The New Year is always a good time to take stock.
With some many interesting developments having happened across the equity compensation industry in recent years, including Pay versus Performance, and pay transparency, we thought it was the perfect time to get some of our most experienced Own Up commentators together to discuss their predictions for 2024, in terms of emerging trends and incoming regulatory changes to watch closely, including:
- Mergers and Acquisitions in 2024
- The end of the ‘Great Resignation’
- How AI could impact HR and total compensation
- Further calls for pay transparency in compensation
- Whether markets will continue to see volatility
Erin Fraser, VP Business Development for Global Shares, a J.P. Morgan company, leads a conversation with Global Shares colleagues Chris Dohrmann, SVP of Strategic Partnerships and John Bagdonas, SVP of Business Development, to talk about the ever evolving space of equity compensation and their predictions for the 2024 market.
Ep14: Predictions for 2024 with Erin Fraser, Chris Dohrmann and John Bagdonas
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This is Own Up, the Global Shares podcast about employee ownership and equity compensation. Answering questions and sharing with industry experts, here are your hosts, Chris Dohrmann and John Bagdonas.
Chris Dohrmann 00:21
Welcome back to Own Up. I'm Chris Dohrmann, and today I'm joined by my colleagues, John Bagdonas and Vice President of Business Development, Erin Fraser. Erin, welcome to the podcast.
Erin Fraser 00:33
Hey, Chris, John, Happy New Year. Thank you for having me on the show.
Chris Dohrmann 00:36
You're most welcome. As we kick off a new year, we're bringing you a new special edition of the podcast. And that's why Erin is our guest host today.
Erin Fraser 00:45
Thanks, Chris. I'm your host for today. I'm thrilled to be here as we reveal our equity compensation predictions for 2024.
Of course it’s important to note that the views expressed by myself, Chris and John in this discussion are our own and any market predictions made may not materialize. This podcast is for informational purposes only.
Whether you're a seasoned listener or are tuning in for the first time, thanks for tuning in! We have some exciting discussion lined up. Chris, I think we should start off with you, if we don't mind getting going. What would you expect for the year ahead? I know that I think one of the items we wanted to discuss was mergers and acquisitions.
Chris Dohrmann 01:22
Thanks Erin. I've been talking about the return of M&A activity for probably almost the full 2023. I think M&A was at record levels in both 2019 and early 2020. And then the world changed a bit during the pandemic. I don't think the drivers for M&A have gone away. I think the focus both corporate and you know, our own culture has changed to be, you know, focused on the pandemic and getting through that. But I think the fact that there are companies out there that have excess cash, there are companies out there that are looking to be acquired, because that's their liquidity event, and the fact that there were two record years prior to the pandemic, I think it's, you know, you add in three years of inactivity, and I think, at some point, waiting for whatever trigger and whether or not that's the end of rising interest rates here in the US, or whether or not there's any type of a scale back because inflation may be under control. I think all of a sudden, you're going to see an increase in the levels of M&A activity, whether or not it's acquisitions, or acquisition heavy, I don't know. But I think it will be mergers, and acquisitions as well.
Erin Fraser 02:44
Thanks Chris. John, let's jump over to you. I know that everyone's hoping that the end of the Great Resignation is nearing. What are your thoughts on that?
John Bagdonas 02:54
Well, thanks, Erin. It's a very interesting topic. I mean, as we all saw during the pandemic, there were a lot of people that changed jobs, because of the fact that all of the different dynamics and factors that took place, people realized they could work remotely, people realized that they didn't necessarily have to stay in one place, there were so many opportunities, because once the economy started to come back, after the initial consequences of the pandemic, people realized they could job hop pretty easily, and what had happened, so many people were beginning to leave and job hop, particularly younger workers, that it took on the nomenclature of the Great Resignation.
