February 7, 2024
Say-on-Pay: What Vanguard Considers
Vanguard recently released its updated 2024 proxy voting policy. The policy is effective beginning this month and applies to Vanguard-advised funds.
There were no significant substantive changes to the asset manager’s case-by-case approach to compensation-related ballot items (including say-on-pay), but it has reframed the factors that it considers.
For example, the policies say that Vanguard considers 3-year TSR as part of its consideration of “alignment of pay & performance.” The policies also expand on what the funds look at for “compensation plan structure” – and they now expressly state that Vanguard considers “governance” as well. Here’s an excerpt:
– Alignment of pay and performance. The funds look for evidence of clear alignment between pay outcomes and company performance. This is mainly assessed through alignment of incentive targets with corporate strategy and analysis of three-year total shareholder return and realized pay over the same period vs. a relevant set of peer companies. If there are concerns that pay and performance are not aligned, a fund may vote against a pay-related proposal.
– Compensation plan structure. Plan structures should be aligned with the company’s stated longterm strategy and should support pay-for-performance alignment. Where a plan includes structural issues which the funds determine have led to, or could in the future lead to, pay-for-performance misalignment, a fund may vote against a pay-related proposal. For compensation structures which are not typical of a market, the Vanguard-advised funds look for specific disclosure demonstrating how the structure supports long-term value creation for shareholders.
– Governance of compensation plans. The funds look for boards to have a clear strategy and philosophy on executive pay, utilize robust processes to evaluate and evolve executive pay plans, and implement executive pay plans responsive to shareholder feedback over time. The funds also look for boards to explain these matters to shareholders via company disclosures. Where pay-related proposals consistently receive low support, the funds look for boards to demonstrate responsiveness to shareholder concerns.
The policy document goes on to list practices that raise high & moderate concern, which are unchanged from last year. But if you find that you are engaged in any of these practices, all is not lost. New this year, the policy also acknowledges:
Where these warning signs exist, elements of strong compensation governance, such as board responsiveness and disclosure that includes data, rationale, and alternatives considered, can sometimes serve to mitigate these concerns.
Keep in mind that there may be other policies at play if your company is in Vanuard’s portfolio. Wellington makes voting decisions for some Vanguard funds and also released its policies (see the full policies and a summary of changes on Wellington’s policy portal). And of course you now also need to keep track of policies that apply when investors are using “proxy voting choice.”
– Liz Dunshee