The executive compensation rulebook might look very different by this time next year. Patricia Adams and Eric Hechler of law firm Vinson & Elkins analyze three critical areas of change under the new Trump Administration, including shifts in proxy adviser oversight, key regulatory appointments and tax policies.
While some Trump-era policies may return, the corporate landscape has evolved significantly since 2020 — particularly in areas like ESG initiatives, shareholder activism and compensation transparency. The incoming administration faces different challenges than it did four years ago, including an entrenched proxy advisory system, established compensation disclosure requirements under Dodd-Frank and heightened investor expectations around executive pay transparency.
Though wholesale regulatory changes appear unlikely in the short term, shifts in enforcement priorities and key personnel appointments could substantially impact how companies approach executive compensation.
Proxy adviser regulations
President-elect Donald Trump’s return to the White House has created uncertainty and challenges for proxy advisory firms like ISS and Glass Lewis, which provide voting recommendations to investors on corporate governance and executive compensation matters. Proxy advisers may face increased challenges and restrictions under the incoming Trump Administration, which is expected to favor corporate interests and deregulation over shareholder activism and ESG initiatives. Trump plans to replace resigning SEC Chair Gary Gensler, who reversed 2020 rules on proxy advisers, with Paul Atkins, who could revisit those rules.
This shift could have significant implications for executive compensation. The incoming administration’s policies may lead to less scrutiny and fewer restrictions on executive pay packages, potentially resulting in higher compensation for top executives. For instance, the reinstatement of the 2020 proxy adviser rules, which required advisers to share their reports with companies before investors, could give companies more control over the narrative and reduce the likelihood of shareholder pushback on generous executive pay packages, as proxy advisers often advise investors to vote against pay packages that they deem excessive, misaligned or lacking transparency. For example, Elon Musk, who is now one of Trump’s most prominent advisers, clashed with these firms when they recommended rejection of his $56 billion Tesla bonus. Musk ultimately won shareholder approval, but this conflict highlights the ongoing tension between proxy advisers and powerful corporate figures.
Proxy advisers may face more pressure from companies and business groups to justify their methodologies, criteria and recommendations, or to adopt more lenient standards for pay evaluation. Proxy advisers may also lose some of their credibility and leverage with investors, who may rely more on their own analysis or other sources of information. Alternatively, proxy advisers may try to maintain or enhance their reputation and value by providing more rigorous and nuanced advice that reflects the diversity and complexity of pay practices and performance measures across different sectors and markets.
The impact of the incoming administration on proxy advisers and executive compensation may also depend on other factors, such as the outcome of pending or future litigation involving proxy advisers, the reactions and preferences of institutional investors and shareholder activists and the evolution of corporate governance and ESG trends and standards. Proxy advisers may have to adapt their business models and strategies to cope with the changing regulatory and political environment and to defend their value and credibility to their clients and stakeholders. This could involve increasing transparency in their voting recommendations, enhancing their engagement with companies and demonstrating the independence and rigor of their research. Proxy advisers and executive compensation practitioners will need to monitor these developments closely and adapt their strategies accordingly.
SEC chair and NLRB general counsel appointments
We expect to see Trump appoint several individuals to key positions that have the power to impact the compensation and benefits landscape, including the appointment of a new SEC chair and general counsel of the National Labor Relations Board (NLRB).
Trump pledged to immediately replace Gensler with Atkins. Gensler was appointed by President Joe Biden in 2021, and, under Gensler’s leadership, the SEC made various updates in the realm of executive compensation and corporate governance. Significantly, updates pursuant to Dodd-Frank included the requirement that publicly listed companies adopt and file a policy regarding the clawback of erroneously awarded compensation and the requirement that companies include on their annual proxy statement certain pay vs. performance disclosures. Throughout his time as chair, Gensler focused on increasing transparency and accountability of corporate executives for investors through his oversight of both rulemaking and SEC enforcement actions.
Atkins will likely take a very different approach than Gensler did, with a more business-friendly tack toward executive compensation and corporate governance disclosures. It is unlikely we will see an increase in reporting requirements and potential enforcement actions related to such requirements during the Atkins term.
Along with the appointment of a new SEC chair, we also expect the appointment of a new general counsel for the NLRB to replace Jennifer Abruzzo. Abruzzo, a Biden appointee, worked to eliminate and remedy the monetary effects of stay-or-pay provisions, which require some employees and executives to repay their employer for certain compensation paid to them should they separate from employment within a specified period. Abruzzo’s memo arguing that these stay-or-pay provisions are unlawful was an expansion of her previous memo taking a position against the lawfulness of many noncompete agreements. With a new general counsel at NLRB, we should expect that the enforcement of her agenda against certain non-compete and stay-or-pay arrangements will come to a halt and that the new appointee will work to undo her efforts in this area of compensation.
Trump-era changes to executive compensation regulations and taxation
Though no campaign promises focus directly on changing the area of executive pay and taxation, there are indirect ways in which the incoming administration will alter the executive compensation landscape.
Trump has promised major tax cuts, which likely includes the renewal of the 2017 Tax Cuts and Jobs Act (TCJA) passed during his first term. The incoming administration and the Republican-controlled Congress have stated that an extension to the TCJA is a top priority. In addition to extending the TCJA, during his campaign, Trump touted additional tax cuts, including eliminating taxes to tips, overtime and Social Security benefits. The budgetary considerations of such tax cuts could have implications to the taxation of executive compensation. Typically, policy makers prefer to offset budgetary expenses with other revenue or reductions in the budget. It is not clear how an extension to the TCJA and the additional cuts will be funded but, in 2017, the TCJA was offset, in part, with the repeal of exceptions to the deduction limitation for commissions and qualified performance-based compensation under Internal Revenue Code Section 162(m).
Section 162(m) limits the deduction by a publicly held corporation for payments to its employees to $1 million. Therefore, publicly held corporations cannot deduct the excess compensation paid to individuals who make more than $1 million, including commissions and qualified performance-based compensation, allowing for increased federal corporate tax revenue. This tweak to the Internal Revenue Code is one of many that the government has available to recoup revenue. The tariffs on imported goods that Trump has promised could be used to offset the tax cuts, but additional changes to the tax code affecting executive compensation are still possible.
It is widely expected that the SEC will roll back Biden-era enforcement policies and issue fewer rules during the second Trump presidency. However, despite the appointment of a new SEC chair, the commission is not expected to reduce current executive compensation and governance disclosures, given the challenges of repealing regulations.
The cost and burden of compliance with compensation-related disclosures is relatively small compared to the cost of complying with more onerous regulations, such as environmental and safety regulations. Thus, special interest groups are likely to focus on regulations with a high compliance burden before targeting those dealing with executive compensation disclosures.
In addition, there are legal and administrative challenges for the SEC and related agencies to repeal their own rules. Given the difficulty in rolling back such policies, the clawback policy requirement and the other compensation disclosure rules promulgated under Dodd-Frank are unlikely to be repealed by Congress or the second Trump-era SEC.
However, it should be noted that in 2017, Trump instructed the Treasury Department to review Dodd-Frank, and congressional Republicans attempted to pass but ultimately failed a law repealing some provisions of the law. Despite Trump’s previous willingness to review Dodd-Frank, there has been no sign of doing so during his second administration. Therefore, no sweeping changes to executive compensation regulations are expected in the early days of the new administration; however, that expectation could change as Trump’s priorities evolve.
Patricia Adams
Eric Hechler
