognition

Section 83 of the Code permits the intentional acceleration of income by US executives in limited circumstances. The opportunity to accelerate income under Section 83 is commonly referred to as the ability to make a Section 83(b) election.

Section 83 of the Code governs the taxation of transfers of property (most commonly employer stock) in connection with the performance of services. Preliminarily, consider the tax consequences to a US executive whose employer promises to pay him or her a bonus of 100 shares of stock in three years if he or she remains employed for the full three-year period (the vesting period). Under the cash-basis accrual rules described above, he or she generally will be required to recognise ordinary income equal to the value of the shares when they are delivered at the end of the vesting period. Now consider the tax consequences if the employer delivers the stock at the time of the promise, and the US executive agrees not to transfer the stock during the vesting period and to return it to the employer if his or her employment ends before the vesting period expires: the US executive would also be subject to tax at the end of the third year based on the value of the stock at that time, unless he or she makes a Section 83(b) election.

A US executive who makes a Section 83(b) election is permitted to recognise income at the beginning of the vesting period in an amount equal to the value of the shares at that time. Any appreciation in the value of the shares during the vesting period will be taxed, at the time that the shares are sold, at typically lower capital gains rates.

There are some negative consequences to making a Section 83(b) election. First, the US executive must pay taxes to the IRS at the beginning of the vesting period, and the amount to be paid generally will need to be taken from his or her savings or other earnings. Second, if shares are forfeited because the US executive's employment ends before expiry of the vesting period, there is no refund of the taxes paid by the executive at the beginning of the period.

v Tax consequences of equity compensation awards

A substantial portion of a US executive's compensation package typically consists of equity-based incentive awards. A description of some common types of equity awards used in the United States, and the basic federal income tax consequences for US executives who receive them, follows.

Stock options and stock appreciation rights

A non-qualified stock option (in contrast to an incentive stock option, described below) is a right to purchase stock at a fixed price in the future. Most non-qualified stock options have terms of 10 years. For tax and other reasons, the exercise price (i.e., the fixed price at which the stock subject to the option can be purchased) is typically equal to the fair market value of the stock at the time that the stock option is awarded. Stock options are usually awarded subject to a vesting condition, such as continued employment or the satisfaction of performance-related criteria. Stock options usually terminate upon or shortly after the termination of employment of the option holder.

A stock appreciation right (SAR) is an incentive award that is financially identical to a stock option but differs because the value upon exercise is delivered to an employee, who is not required to pay any amount to purchase the underlying stock. Employers sometimes use cash-settled SARs, rather than stock options, so that legal restrictions related to the sale or ownership of stock do not apply or to avoid issuing actual equity to executives.

A US executive is generally not required to recognise income at the time that he or she is awarded a non-qualified stock option or SAR or at the time such award vests. Rather, the US executive is taxed at the time that the award is exercised. The value at exercise is taxed at ordinary income rates as compensation. If stock is received upon exercise, any subsequent appreciation (or depreciation) in the value of the stock is treated as a capital gain (or loss).

The tax consequences described in the preceding paragraph do not apply to incentive stock options that qualify for special tax treatment. The special rules for incentive stock options were intended to provide tax benefits to executives, subject to certain conditions. Specifically, gains from incentive stock options may not be required to be recognised until the stock underlying the stock option is sold, and that gain may be taxable at capital gains rates rather than regular, graduated rates. Historically, there was a substantial tax risk for most US executives of earlier taxation under the alternative minimum tax rules. The alternative minimum tax is a parallel regime for income tax under which taxpayers who are not liable for regular income tax (because, for example, they qualify for large tax deductions) are nevertheless liable to pay a minimum amount of tax, which can be significant. For this and other reasons, incentive stock options were not widely used. Although the TCJA increased the alternative minimum tax exemption and phase-out amounts, this change does not appear to have caused companies to reconsider the use of incentive stock options.

Restricted stock and restricted stock units

Restricted stock and restricted stock units (RSUs) are two common types of equity awards under which US executives may be entitled to earn the full value of a share of employer stock, and not just the future appreciation as with stock options and SARs. An award of restricted stock is a current transfer of stock from an employer to an executive, subject to a forfeiture condition (such as continued employment or financial performance). If the forfeiture condition occurs, then the stock must be returned. When a share of restricted stock is awarded, the share is treated as outstanding under US corporate and accounting principles, so that it can be voted on and dividends may be payable to the holder of the stock. Frequently, dividends paid on restricted stock are subject to the same forfeiture conditions as the restricted stock itself. As discussed above, restricted stock is taxed under Section 83 of the Code.