But interestingly enough, since about quarter one of 2022 is really when the attrition rate really peaked, it got up to about 3% of total employment, including non-farm payroll, it's really begun to slow down again, and we're down to what they call a quits rate is now down to about 2.25% as of the end of the third quarter, which doesn't seem like a big number compared to 3%. But if you think about the total number of people that are employed, it is a pretty significant number. And so what companies are finding is that people are not leaving now that the attrition rate has slowed down. And particularly with newer employees, it's sort of what they call a FIFO effect where the first employees in, if a company is going to start cutting back, they're usually the first ones that are maybe going to be let go.
And so newer employees are particularly being cautious and keeping their heads down, so to speak, and what that's causing, particularly from a budget stamp, what many companies, large companies in particular, actually planned for a high attrition rate over the course of this past year. And what they've had to do, at least some larger companies, like in the news with Bank of America and also Morgan Stanley and Wells Fargo, they've actually had to do some headcount reductions because they had planned for such a high attrition rate. But where it does impact, in at least in my opinion, equity compensation is that it's harder to promote, because people not as many people are leaving, it's harder to promote higher performing employees because of the fact that those positions above them are not necessarily opening through attrition or through the normal process.
So I think equity rewards are going to become more skewed towards those higher level performers as compared to retention because when people were just leaving, there were, I think, a number of equity awards that were used for retention purposes, and now not as many people are leaving. I think, what we're going to see is that it's going to go more towards what used to happen, that equity is skewed much more towards the higher performance than necessarily across the board. So that's sort of my high level view of that. And, Chris, I don’t know if you had any thoughts about that?
Chris Dohrmann 05:46
I do. I just wanted to reinforce that, I agree. And I think it ties back to, you know, the M&A as well, these are two factors, where you can see things happening when people are considering changing the vesting schedules. So I think during the Great Resignation, folks were considering from going what was four and five years vesting down to three. And I think we've already started to see people move back to a four year vesting, because the competition for labour has, I won't say shifted back into the favor of the employer, but I think it's more to the middle, where people aren’t over extending their offerings as far as generous resting schedules and they're going back to what was a more practical four year schedule, or something that was more common. And that was my point with M&A, I don't think people are ready to get back to when you require a company to be adjusting vesting schedules on a large scale, in a very short period of time. I always thought the best practice was to cash out. But adjusting vesting schedules, and adjusting the culture is something that would you don't want to trigger back, you know, people wanting to leave again, you want to make sure that the cultural change is something that's positive. So I just wanted to bring up those two points.
Erin Fraser 07:08
Definitely something I think most of us have experience with, with the companies we're in, whether that's seeing a lot of people leave or now with, you know, no one wants to say recession, and maybe recession won't happen but definitely, with companies tightening the reigns of their finances where we're seeing that strain on the employee base and the need to manage layoffs, as you mentioned, with Morgan Stanley, and Wells Fargo, etc. in the market that we're seeing.
We’re shifting topics a little bit to more of a buzzword, I guess AI would be something we're all hearing everywhere we go it is endless. Chris, what are your thoughts on how AI is going to affect HR in total rewards?
Chris Dohrmann 07:53
Well, I mean, first, I want to just mention the fact that I you know, people hear AI and they think of, you know, a Steven Spielberg movie or something like that. You know, I'm not sure that that's the way to think about it.
I think almost everybody who's in an office environment that uses Teams, that uses, you know, any type of communication, even, you know, you're talking about the Apple, you know, texting and messaging, it always prompts a response, that's not a guess, that's, you know, learned and learning behavior from the software, that saying this is the appropriate response to the text that you've already started or the conversation. So I think more people are using it than realize, and what I think is going to happen, going forward. And I think Bill Gates has already mentioned this, is that, you know, basically Siri and Alexa, or Cortana, are all going to be a little bit more intuitive. And it's going to be, you know, where I could actually have a letter written disputing a charge on my credit card, instead of just saying, you know, what's the weather? But as far as HR is concerned, I think AI is the answer to what was the trend before AI, which is big data and reporting. AI allows a company to, I won't say mine, because that has a negative conversation, but to peruse large amounts of data, you know, from sources that may be already available to them, whether they be resumes, or whether they be exit interviews, or whether they be management reviews that are done on a quarterly or an annual basis, and identify people that may be looking to change jobs, and identify people that may be at risk, and should be, you know, cultivated or discussed for a job change before they elect to just abandon the job and abandon the company. So it can prompt reviews earlier, or at least conversations earlier than we normally would have. So I think AI is going to be the way we can actually get to use big data because it'll give us a tool that allows people, you know, something to be done much quicker than people could do it on their own.
