The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

March 22, 2021

Say-on-Pay: Is 2021 the “Year of Reckoning”?

Liz Dunshee

According to this WSJ article and data from ISS Corporate Solutions, only 10 S&P 500 companies have had shareholders reject annual say-on-pay resolutions in the last year – but this year could be different.

In our “Top Compensation Consultants Speak” webcast on Tuesday of last week, Semler Brossy’s Blair Jones noted that the early proxy returns are indicating that failures are up and everything is being scrutinized. The very next day, shareholders at Starbucks rejected the company’s say-on-pay resolution. Here’s the company’s Form 8-K with the voting results.

The Starbucks vote followed “against” recommendations from ISS and Glass Lewis due to one-time awards to the CEO and former COO. The company had filed a proxy statement supplement to provide more color around those awards, but it wasn’t enough.

In another vote last week that was attracting attention in the Twittersphere, 48% of all AmerisourceBergen shareholders & 72% of independent shareholders voted against the NEO pay package. The company’s Form 8-K shows that the resolution narrowly passed. This article explains that Vanguard voted “for” and BlackRock voted “against” say-on-pay, which some are saying could be a sign of more splits to come. The state treasurers of Connecticut and Rhode Island also led a campaign against it because executive pay was calculated by excluding the costs of the opioid settlement.

As You Sow is forecasting that 2021 will be a “time of reckoning” for executive pay. That could be a problem for companies, with more shareholders voting against compensation committee members in the same year of a failed vote, and activists viewing a say-on-pay failure as “blood in the water.” As You Sow’s recently issued “100 Most Overpaid CEOs” report provides a few nuggets that underpin its prediction:

– Institutional opposition to overpaid CEOs is stronger than suggested by votes as reported to the SEC. As You Sow has used the level of shareholder votes against the CEO pay package as one factor in determining who the Most Overpaid CEOs are. This year – as described more fully in “How we identify the 100 Most Overpaid CEOs” – we used, with the assistance of Proxy Insight and Insightia company, an analysis that excluded votes from shares controlled by management and others and instead measured only votes controlled by institutional fund managers. Using these votes, the number of S&P 500 companies where the CEO pay package failed to get at least 50 percent of the votes more than doubled, going from six companies to 15 companies. Public shareholder opposition is less obvious when there is a dual-class share structure or significant insider ownership.

– The level of shareholder opposition to excessive CEO pay continues to grow, yet CEO pay continues to increase. The number of financial fund managers who voted against the CEO pay package of at least half of the “100 Most Overpaid CEOs”in their investment portfolios reached 47. Pension fund opposition was even higher. More shareholders are taking another step in calling for accountability by voting against members of the compensation committees. Yet, as further detailed below, executive compensation continued to increase.

– The economic disruption of the pandemic means that the upcoming proxy season could be a time of reckoning. What happens when performance criteria are not met? There are indications that executives may be insulated from bearing the full brunt of the downside though they are generally given full credit for the upside. Some investors have already noted that they will evaluate the context of the pay packages, in light of how shareholders and employees have fared during the pandemic.

This means that disclosure and engagement will be even more important this year, and you’ll need to understand the unique positions and hot-button issues for each significant investor. BlackRock issued stewardship guidance on executive pay last week – and we have other policies posted in our “Investor Voting Policies” Practice Area.