RSUs, also sometimes referred to as phantom stock, provide a substantially similar financial benefit to US executives as restricted stock, but are subject to different tax rules. An RSU is a promise to deliver stock, or cash equal to the value of a specified number of shares of stock, in the future. The promise is usually subject to a vesting condition, but the delivery date does not have to be coincident with the satisfaction of the vesting condition. US executives must recognise income for US federal income tax purposes only when the shares or cash are delivered, in an amount equal to the value of the shares at that time or the amount of cash paid. Under US corporate and accounting principles, the shares are not treated as outstanding until they are delivered, so they cannot be voted on, and no dividends are paid on the shares until the delivery date. No Section 83(b) election can be made for shares subject to an RSU. RSUs are subject to the requirements of Section 409A of the Code described above, unless they are exempt as short-term deferrals, and in any case are not subject to the rules of Section 83.

Profits interests

Profits interests are a type of equity award commonly used in the United States in certain limited business contexts, typically involving investments by private equity or hedge funds. Profits interests have financial characteristics for executives that are similar to stock options, but the income to executives is largely taxed at capital gains rates, rather than as ordinary income, provided that certain conditions, including a three-year holding period requirement, are met. The term 'profits interest' refers to an interest in a business enterprise organised as a partnership (including limited liability companies that elect to be treated as partnerships for US federal tax purposes). The use of an entity taxed as a partnership as part of the ownership structure of a business is necessary to be able to take advantage of the special rules available for profits interests. A protective Section 83(b) election can be made for a profits interest.

Private company options and restricted stock units

Under Section 83(i), which was added to the Code in connection with 2017 tax reform, certain employees of privately held corporations who receive company stock in connection with the exercise of an option or the settlement of an RSU award may elect to defer tax for up to five years post-vesting, subject to specified eligibility requirements, which are quite restrictive.10 The amount of income required to be recognised at the end of the deferral period is based on the value of stock on the original exercise or settlement date. Private companies are required to notify employees of the Section 83(i) deferral election opportunity on or prior to the time that an option or RSU vests, and failure to provide this notice will result in a fine of US$100 per missed notice, subject to a cap of US$50,000 per year.

The following chart summarises the federal income tax treatment to US executives of common types of equity awards:

OptionRestricted stockRestricted stock unit (promise to deliver stock in the future)
Tax treatment upon grantNon-event
  • No 83(b) election: non-event
  • 83(b) election: ordinary income equal to the fair market value (FMV) of the shares acquired (less any purchase price)
Tax treatment upon vestingNon-event
  • No 83(b) election: ordinary income equal to the FMV of the shares acquired
  • 83(b) election: non-event
Tax treatment upon deliveryOrdinary income equal to the excess of FMV of shares acquired over the exercise priceN/AOrdinary income equal to the FMV of the shares acquired
Tax treatment upon sale of underlying sharesCapital gains equal to the excess of sales proceeds over amount previously recognised as ordinary incomeCapital gains equal to the excess of sales proceeds over amount previously recognised as ordinary incomeCapital gains equal to the excess of sales proceeds over amount previously recognised as ordinary income

vi Special deductibility rules

There are two important exceptions to the generally applicable deductibility rule for compensation paid to US executives described above.

First, Section 162(m) of the Code limits the ability of a US public corporation to take tax deductions for compensation in excess of US$1 million per year paid to certain covered executives, including the CEO. Prior to the enactment of the TCJA, covered executives under Section 162(m) included a company's CEO and the three other most highly compensated executive officers, other than the chief financial officer (CFO). Further, there was a significant exception from the deductibility limit for qualified performance-based compensation. Effective in 2018, the scope of covered executives under Section 162(m) was expanded to include a company's CFO, and once an executive qualifies as a covered executive, the deduction limitation applies indefinitely. The TCJA also eliminated the qualified performance-based compensation exception and expanded the scope of companies subject to the rule. The TCJA provides limited transition relief that preserves the deductibility of compensation provided pursuant to written binding contracts in effect on 2 November 2017 and not materially modified thereafter.

Second, a corporation that pays an annual bonus that is fully earned in a taxable year not later than two-and-a-half months following the end of that taxable year may deduct the bonus payment for the taxable year in respect of which it was earned, even though it is not paid, and the US executive who receives the payment is not required to include the amount in income until the following year.

vii Golden parachute excise tax

Sections 280G and 4999 of the Code provide for a special 20 per cent excise tax on certain US executives, and a loss of deduction for their employers, for certain payments made in connection with a CIC of a corporation. Practically, these rules apply only to public corporations, as an exception applies to privately held corporations whose shareholders approve the compensation payments. The tax rules only apply to the extent that the CIC compensation payable to a US executive equals or exceeds a minimum threshold of three times the executive's average compensation from a corporation during the previous five years. If that threshold is crossed, then the amount of CIC compensation in excess of one times that average is subject to the tax and non-deductible. CIC compensation includes cash and stock payments linked to the CIC, including the accelerated vesting of equity and other incentive awards. Exceptions apply for reasonable compensation earned prior to and following the CIC. Any amount paid, or payable pursuant to an agreement entered into, within one year prior to the CIC is rebuttably presumed to be linked to the CIC.

