The Advisors' Blog

Since the early years of say-on-pay votes, low outcomes have been considered a potential sign of broader problems — low say-on-pay support may signal that shareholders have performance concerns, putting the company at heightened risk for an activist attack. This post from Meridian Compensation Partners discusses why and how activist shareholders seeking more widespread changes also raise compensation issues — noting that they can be “a ‘wedge’ to gain broader shareholder and proxy advisor support,” and activists may gain leverage by using compensation issues to “embarrass the board and hamstring the executive team.”

The post identifies the following compensation issues likely to attract the attention of activist shareholders:

• Use of aspirational peer groups or aspirational pay positioning (top quartile target pay positioning)
• High ratio of CEO pay to pay of other named executive officers
• Pay programs that are different from those of peer companies or the broader market without a disclosed rationale that activists believe
• Incentive targets set to reward executives for performance that lags industry norms
• Large incentive payouts when company has “underperformed” on financials or stock price
• Designs that don’t align pay outcomes with performance

Meridian suggests companies work with their compensation consultant to take the following steps to avoid compensation making the list of issues an activist may raise:

• Audit compensation plans and programs
• Identify disconnects between realized pay and financial and stock performance
• Identify other potential compensation issues — peer group, CEO to NEO pay ratio, etc.
• Take steps (as appropriate) to change incentive design or target setting and/or enhance public disclosure of the business rationale for pay design and outcomes

– Meredith Ervine