The Advisors' Blog

Pay decisions are complicated and rest on many factors. Sometimes boards need to depart from “best practices” to compete for talent or reward work on key initiatives, even if it could trigger “against” recommendations and votes under the standard policies of proxy advisors & investors. That might be fine to do for a year or two, but a longer-term pattern eats into director support – and advisors should make sure that boards are aware of that.

According to a recent Semler Brossy memo, a drop in support can come as soon as the next year. An Agenda report based on data from Farient Advisors shows that controversial decisions over a 3-year period can be even more problematic. Here are more details:

– Over the past five years, average Director election vote support at companies that received a Say on Pay vote below 50% in the prior year is six percentage points lower than at companies that received above 70% support.

– Average director support in the year after a 50-70% say-on-pay outcome was about 2% lower than at companies that received above 70% support.

– Where the say-on-pay resolution received less than 85% support for at least 3 years in a row, the companies were 7x more likely to have 3 or more directors receive below 90% support.

This comes at a time when say-on-pay support is declining for large companies – and this latest Semler Brossy SOP update flags a notable spike in S&P 500 failures this year, up to 4.5%. It’s not clear yet whether support will rise as companies catch up to the enhanced investor expectations that are driving this trend – or whether this trend will continue and possibly even shift to companies outside of the S&P 500. None of this changes the fact that directors need to do what they believe is best for the company – but it does up the ante for balancing interests and engaging with different stakeholders. Especially since low say-on-pay results can draw activist attention.

In a separate memo, Farient suggests these action steps:

– Recognizing that the demands of hot talent markets and the quest for good governance are on a collision course, compensation committees still need to consider balanced approaches, particularly to special awards. Rules of thumb include:

– Exclude CEOs from special award programs

– Require performance conditions for earning awards

– Keep awards at reasonable levels

– Be crystal clear as to the rationale for the awards

– State that such awards are intended to be a one-time or infrequent occurrence

– If the company receives a poor SOP vote, the compensation committee should consider how to cure the root causes of the vote and proactively engage with investors on planned changes

– The credo for boards and compensation committees should be “absolutely no surprises.” Investors hate surprises, including one-time mega grants, retention grants, excessive pay, and poor pay-for-performance outcomes. While not all actions can be telegraphed in advance, companies should proactively engage with investors and disclose key changes whenever possible (e.g., discuss anticipated changes with investors before final decisions are made, disclose forward-looking strategies and changes, rather than simply historical ones)

Mark your calendars for our August 16th webcast – “Executive Compensation & Equity Trends in a Volatile Environment” – for practical guidance on structuring pay in a way that balances changing executive needs with say-on-pay drivers. Of course, we will also be discussing these trends – and providing recommendations – at our October “Proxy Disclosure & Executive Compensation Conferences.” Check out the agendas – 18 sessions over 3 days. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.

– Liz Dunshee