viii Medical benefits

Rules under the Patient Protection and Affordable Care Act (commonly referred to as Obamacare) continue to be implemented, but the mandate requiring individuals to purchase a minimum level of health coverage was effectively eliminated under the TCJA. While the rules have only limited applicability to executives, aspects of some executive arrangements, involving special medical care arrangements for executives, may be affected by the rules. Various legislative proposals to repeal and replace the Patient Protection and Affordable Care Act have been introduced, but none of these proposals have been enacted.

Tax planning and other considerations

Special, limited transitional rules apply under Section 409A of the Code for US aliens who become US taxpayer executives and who entered into deferred compensation arrangements prior to becoming US taxpayer executives. Generally, the rules provide a one-year period to amend such arrangements to comply with Section 409A. In addition, as noted above, Section 409A prohibits an employer from setting aside amounts in a non-US account or other funding vehicle to provide for the payment of deferred compensation. Consideration should be given to any such arrangements maintained for the benefit of US aliens who become US taxpayer executives.

Employment law

i Employment contracts and severance benefits

As noted above, most of the terms and conditions of an executive's employment are established by contract between the employer and the employee, and not by statute.

Executives typically enter into contractual agreements with their employers, which provide that, if an executive's employment is involuntarily terminated, he or she will be entitled to a severance benefit that is usually a multiple of compensation – for example, one to two times the executive's average total compensation for the previous three years. Often, other ancillary benefits are also provided, such as vesting of equity-based compensation awards or continued provision of medical benefits. An employer's obligation to pay severance is almost always conditioned on an executive agreeing to release the company from any legal claims that the executive may have against the company. The severance benefit can be paid either in instalments over time or as a lump sum. It is uncommon for cash severance benefits to be reduced in the event that the executive obtains new employment following his or her dismissal.

ii Agreements not to compete or solicit

Many US companies require their executives to agree, as part of their employment terms, that after their employment ends they will not disclose confidential information about the company to other persons, disparage the company, solicit the company's employees or customers or, sometimes, compete with the company. While confidentiality provisions are often very broad and continue indefinitely, non-competition and other restrictions are usually narrowly tailored to the particular company's circumstances and extend for a limited period (e.g., as little as six months or as long as five years). Furthermore, the enforceability of non-competition provisions is often subject to some uncertainty, and in some jurisdictions (e.g., California) non-competition provisions are generally unenforceable unless a non-competition agreement is negotiated in connection with the acquisition of a business in which an executive is an owner.11 Typically, the enforceability of such provisions is linked to whether they are viewed as a reasonable means to protect a company's proprietary interests, viewed in light of the public policy favouring employment. Garden leave or similar provisions, under which an employee is paid during a period of notice prior to termination of employment or forced inactivity, are used intermittently. In recent years, some states have narrowed their non-compete laws, limiting the duration of the restricted period or limiting or prohibiting non-competes for certain employees. For example, Massachusetts passed a law in 2018 that, among other items, limits post-employment non-competes to a maximum period of 12 months and, absent an agreement to the contrary, requires employers to pay 50 per cent of a former employee's back salary during the restricted period.12 Other states, such as Maine, Maryland, New Hampshire and Oregon, have limited or prohibited non-competes for employees earning less than a specified minimum threshold. In July 2021, the Biden administration released an Executive Order that encourages the Federal Trade Commission (FTC) to exercise its statutory rule-making authority to curtail the unfair use of non-competes.13 While the regulation of non-competition agreements has historically been a matter of state, rather than federal, law, whether and when the FTC will act, as well as the substance of any such rule, remains unclear.

iii CIC benefits

It is very common for US public companies to provide certain benefits to their executives if there is a CIC in order to provide a strong retention incentive and to ensure equitable treatment to management in the event of a sale of a company.

Enhanced severance benefits and accelerated vesting of outstanding incentive awards are the two most common types of supplemental CIC benefits. Enhanced severance benefits provide a strong incentive for executives to remain employed notwithstanding the prospect of the sale of a company. Often, the enhanced severance benefits are paid if an executive is dismissed or if an executive voluntarily ends his or her employment after a CIC because of an adverse change to his or her job (e.g., a demotion or a pay reduction) following the CIC. These are commonly referred to as terminations for good reason. In the past, it was also not unusual for senior executives to be entitled to voluntarily quit their jobs within a specified window following a CIC and receive enhanced severance benefits. This is referred to as a single-trigger arrangement (as contrasted with a double-trigger arrangement, under which two events beyond the executive's control – that is, both a CIC and involuntary termination of employment – had to occur for the executive to be entitled to the benefit), and it provides a very strong retention incentive, because executives who work until the CIC occurs are assured of the ability to collect these enhanced benefits. However, single-trigger arrangements have become less common on the basis that they are unnecessarily generous.14

