If you’re an executive negotiating a new employment agreement — or a company trying to attract top talent — you need to understand the landscape. Three major forces are shaping executive compensation right now: the SEC, ESG policies, and the IRS.
Here’s what you need to know.
Possible SEC Changes to Executive Compensation Disclosure Rules (Item 402 of Regulation S-K)
The SEC is considering changes to Item 402 of Regulation S-K, which governs how public companies disclose executive compensation.
What’s happening:
The SEC held a roundtable discussion on June 26, 2025, where public companies, investors, compensation consultants, and law firms debated the current disclosure rules. There was general agreement that the rules need improvement — but little consensus on how.
The divide:
| Public Companies Say | Investors Say |
|---|---|
| Simplify the rules. Generating the required information is too expensive. | Add more disclosure, especially on equity and performance-based awards. |
What’s at stake:
The SEC has requested public comments and is expected to propose revisions soon. If adopted, these changes could affect how your compensation is reported — and how it’s perceived by shareholders and proxy advisors.
What this means for you:
If you’re an executive, expect more scrutiny on equity awards. If you’re a company, prepare for potential new disclosure requirements.
Ongoing Impact of ESG Policies and Proxy Advisory Firm Perspectives
ESG (Environmental, Social, and Governance) policies continue to influence how proxy advisory firms like ISS and Glass Lewis evaluate executive compensation.
The key players:
- ISS and Glass Lewis make recommendations to shareholders on say-on-pay votes.
- Their policies shape how shareholders vote — and how companies design compensation packages.
What ISS is watching:
- Alignment of CEO pay with total shareholder return (TSR) — still the most important quantitative factor.
- Problematic pay practices: excessive change-in-control provisions, benchmarking above peers, repricing options, and excessive perquisites.
- Responsiveness to shareholders — companies that don’t engage after a low say-on-pay vote face higher risk of negative recommendations.
What Glass Lewis is watching:
Performance measures beyond TSR — financial metrics and industry-specific indicators.
What this means for you:
If your company receives less than 70% support on a say-on-pay vote, expect ISS and Glass Lewis to scrutinize your compensation practices closely. Engagement with shareholders matters.
Impact of IRC Section 162(m) on Deductions
Section 162(m) of the Internal Revenue Code limits the deduction a public company can take for compensation paid to its CEO and other top executives.
The rule:
Public companies cannot deduct compensation over $1 million for certain top executives.
What this means:
- Companies are incentivized to structure compensation as performance-based to preserve deductions.
- But the $1 million cap applies broadly — and many companies have already hit it.
What this means for you:
If you’re an executive, your compensation package may be structured to maximize deductions — which can affect how your bonus and equity are designed.
Bottom Line
| Topic | What’s Happening | What It Means for You |
|---|---|---|
| SEC disclosure rules | Proposed changes to Item 402 | More scrutiny on equity and performance-based awards |
| ESG and proxy advisors | ISS/Glass Lewis focusing on pay-for-performance and responsiveness | Companies must engage shareholders and justify pay practices |
| Section 162(m) | $1 million deduction limit | Affects how compensation is structured |
Contact an Employment Lawyer for Guidance
If you’re negotiating an executive employment agreement or concerned about how these developments affect your compensation, an experienced attorney can help.
At The Farrow Firm, we represent executives and professionals in employment negotiations, severance reviews, and compensation disputes.
Contact us today to schedule a confidential consultation.
** Disclaimer: This blog post is intended for informational purposes only and does not constitute legal advice. For specific legal guidance, please contact us today.