Erin Fraser 10:06
Interesting. John, do you have any thoughts on AI?
John Bagdonas 10:10
Well yeah, I mean, AI is going to cross basically all things that we do, and continues to do that. And it's going to be very interesting to see how companies adapt, because AI and how people are using AI or how people predict someday that there may be some sort of sentience with AI that it’s going to be interesting how we adapt, and how we continue to evolve, whether it's within the business world or all aspects of life. And I think it touches so many different topics. And I think probably some of the additional things we're going to talk about as well are going to have a strong AI flavor.
Erin Fraser 10:50
I think we could probably talk about AI all day, but we don't have the time. So let's jump into another hot topic, which is cybersecurity. John, did you want to jump in on that one first?
John Bagdonas 11:02
Sure, just as I was saying about how AI touches so many things, I'll just go through a few bullet points here on cybersecurity issues in general. But it's interesting how AI is really almost at the forefront of some of the cybersecurity trends that are going on. I saw a stat not that long ago, I believe it's from Forbes, that by the end of this year, the cost of cyber-attacks on the global economy is predicted to top $10.5 trillion. I mean, that's a lot of money, you think about it, but you think how many assets and strategies and so many other things that are deployed on both on both sides of the equation, because it’s interesting from a cybersecurity standpoint, you've got the attack side, and you've got the defence side. And so as we were just talking, and on Chris’s last discussion point, AI is really going to have a transformative impact on both sides of those equations.
Someone, I saw an analogy not that long ago that it's like a chess game, you know, with cybersecurity that you've got both opposing sides, sides that are trying to attack utilizing cybersecurity and AI tools and then from a defensive standpoint, people are trying to do the same thing and that, within that chess game AI is really the Queen that's really become the, you know, the most powerful piece on the chessboard, the things you can do with AI and particularly from a generative AI standpoint, like ChatGPT is a good example of that, the sophistication of AI powered attacks, think about malware that can adapt and intelligently evade detection, that's going to continue to happen and continue to evolve. Similarly, from a people standpoint, you think about phishing, we're getting very close to the next level phishing attacks where this generative AI, the tools can enable very, very sophisticated, very good, deep fake attacks. So even from a people standpoint, you know, you think about these examples where people are utilizing it for voice purposes, you know, that you think you're on the phone with someone, and it's really not that person, because that that voice is created through AI, you can have these phishing or deep, deep fake attacks, where people think that they are speaking to a certain person, and they're not.
And so there's definitely going to be a strong human component to that as well. You know, from a corporate standpoint, another stat I saw recently was that by 2026, you think about the boardroom, that 70% of all boards are likely to have at least one member of the board with expertise in the field, you know, and from a cybersecurity standpoint, so it really becomes prevalent, particularly think about the company that we worked for, that's one of the highest priorities in terms of protecting the assets of all of our clients and customers. And so it's extremely important. But one place where there's a little bit of a gap from a cybersecurity standpoint, doesn't necessarily affect us on the equity side, but it's really the Internet of Things.