Accelerated vesting of incentive awards assures executives that they can participate in the sale that constitutes the CIC with a portion of their otherwise unvested incentive compensation. Accelerated vesting can be single-trigger (i.e., immediately upon the CIC) or double-trigger (i.e., accelerated vesting occurs if an executive's employment is terminated involuntarily without cause or voluntarily for good reason shortly after a CIC).

iv Salary history bans

In recent years, several US states and certain cities have adopted or proposed legislation that would prohibit employers from enquiring about an employment applicant's salary history. Salary history is generally defined broadly to encompass salary, bonus and other forms of remuneration. These legislative efforts are primarily aimed at reducing gender pay inequality, and the prohibition appears to apply only to new hires.

Securities law

i Offerings and resales of securities

The Securities Act of 1933 (the Securities Act) requires that offers and sales of securities be registered with the SEC, subject to certain exceptions. Many typical executive compensation arrangements, including stock options, are considered to involve the offer and sale of securities. For US public companies, and for non-US companies that are listed for trading on a US exchange, registration is not burdensome and is the typical approach. For other companies, two types of exemptions are typically available. First, such companies typically can rely on an exemption under Rule 701 of the Securities Act that specifically exempts sales pursuant to employee benefit plans, subject to certain conditions.15 The principal condition is that if more than US$10 million in value of securities is offered or sold during any 12-month period, extensive financial disclosure is required to be made to participants of the plan. Following the issuance of a Concept Release in 2018, in late 2020 the SEC issued proposed amendments to Rule 701 and Form S-8, as well as proposed temporary rules.16 The proposed amendments to Rule 701 generally increase the offering cap on sales that can be made in reliance on the rule in a consecutive 12-month period, reduce the amount of additional disclosure required to be provided to investors, simplify the requirements regarding financial statement disclosure, clarify the disclosure requirements following business combination transactions and expand the scope of eligibility for consultants, advisers, former employees and employees of subsidiaries. The proposed amendments to Form S-8 make certain clarifications regarding a public company's ability to register offerings under multiple plans on a single Form S-8 and/or add shares or plans to existing Form S-8s, simplify fee calculations and payments for defined contribution plans, eliminate certain requirements related to tax-qualified plans, and expand eligibility for consultants, advisers and former employees. The SEC's proposed temporary rules would permit companies to make offerings under Rule 701 or Form S-8 to persons providing services in the 'gig economy' on a temporary, trial basis. Final rules have not yet been adopted by the SEC.

Second, there are various private placement exemptions. Generally, for offerings to very small numbers of senior executives, the statutory exemption for private placements is often utilised, under which there are no specific conditions associated with the offering. Regulation D under the Securities Act provides detailed rules for offerings to larger groups of executives, including a rule for offerings to an unlimited number of executives who qualify as accredited investors (i.e., they meet certain financial requirements related to their net worth or income). Regardless of the approach for complying with the registration requirements of the Securities Act, anti-fraud provisions of that law will apply and, as a result, disclosure of material information concerning the issuer is normally highly recommended.

Very senior executives (referred to as affiliates and often limited to the top two or three most senior executives of a company) who acquire securities in registered offerings may nevertheless be permitted to resell those securities on the market in the United States only pursuant to Rule 144 under the Securities Act. Typically, for registered securities being resold by affiliates, compliance with Rule 144 only requires the filing of a simple one-page form with the SEC. For securities acquired in private placements, resale in a public market, if one exists, may require compliance with that same form-filing requirement as well as a six-month holding period requirement under Rule 144. In late December 2020, the SEC proposed to amend Rule 144 to revise the determination of the holding period for securities acquired upon the conversion or exchange of certain 'market-adjustable securities' of companies that do not have securities listed on a national securities exchange. The proposal also included amendments that would update and simplify the form-filing requirements (including eliminating the requirement to file a form with respect to certain sales of securities and amending the form-filing deadline).17 These amendments have not yet been adopted.

ii Cashing out, repricing or modifying the terms of equity awards

Under the US securities laws, consideration must also be given to whether the cashing out, repricing or modification of a stock option or other equity award would constitute a tender offer. These considerations are particularly important for US companies considering changes to their executive compensation programmes, such as option repricing, in the wake of the market downturn caused by the covid-19 pandemic. The tender offer rules apply when a recipient is asked to make an investment decision as to whether to accept the cashing out, repricing or modification of the terms and conditions of the award. If such action constitutes a tender offer, a public company would have to comply with various requirements, such as the mandate to:

