Compensation Season 2026
With 2025’s deal momentum expected to continue into 2026, attracting and retaining key talent remains critical amidst economic and political uncertainty. Macroeconomic indicators are mixed, with stable economic growth and easing interest rates coupled with above-target inflation and a slowing labor market. At the same time, the new U.S. presidential administration has ushered in large-scale policy shifts. Keeping executives and employees engaged is essential to navigating the current landscape. We review below some of the legal updates and compensation trends that may shape compensation decisions in 2026 and beyond.
2026 Updates
Increasing Scrutiny of Proxy Advisory Firms. The major proxy advisory firms ISS and Glass Lewis, which have long had a prominent voice in shaping compensation decisions at public companies, are now facing heightened regulatory and stakeholder scrutiny that may impact their role over time. On December 11, 2025, President Trump signed an executive order directing the Securities and Exchange Commission (SEC) to increase its oversight of proxy advisors. The order instructed the SEC to, among other things, assess whether to require proxy advisors to register as investment advisors and consider whether to require proxy advisors to provide increased transparency on their recommendations, methodology and conflicts of interest, especially regarding diversity, equity and inclusion (DEI) and environmental, social and governance (ESG) factors. The order also directs the Federal Trade Commission (FTC) to review state antitrust investigations into proxy advisors and determine if there is a probable link to violations of federal antitrust law. Further, the order directs the Department of Labor to strengthen the fiduciary standards of pension and retirement plans, which could result in the proxy advisors being treated as ERISA fiduciaries. It remains to be seen how this increased scrutiny will impact the proxy advisors, but Glass Lewis announced late last year that it will begin offering more customized voting recommendations (enabled in part by AI) beginning in 2027. We may see an acceleration in the use of alternatives to standardized proxy advisor frameworks to inform voting policies, such as development of internal guidelines or creation of in-house, AI‑driven tools. Although ISS and Glass Lewis are likely to remain highly influential in the 2026 proxy season, if there is large-scale movement away from standardized voting frameworks in the future, companies will need to consider how to adequately conduct investor outreach to guard against unforeseen voting outcomes, especially on sensitive compensation matters.
Pressure-Testing Restrictive Covenants. While the FTC formally abandoned its proposed noncompete ban in September 2025, the FTC continues to pursue targeted enforcement actions with respect to noncompete covenants that it views as unlawfully anticompetitive. Meanwhile, noncompete covenants are increasingly more regulated at the state level, with many states adopting noncompete statutes in recent years. Some state statutes flatly prohibit noncompete covenants in the employment context (including California, Minnesota, North Dakota and Oklahoma, although in certain cases, sale of business or similar exceptions may apply), while others prescribe tests for validity and enforceability, including reasonableness as to duration and geographic scope, required consideration value or income thresholds. Even in the absence of a statute, state courts are applying increasing scrutiny in examining restrictive covenants pursuant to applicable case law, including in jurisdictions such as Delaware that historically have been viewed as supportive of protecting an employer’s right to enforce restrictive covenants. Given the decreasing certainty that restrictive covenants will be upheld, companies should periodically review the scope and wording of their existing restrictive covenants to maximize enforceability in the evolving legal landscape and should also consider other appropriate tools to protect their business interests, such as confidentiality restrictions and enhanced employee retention efforts.
SEC Roundtable on Executive Compensation. On June 26, 2025, the SEC hosted a roundtable on executive compensation, during which Chairman Paul Atkins referred to the current executive compensation disclosure regime as a “Frankenstein patchwork of rules.” In particular, recent additions to the regulations, including the Pay Versus Performance rules, may be viewed as a “regulatory tax” on public companies (in the words of Commissioner Hester Peirce) rather than a benefit to investors. Chairman Atkins signaled that the rules may be amended to enhance transparency and to reduce complexity for investors. The SEC has not given any further indication as to what steps it may take, with commenters divided on specific reforms and some of the most onerous and controversial disclosure rules (such as Pay Versus Performance and Pay Ratio) being a product of the Dodd-Frank Act, rather than SEC rulemaking alone. Final rulemaking is unlikely before the 2027 proxy season, but 2026 may bring proposals for new rules or changes to, or rescission of, existing requirements.
Insider Reporting Obligations for FPIs. Effective March 18, 2026, directors and officers of foreign private issuers (FPIs) will, for the first time, be subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934. This includes a requirement to file Forms 3, 4 and 5 with the SEC. However, directors and officers of FPIs will not be subject to the short-swing profit disgorgement provisions of Section 16(b). FPIs will need to quickly prepare for compliance with these new requirements, including by ensuring directors and officers have current filing codes for the SEC’s EDGAR system to enable filing of ownership reports beginning March 18, 2026.
Current Considerations in M&A
Early-Stage Transaction Planning. At a time of increased volatility in the M&A market, deals have generally been moving quickly from the initial engagement of the parties to the signing of definitive agreements. Given the compressed timelines, companies should take early steps to prepare for the possibility of a transaction. In particular, during the preliminary stages of the process, the target company should work with legal counsel to review and assess the scope and terms of any existing executive change-in-control arrangements, the terms of outstanding equity awards governing their treatment in a corporate transaction (including the treatment of any performance metrics), and the retention and severance needs for the broad-based employee population, among other key employee-related items. In addition, Section 409A implications should be analyzed, and companies should prioritize engaging an accounting firm and legal counsel to prepare preliminary Section 280G calculations to assess the potential excise tax exposure and loss of deductibility for change-in-control compensation. In our experience, a high degree of preparation in the early stages of the process, prior to the signing sprint, leads to better outcomes, with parties agreeing to appropriate terms that facilitate the transaction by retaining and incentivizing employees.
Uncertain Interim Periods. In contrast to the accelerated deal signing process common today, interim periods have become more difficult to predict. The interim period is inherently a time of uncertainty for target company employees, and the longer the period extends, the more challenging it can be to retain key employees. Accordingly, in circumstances where the interim period may be lengthy, in particular if it could exceed 12 months, companies should be especially thoughtful and creative in designing appropriate retention incentives. For example, companies may consider granting transaction-related retention with partial payment prior to closing.
Executive Transitions in M&A. Corporate transactions inherently involve planning for, and the implementation of, one or more executive transitions. But as transactions become increasingly complex, executive transition arrangements become more bespoke to meet the circumstances. For example, the chief executive officer of one of the merger parties may assume the role of executive chair of the combined company for a defined term following the closing, or may serve as non-executive chair, as a non-employee director, or in an advisory role, whether as a non-officer employee or as a consultant. The scope of the role and the corresponding compensation must be tailored to the parties’ needs, with consideration given to corporate governance impact, treatment of change-in-control compensation, Section 280G and Section 409A tax implications for the executive and for the combined company, and the effect of the transition on retention of other key executives. Careful thought and coordination among the many different stakeholders, with the advice of external counsel, is essential to balance the different overlapping considerations and reach an acceptable outcome for the transitioning executive and the merger parties.
A company’s compensation framework should be regularly reviewed given the complex legal, accounting and governance considerations that go into designing a compensation program. Companies at all stages of the corporate life cycle benefit from strong executive leadership and committed personnel. By focusing on attracting and retaining key talent, companies will be best positioned to deliver long-term value for their shareholders.
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Jeannemarie O'Brien |