You think about how our refrigerators and all of our appliances are connected to the internet these days, the protocols for a lot of the IoT, or the Internet of Things are not nearly as robust as it is for other things that we do from an internet and cybersecurity standpoint. So it'll be interesting to see how people may begin to direct attacks at things at the Internet of Things as compared to the traditional informational connectivity. But the last point, the last place where people really have seen it or fear it is really the cyber warfare and state sponsored cyber-attacks. And particularly, in this year, it's a presidential election year in the US. I know in the last few cycles, there's been all sorts of accusations and talk about, you know, cyber-attacks in terms of our if not necessarily the voting infrastructure, just how the information people get in terms of voting and things along those lines. So that's going to be very interesting to see and what the consequences are because not just in the US, is going to be major elections in the UK and India as well. So it's going to have potentially global consequences. So I know I didn't limit my comments just to the equity world. But Chris, maybe you have some thoughts about cybersecurity in our world or in our industry?
Chris Dohrmann 15:33
I do and I was going to say maybe I'm a little bit naive, but I'm going to liken, you know, the emergence or the preponderance of cyber warfare and cyber security and cyber threats on the positive side, so let me just use Microsoft, Amazon, and others, I think some of their most profitable business lines are now cloud computing. And that didn't exist, you know, three, four years ago, so for that to be so profitable for those companies in such a short period of time, I think is amazing. So follow the money. You had talked about the fact that cyber threats and cybersecurity will potentially cost the US economy $10 trillion.
John Bagdonas 16:20
Well the global economy!
Chris Dohrmann 16:22
The global economy. I've already you know, seen Microsoft make very auspicious comments in the press, about the fact that they're going to police use of their software when it's done for nefarious means. And I think, you know, the fact that cyber, you know, anti cyber or cyber protection, whether it be multi factor authentication, whether it be you know, biometrics, whatever it need be to protect all of us, from somebody attacking our wealth and, and our finances, I think that's going to be a very profitable area for the company that comes out and says, we can be the defender, or we can be the proactive defender for your, you know, wealth and data. So I think that's going to come up as well.
Erin Fraser 17:09
So kind of shifting topics from cybersecurity. Going more back into the equity compensation world and talking pay transparency. There's been a lot of conversation around this of late, and I'd love to hear your feedback on it, Chris?
Chris Dohrmann 17:27
Sure! I think in the US there are probably more than 25 or 30 jurisdictions that now have some type of call for pay transparency. And I think it originally started with salary. So whether or not you're posting a job, or whether or not you're recruiting for a job, there was a requirement that that salary had to be made available. Now, this brings in a number of other different factors, whether they be generational or not. So for example, as a boomer, I would be reluctant to share my salary with anyone, whereas Gen X, Y, and Z tend to be very open about their pay. But having it mandated by a jurisdiction or a regulatory body is something different. So we've already seen, you know, whether it be New York, whether it be Colorado, whether it be California, the jurisdictions put out their version of it. And I think New York City has already started to saying, wait, transparency really applies to total compensation, not to just salary. So whereas maybe you could put out a range and say, look, we're going to start with the low end to the midpoint, as I think a lot of companies have done to try and address the pay transparency requirements. New York City's throwing in, you know, a complicating factor by saying it's total compensation. I don't know if you can do the same range in a real fashion, when you're talking about equity, because I think it's going to be performance equity, and it could be a lot more different, that range is not going to be so easy to calculate.
And the other complicating factor that New York City is throwing in, and I think New York State will soon adopt, and the like, is the fact that New York City is saying if you have remote workers, which I think is a reality, and people are going to have that now, whether it's hybrid or fully remote from now and forever. If they report to a New York HQ, then you're subject to the New York City regulatory requirement. So in short, I think pay transparency is already started. It's already out there. It's going from salary to total compensation. And it's also going to address where much like taxation, where the individuals report to, not where they're working from. So I think we're going to see people come up with a solution as companies always do to regulation, and it'll be the path of least resistance, but I think it's going to be a complicating factor and I think jurisdictions like New York, which are usually New York and California, usually on the forefront of labour, pro-labour justifications are going to continue to evolve.