  1. file with the SEC a Schedule TO and all written communications made by the public company relating to the tender offer from and including the first public announcement as soon as practicable on the date of the communication;
  2. disclose the essential features of the tender offer, including any risks that award recipients should take into account when making the decision whether to accept the offer;
  3. keep the tender offer period open for at least 20 business days from its commencement;
  4. ensure that all award recipients are given the opportunity to participate in the offer; and
  5. ensure that the consideration paid to any award recipient represents the highest consideration paid to any other security holder for securities tendered in the offer.18

iii Registration of issuers

When executive compensation plans involve offerings to large numbers of employees, consideration must be given as to whether the issuer of the securities being sold must, as a result, register as a public company with the SEC. In 2012, legislation was passed increasing the number of holders of securities of any class that is permissible without such registration to 2,000 employees, no more than 500 of whom may be non-accredited investors.19

iv Insider trading and short-swing trading

Generally, anti-fraud provisions of the US securities laws prohibit executives from trading in securities of their employers on the basis of material non-public information. The determination of whether information constitutes material non-public information, and whether a purchase or sale of securities is on the basis of material non-public information, is typically a very fact-intensive inquiry that is informed by court opinions rather than bright-line rules. Rule 10b5-1 under the Securities Exchange Act of 1934 (the Exchange Act) currently provides a safe harbour under which executives can enter into trading programmes that provide them with a defence against claims that they traded on the basis of material non-public information, subject to certain conditions.20 In June 2021, the chair of the SEC asked the SEC staff to make recommendations as to how Rule 10b5-1 might be updated. The SEC has included Rule 10b5-1 in its 2021 rule-making agenda, but proposed rules have not yet been issued.

Separately, a complex regulatory regime prohibits executives of US public companies from profiting from short-swing price movements in their company's stock.21 Generally, senior executives are required to return to the corporation any profits derived from purchases and sales of stock within any six-month period, regardless of the order of the transactions. These rules are inflexible and do not depend on the possession of any non-public information. They apply to trading in the actual securities of a public company, as well as in options and other derivative securities, the value of which depends on the value of stock of that public company. The rules include a broad exemption for purchases and sales by executives with the company itself, subject to certain conditions.

v Share ownership guidelines and anti-hedging provisions

Most large US public companies require executives to own employer stock in order to align the interests of executives and shareholders. Typically, employers permit new executives to accumulate shares to meet their guidelines over a period of years and through outright ownership or equity compensation programmes. The amount of stock required to be owned is typically related to an executive's salary or seniority in an organisation, or to both. US public companies are also required to disclose any policies or practices (whether written or not) regarding the ability of their employees, officers or directors, or their respective designees, to purchase financial instruments, or otherwise engage in transactions that hedge or offset, or are designed to hedge or offset, any decrease in the market value of company equity securities that are granted to them as compensation, or are held directly or indirectly by them. The rule does not require companies to maintain practices or policies regarding hedging, or dictate the content of any such practice or policy.


US public companies are required to provide extensive annual public disclosures concerning the compensation of, typically, five of their most senior executives.22 Three years of information is required, including disclosure concerning salary, bonus, the value of equity awards made, pensions accrued during the year and the value of certain perquisites. This disclosure is generally required to be set out in the annual proxy statement related to the election of corporate directors.

In addition, US public companies are required to disclose the median of the annual total compensation of all its employees, except the CEO, the annual total compensation of its CEO, and the ratio of those two amounts.

Under the SEC's proposal pertaining to the recoupment of erroneously awarded compensation, a company listed for trading on a US exchange would be required to file its compensation recovery policy as an exhibit to its annual report. Furthermore, if during its last completed fiscal year it either prepared a restatement that required recovery of excess incentive-based compensation, or there was an outstanding balance of excess incentive-based compensation relating to a prior restatement, a listed company would be required to disclose the date on which it was required to prepare each accounting restatement, the aggregate dollar amount of excess incentive-based compensation attributable to the restatement and the aggregate dollar amount that remained outstanding at the end of its last completed fiscal year.

The SEC has also proposed rules requiring companies to disclose in a table the comparison between the compensation actually paid to their most senior executives to total shareholder return (TSR) and include a description of this relationship between pay and performance in either narrative or graphic form. A company would be required to disclose executive compensation actually paid for its CEO using the amount already disclosed in the proxy statement, making adjustments to the amounts included for pensions and equity awards. The amount disclosed for the remaining executive officers would be the average compensation actually paid to those executives. As the measure of performance, a company would also be required to report its TSR and the TSR of companies in a peer group.

As discussed above, while these proposed rules have not yet been finalised, they have been included as part of the SEC's 2021 rule-making agenda.

Finally, US public companies are required to publicly disclose information about material new compensation arrangements and agreements for senior management at the time such agreements are established or entered into.

