The primary theme for the 2025 compensation committee agenda will be responding to the impact of the 2024 presidential election. Specifically, we think that the election results will dramatically impact the executive branch's regulatory agenda, the potential impact of tax cuts and tariffs will need to be considered in incentive plan design and companies may need to rethink how they incorporate ESG considerations into compensation plans. Beyond the impact of the election, there are some shareholder-specific considerations for long-term incentive design that should also be addressed by compensation committees.
The Trump administration's regulatory agenda. We expect that the Trump administration will pull back the reins on the regulatory efforts of the Biden administration. For example, we expect that the Federal Trade Commission will drop its efforts to ban non-competes and will no longer contest the Texas district court decision to strike down the non-compete ban nationwide. At the SEC, we expect them to back off defending the legality of the climate disclosure rules adopted in March 2024, which are under challenge in the U.S. Court of Appeals for the Eighth Circuit. We also expect that efforts to revise the Human Capital Management disclosure requirements to be more quantitative and consistent across companies will be dropped. The new Trump administration may also revive efforts to regulate proxy advisors, though the SEC's 2020 rules are currently under review by the U.S. Court of Appeals for the District of Columbia Circuit. The net impact for compensation committees is likely a more “regulatory-lite” environment for executive pay.
Proposed tax cuts and tariffs. President Trump campaigned on extending the 2017 Tax Cuts and Jobs Act, which is set to expire at the end of 2025. Beyond that, he has proposed further reducing the corporate income tax rate from 21% to 20% and potentially lowering it to 15% for domestic manufacturers (provided the products are made in the United States). He also has proposed eliminating taxes on tips. To help pay for these changes, he has proposed universal 10-20% tariffs on foreign goods and services (60% on China). It is unclear how much of this will actually make it into law; however, it is important to review your incentive plans to understand whether the compensation committee will have the potential to adjust for the impact of tax cuts or tariffs on performance results. While tax cuts may be a windfall for performance, the impact of tariffs is harder to predict. Tariffs may drive business toward domestic companies but may have an inflationary impact on the economy as a whole (via reducing demand). In addition, other countries will likely implement retaliatory tariffs on U.S. businesses, adversely impacting exports. For these reasons, 2025 may be a challenging year for forecasting performance. Some flexibility may be warranted as long as it is objective and transparent.
ESG and DEI in incentive plans. The Trump administration has put companies on notice that the environment will not be friendly to DEI efforts. Companies should ensure that their DEI efforts are likely to withstand legal challenges (i.e., do not confer a preference on legally protected groups). Some companies are reevaluating the language around DEI (i.e., frequently emphasizing having inclusive environments) and shying away from diversity and equity as these terms are more “loaded.” It is important to recognize that the presidential administration is only one of many stakeholders to which companies are accountable. The interests of shareholders and employees should likely carry more weight in determining whether the company wants to incentivize management for having an inclusive workforce.
Rethinking restricted stock. There is a minority view among some institutional shareholders that performance shares are overrated as a form of long-term incentive, and that restricted stock vesting over a relatively long period of time is a better alternative. So far, this view does not have a lot of traction, but it surfaced in a question in the Institutional Shareholder Services 2024 policy survey and it is a factor they are actively considering. Compensation committees may want to consider how high levels of executive stock ownership help directly align the interests of management with shareholders, particularly if a large portion of the shares delivered through compensation are required to be held until the executive leaves the company.
The Road Ahead
Economic conditions in 2025 appear to be robust and we expect financial performance to be reasonably strong. We expect the biggest driver of uncertainty and change will be in the realm of policy. While the Trump administration’s regulatory agenda is somewhat straightforward to predict, the legislative agenda is much more of an open question as it is always challenging to get budgetary legislation passed. We expect that there will be some degree of compromise but anticipate that some form of tax cuts will be enacted and some tariffs will be implemented. Compensation committees should work with their management teams to understand the potential impact on the companies they oversee.