Erin Fraser 20:16
John, do you have any thoughts on that? Or do we want to shift into pay equity and pay versus performance?
John Bagdonas 20:22
Yeah I think that they're very intertwined and very related, as Chris was saying about pay transparency, I think companies have made a very good effort in terms of collecting that data, disclosing that data, particularly from a pay equity standpoint on the class side. There are a lot of companies including our own parent company that have made leaps and bounds in terms of being able to document that and display it and report it, etc. And make strides towards the end goal of having that equity or that no discrepancies between different classes of employees. But equity is, I think, going to continue to complicate the picture and particularly how equity is used at different levels in the organizations that it's going to still require quite a bit of work to build in that total picture, including equity. And a lot of the requirements at least, haven't necessarily initially required that but it's going to be interesting to see over the next few years how that's going to involve. But on a related topic, as you mentioned, about pay versus performance. It's interesting how, over the last year and a half or so, how companies have gone through this requirement. And last year 2023 was the first year that the disclosures were required. And we saw tangentially with many of our clients that they had to create multidisciplinary teams, including HR, legal and many times their outside advisors to calculate the compensation actually paid and put it in the appropriate, their interpretation of the appropriate formats, and discussions within their proxy disclosures, etc. And particularly from an equity standpoint some of the rules were pretty complex on how they were valued. And also they had to do remeasurement, depending on the plan type and the award types, etc. And so it's still very early on in the process. But I think the early feedback from last year is that the compensation actually paid, it's a helpful insight, but it wasn't as reliable necessarily, as some of the other historic measures on how, particularly executives were measured from, from a comp standpoint, but the SEC conducted numerous reviews of the disclosures. And it'll be interesting for, you know, for this year, to see how institutional investors in particular and proxy advisors, again, to build in sort of requirements or comments or how they will opine on various disclosures during this upcoming proxy season in 2024. And it will continue to be an iterative process. But, Chris, I'm just curious if you had any additional thoughts about, you know, particularly institutional investors and how they look at or will continue to look at these initiative?
Chris Dohrmann 23:13
And I think that's exactly the key. So for example, institutional investors are not usually reacting to new regulations in the first or second year. I think they wait a bit to find out how it's being implemented, how it's being adopted, and whether or not there's any corporate pushback on the regulatory bodies. And then I think they solicit whether or not they'd be large pensions, large, private equity firms, you know, as their constituency as institutional investors, I think the proxy advisors react after the fact. So I think they're slow, you know, two years being the definition of slow here. So I think they will react, I think they will have an opinion, I think they will recognize the fact that pay equity, and a pay transparency is probably good corporate governance. But I don't think it's going to come, you know, in 2024, it may be, you know, suggested, depending on, because you know the guidelines are already out for 2024. So, it may be, you know, something that's supplemented, or it may be a 2025 activity.
Erin Fraser 24:20
Well, you guys, it's been an interesting discussion. I've learned a lot. We're almost out of time. But I know there's still quite a few things coming up in 2024. I don't know if John you wanted to touch on any of those?
John Bagdonas 24:33
Sure, I mean, there's a couple of compliance or regulatory issues that we're going to see over the course of this year, probably the one that's closest right now is the transition to T+1 which is scheduled to happen as of May 28 of this year. And so there's definitely an impact from an equity plan standpoint, the settlement is going to go down to the next day on any market transactions basically. So I think the biggest consequence or preparatory thing is to make sure that the records are in good shape because you're going to transactionally lose a day to recoup or correct any transaction or let's say a stock option exercise or a vesting that's not correct. So, Chris, have you had any thoughts on T+1?
Chris Dohrmann 25:18
Well, I think it's more as expected, but I also think it's going to be very much a data change. People have been using the time between trade date and settlement date, to correct taxation or correct a number of different things. And they're going to lose that, because it's going to T+1, and, you know, whatever was there on trade date is going to be part of the taxation that's there on settlement. So I think people are going to, you know, it may be an easy, you know, application from the transfer agents and from the brokers and from transactions, I think people are going to have to adjust in a data matter to realize that they don't have any more fallback to correct any errors.