Corporate governance

i Independent directors

For US public companies, various requirements dictate that the compensation of senior executives be established by members of a company's board of directors who are independent of management. Currently, there are several definitions of the term 'independent' as it is used for these purposes. These different definitions apply to a number of different tax and securities rules, as well as rules promulgated by the US listing exchanges.

ii Say on pay vote and proxy advisory firms

Since 2011, large public companies have been required to submit their pay decisions for senior executives to an advisory, non-binding vote of shareholders. Shareholders are permitted to decide on the frequency of these votes. At most companies, they occur annually.

An important factor influencing the outcomes of these say on pay votes has been proxy advisory firms, which are entities that help institutional investors analyse and vote on annual proxy statements. Two proxy advisory firms – Institutional Shareholder Services (ISS) and Glass Lewis & Company – constitute 97 per cent of the proxy advisory firm industry,23 with ISS the dominant force in the market. The combination of the growth of institutional investor portfolios, the growing length and complexity of proxy statements and a perception that institutional investors have a fiduciary duty to vote the proxies for all the companies in their portfolios24 has contributed to a significant growth in the power and influence of these proxy advisory firms. Companies closely watch the voting policies of firms, and monitor which of their large investors tend to vote in accordance with firms' recommendations.

Firms develop guidelines and issue voting recommendations both in connection with a company's annual meetings, and any special item (e.g., a proxy contest or merger proposal) put before shareholders for approval. In the case of ISS, its recommendations on company say on pay votes take into consideration factors such as pay for performance, problematic pay practices (i.e., excessive perquisites or a CIC payment exceeding three times base salary and average, target or most recent annual bonus), and the level of board communication and responsiveness to shareholders. In addition to say on pay, these firms have policy guidelines on compensation matters, such as the election of directors who will comprise the compensation committee, as well as proposals to adopt or amend equity plans. These matters are often affected by the proxy advisory firm's say on pay recommendation. For example, if a company previously received a negative recommendation on a say on pay resolution related to an issue that is still ongoing, ISS or Glass Lewis may also recommend voting against any compensation committee members up for re-election.

In recent years, the outsized influence of proxy advisory firms has resulted in enhanced scrutiny by regulators. In late 2018, the SEC hosted a roundtable discussion on the role and influence of such firms, and in August 2019, the SEC issued guidance clarifying the applicability of the proxy rules to voting advice provided by proxy advisory firms, and the responsibility of investment advisers in exercising their proxy voting responsibilities, including in connection with the retention of a proxy advisory firm. Following the release of this guidance, in November 2019, the SEC proposed amendments to its rules regarding proxy advisory firms,25 and ultimately issued final rules in July 2020.26 The final rules codify the SEC's view that proxy voting advice, as currently provided by proxy advisory firms, constitutes a solicitation for purposes of the US proxy rules. However, the final rule provides that proxy advisory firms would qualify for an exemption from the proxy solicitation requirements if: (1) the proxy advisory firm discloses any material conflicts of interest in its proxy voting advice or in an electronic medium used to deliver such advice; and (2) the proxy advisory firm adopts and publicly discloses written policies and procedures reasonably designed to ensure that (a) companies that are the subject of the voting advice are able to obtain such advice at or prior to the time when the advice is disseminated to the proxy advisory firm's clients; and (b) the proxy advisory firm provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements made by the company that is the subject of such advice prior to the company's annual meeting of shareholders. The final rule provides two safe harbours for proxy advisory firms with respect to the written policies and procedures requirement described above, and clarifies that proxy advisory firms do not need to comply with such requirement if their proxy voting advice is based on a custom policy or if such advice is provided as to a non-exempt solicitation regarding certain merger and acquisition transactions or contested matters. The final rule also modifies the SEC's existing rule prohibiting any proxy solicitation from containing false or misleading statements in order to provide examples of when material omissions in proxy voting advice could be considered misleading. Following the 2020 election and subsequent change in administration, in June 2021, the SEC chair directed the SEC staff to consider whether to recommend that the SEC revisit its 2020 codification of the definition of 'solicitation' as including proxy voting advice, as well as the related guidance. As a result, the SEC will not be recommending enforcement action while additional regulatory action is under consideration, though the rules still technically remain in effect.

iii Indemnification

It is standard in the United States for public companies to agree to indemnify their senior executives for legal claims that may be made against them that arise from their employment, usually unless an executive has engaged in misconduct or gross negligence. Such litigation is not uncommon. In addition, many executive employment agreements provide supplementary indemnification rights and protections to executives, including, for example, the right of the executive to have the company pay the executive's legal fees in disputing any such claim as they are incurred.

iv Environmental, social and cultural issues

In recent years, there has been an increased focus from both shareholders and legislatures on environmental, social and cultural issues in the corporate governance space, including issues arising from the #MeToo movement. For example, the SEC recently adopted an amendment to its existing disclosure rules that requires US public companies to disclose a description of their human capital resources, including any human capital measures or objectives that such companies focus on in managing their business, such as measures or objectives that address the development, attraction and retention of personnel. Following the change in administration, the SEC has also indicated its enhanced scrutiny of these issues, and recently requested public comment on climate change disclosures. Shareholders have been increasingly focused on diversity and filed a number of derivative lawsuits against the boards of directors and certain executive officers of large public companies in 2020, alleging that despite public statements emphasising the importance of diversity, the boards and senior executive teams of such companies continue to lack racial and gender diversity.27 Although the plaintiffs in these suits have not yet prevailed, the lawsuits nonetheless suggest that shareholders are willing to pursue litigation in order to hold boards accountable for diversity objectives. In August 2021, the SEC approved a Nasdaq-proposed rule that generally requires Nasdaq-listed companies to have, or explain why they do not have, at least two diverse board members, including one director who self-identifies as female and one director who self-identifies as an underrepresented minority or LGBTQ+.28 The effective date of the board diversity objective rule varies depending on the company's listing tier. Nasdaq-listed companies will also be required to disclose board diversity data in a matrix in their annual proxy statement or on the company's website. Such companies will have until the later of 8 August 2022 or the date on which the company files its 2022 annual proxy or information statement (or, if the company does not file a proxy or information statement, the date it files its Form 10-K or 20-F) to comply with the diversity matrix requirement. In addition, some states have passed or introduced legislation requiring companies to issue reports on board and executive diversity, and California currently requires California-headquartered companies to have at least one female director on the board by the end of 2019, and at least three female directors on boards with more than six directors by 2021. As a result of legislation passed in 2020, California-headquartered companies are also required to have a minimum of one board member from an under-represented community by the end of 2021, and two or three such board members by the end of 2022, depending on the size of the company's board. Both of the California laws were challenged in federal court in 2021 on the basis that they violate the US Constitution, but the lawsuit is still pending.29 Another example is the TCJA's addition of a new Section 162(q), which prohibits deductions for settlements or payments related to sexual harassment or sexual abuse if such settlements or payments are subject to a non-disclosure agreement, or attorneys' fees related to such settlements or payments. This Code provision is aimed at discouraging employers from keeping confidential payments made in connection with sexual harassment settlements. Institutional investors continue to be focused on sustainability reporting and environmental, social and governance disclosures at US public companies.30

Specialised regulatory regimes

As noted above, the financial crisis that began to unfold in 2008 caused US regulators to focus special attention on compensation in the financial services industry, in accordance with global mandates focused on that sector. In the spring of 2016, US regulators re-proposed rules under Section 956 of the Dodd‒Frank Act that seek to prohibit incentive-based compensation arrangements that US regulators determine might encourage inappropriate risks by providing excessive compensation or incentives that could lead to material financial loss to financial institutions. The 2016 re-proposal took a more prescriptive approach than prior guidance in this area, with mandates such as:

  1. requiring deferral of at least 50 per cent of incentive compensation for a minimum of three years for executive officers of covered financial institutions with US$50 billion or more in total consolidated assets (covered institutions);
  2. prohibiting incentive-based compensation arrangements for executive officers, employees, directors or principal shareholders (covered persons) that would encourage inappropriate risks by providing excessive compensation;
  3. requiring a clawback provision that allows the covered institution to recover incentive-based compensation for seven years following vesting if the covered institution determines that an individual engaged in misconduct that resulted in significant financial or reputational harm, fraud or intentional misrepresentation of information used to determine an individual's incentive-based compensation;
  4. requiring policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of an institution to help ensure compliance with the re-proposed rule's requirements and prohibitions; and
  5. requiring annual reports on incentive compensation structures to an institution's specific US regulator.

As discussed above, while these rules are included in the SEC's 2021 rule-making agenda, it is currently unclear what form any such proposal would take.

Developments and conclusions

The regulation of executive compensation in the United States remains in a state of flux. Following the 2020 election and subsequent change in administration, it is possible that many of the executive compensation measures under the Dodd–Frank Act, including the SEC’s proposed rules described in this chapter, will be adopted in some form, and there may be increased efforts to tie executive compensation to environmental, social and governance measures. The combination of populist politics and institutional investor and shareholder concerns suggests that the United States will not see a substantial decrease in the legislative and regulatory focus on executive compensation issues.


1 Michael Albano is a partner and Julia Rozenblit is a practice development lawyer at Cleary Gottlieb Steen & Hamilton LLP.