John Bagdonas 26:01
Okay, and the other thing that I know going to come into vogue or requirement, not really, for all companies, but for a large number companies is the Corporate Transparency Act, which is going to become effective in January next year 2025, where there's going to be a new beneficial ownership reporting requirement that's basically through FinCEN, or through the Department of Treasury where they want to track entity structures and ownership, really, for AML or anti money laundering and KYC or Know Your Client purposes, and will affect predominantly non reporting companies, in other words, non-publicly traded companies, but interestingly enough, even for publicly traded companies that if their subsidiaries meet certain requirements, they may be subject to it as well. And there actually will be criminal penalties for non-compliance. And so it's something that's going to be very important, and for all companies that existed before 2024 the deadline is early January for to be in compliance, so that’s something to keep aware of as well.
And Chris, I think you may have some thoughts, not so much on that or the regulatory things, but I have to give you kudos for just from an economic standpoint, earlier this year, or I'm sorry, you know, about a year ago, there was a lot of talk out there in the marketplace about a recession taking place, that there was going to be a big recession or recession could happen in 2023. And the preponderance of economists and other people, prognosticators were in agreement with that. I know you were somewhat countercultural in that regard, as it turns out, you were right. You could say that there was a soft landing, but we never did experience a recession, that's most of the fundamentals of the current economy seem to be good. I mean, there's definitely pockets in industry where it's not. And then also you add in all of the uncertainty, the dynamics going on from a geopolitical standpoint, with all the conflicts and unrest in different parts of the world, then layer in on top of that, that it's an election year, presidential election year, and also leadership election role in a number of other countries around the globe. Just curious, I give you credit for predicting there wouldn't be recession, but just curious what your thoughts are, over the course of 2024?
Chris Dohrmann 28:16
Thanks, John. And I just want to go back to your closing thing about the Corporate Transparency Act. I think the regulators are going to use publicity, because of the recent finance ruling where a you know, potentially Binance is going to end up having to pay $4.3 billion in, in penalties in its anti-money laundering. So I think they're going to use, and they should, you know, it's good PR. You know, as far as the economy, I just thought full employment was going to make it very, very hard for a recession to take place. And, you know, so even a broken clock is right twice a day but thank you. And what I also wanted to mention, as far as geopolitical politics, really has an impact on the economy, and on equity, specifically, because politics usually ends up talking about, it's really about money, and it's talking about taxation. And taxation is something that's going to really trigger whether or not equity is something that people can receive and profit from. But it also triggers volatility. So politics, I think we've learned from the pandemic multiple lessons. But I think the fact the return of volatility, you know, from when we were much younger John, to now, people hadn't seen it for the better part of 15 years. And I think now it's here to stay. So volatility in the markets is something that's probably not going to go away anytime soon.
John Bagdonas 29:38
So in other words, fasten your seatbelts.
Chris Dohrmann 29:41
It's going to be a bumpy ride!
Erin Fraser 29:43
Well thank you Chris and John for everything you've told us today. Thanks for listening to Own Up by Global Shares. This podcast was brought to you by Global Shares in association with DustPod. If you like what you hear, please do subscribe, and then you can get new episodes as they become available. Chris, John, it's been an absolute pleasure!
Chris Dohrmann 30:03
Erin, thank you so very much. It really has been a pleasure.
John Bagdonas 30:06
And thanks Erin you can join us anytime, you can be the guest host whenever you'd like!
Erin Fraser 30:11
Sounds good! Until next time, for now from me Erin Fraser.
Chris Dohrmann 30:16
And from me Chris Dohrmann!
John Bagdonas 30:18
And me John Bagdonas.
Erin Fraser 30:20
Thank you for listening and take care.
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