2 See The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT), Public Law No. 116-136 (2020). Under the CARES Act, the US Treasury is permitted to provide financial assistance in the form of loans, loan guarantees and other investments to industries affected by the covid-19 pandemic. However, businesses receiving such assistance are subject to several restrictions, including limitations on compensation and severance benefits payable to certain covered employees. The CARES Act also imposes certain requirements around employment levels for businesses accepting financial assistance from the US Treasury, and separately provided for tax relief for individuals and businesses with respect to certain tax-qualified employee benefit plans.

3 Pay Ratio Disclosure, SEC Release Nos. 33–9877; 34–75610 (18 August 2015), 80 Fed Reg 50104, available at

4 Disclosure of Hedging by Employees, Officers and Directors, SEC Release Nos. 33-10593; 34-84883 (6 February 2019), 84 Fed Reg 2402, available at

5 Incentive-based Compensation Arrangements, SEC Release No. 34–77776 (10 June 2016), 81 Fed Reg 37669, available at

6 Treasury Regulations Section 1.861-4(b)(2).

7 An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub Law No. 115-97 (2017).

8 Section 3121(l) of the Code permits a non-US subsidiary of a US corporation to enter into an agreement to permit US employees of the subsidiary to participate in the Social Security system.

9 Treasury Regulations Section 1.451-2.

10 For example, an employee must meet the statutory definition of qualified employee, and a private company must have a written plan under which, in the applicable calendar year, not less than 80 per cent of all employees who provide services to the company in the US are granted stock options or RSUs with the same rights and privileges to receive qualified stock.

11 California Business and Professions Code Sections 16600 to 16607 (2021).

12 Massachusetts Noncompetition Agreement Act, MGL Chapter 149 Paragraph 24L.

13 Executive Order on Promoting Competition in the American Economy (9 July 2021), available at

14 2011–2012 Study of Executive Change-in-Control Arrangements, Meridian Compensation Partners LLC.

15 17 CFR Section 230.701 (2021).

16 Concept Release on Compensatory Securities Offerings and Sales, SEC Release No. 33–10521 (18 July 2018), available at; Modernization of Rules and Forms for Compensatory Securities Offerings and Sales, SEC Release No. 33-10891 (11 December 2020), 85 Fed Reg 80232, available at; Temporary Rules to Include Certain “Platform Workers” in Compensatory Offerings Under Rule 701 and Form S-8, SEC Release Nos. 33-10892; 34-90948 (11 December 2020), 85 Fed Reg 79936, available at

17 Rule 144 Holding Period and Form 144 Filings, SEC Release No. 33-10911 (19 January 2021), 86 Fed. Reg. 5063, available at

18 17 CFR Section 240.13e-4 (2021). Certain of these requirements are waived in certain circumstances, if the public company is incorporated outside the United States.

19 Section 501 of the Jumpstart Our Business Startups (JOBS) Act, Pub L 112-106, 126 Stat 313 (2012).

20 17 CFR Section 240.10b5-1 (2021).

21 Section 16(a) of the Exchange Act (15 USC Section 78p(a)) and the rules thereunder.

22 Item 402 of Regulation S-K at 17 CFR Section 229.402 (2021).

23 US Chamber of Commerce's Corporate Governance Update: Public Company Initiatives in Response to the SEC Staff's Guidance on Proxy Advisory Firms, available at

24 SEC Staff Legal Bulletin No. 20, Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms, available at

25 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, SEC Release No. 34–87457 (5 November 2019), available at

26 Exemptions from the Proxy Rules for Proxy Voting Advice, SEC Release No. 34-89372 (22 July 2020).

27 See, e.g., Complaint, Klein v. Ellison, Case No. 20-cv-4439 (N.D. Cal. 2 July 2020); Complaint, Ocegueda v. Zuckerberg, Case No. 20-cv-04444 (N.D. Cal. 2 July 2020); Complaint, Kiger v. Mollenkopf, Case No. 20-cv-01355-LAB-MDD (S.D. Cal. 17 July 2020).

28 Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Approving Proposed Rule Changes, as Modified by Amendments No. 1, to Adopt Listing Rules Related to Board Diversity and to Offer Certain Listed Companies Access to a Complimentary Board Recruiting Service, SEC Release No. 34-92590 (6 August 2021), available at

29 Alliance for Fair Board Recruitment v. Weber, Case No. 2:21-cv-05644 (C.D. Cal 12 July 2021).

30 Despite this focus from institutional investors, in 2020 the US Department of Labor issued rules limiting the extent to which investments made by retirement plan fiduciaries may take into account environmental, social and governance concerns rather than focusing exclusively on financial considerations, and curbing the ability of such fiduciaries to vote proxies on matters that do not have an economic impact on the plans they manage. Following the change in administration as a result of the 2020 US election, the DOL issued an enforcement policy statement in which it indicated that it would decline to enforce these rules, though it will continue to engage with stakeholders and is likely to reopen the rule-making process on related issues.

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