The Advisors' Blog

Our webcast earlier this week included a lot of practical tips & experiences from folks who have been in the trenches to respond to (or anticipate & avoid) low say-on-pay votes. It’s also useful to consider what the data shows, and a recent study from Amit Batish, David Larcker, Lucia Song, Brian Tayan & Courtney Yu – of Stanford’s Rock Center for Corporate Governance – does just that.

Using disclosures from 77 companies in the Russell 3000 that implemented compensation changes in 2023 in response to a failed say-on-pay vote in 2022, the paper identifies patterns that anyone advising on compensation should be aware of, such as the primary factors that drove negative votes, according to the company:

– 30 percent of the companies cited criticism of a special award (its size, term, or performance criteria for vesting equity grants) as the main reason for the negative vote.

– 18 percent cited too little (or no) performance-based awards in the long-term incentive program.

– 13 percent said their shareholders believe the overall pay level was too high.

– 12 percent said shareholders objected to the performance metrics used in the short-term bonus.

– 10 percent cited criticism of a discretionary action the company took to award a bonus payment (short- or long-term) when it would not otherwise have been merited.

– Less frequently, the primary objection was pay mix, disclosure practices, the choice of companies in the peer group, or governance practices (apart from its compensation structure—see Exhibit 6).

This excerpt summarizes the steps that companies took following the say-on-pay failure:

– Companies made 2.5 changes, on average, to their compensation program.

– 66 percent made changes to the performance metrics or weightings in their short- or long-term incentive programs.

– 36 percent increased disclosure.

– 19 percent changed a performance measurement period.

– 18 percent reduced overall pay.

– 16 percent added or strengthened clawbacks (see ISS’s recent FAQ update).

– 16 percent shifted away from time-based awards toward performance equity.

– Actions less frequently made include compensation caps, modifying peer groups, ownership guidelines, ESG incentives, eliminating overlapping metrics, or changes to the compensation consultant or compensation committee members.

– 5 percent of companies committed not to awarding special awards in the future (see Exhibit 7).

The study found that following these changes, say-on-pay support rebounded significantly, to levels achieved prior to the failing vote. That said, the post-correction support levels averaged 76%, which still fell short of Russell 3000 average support. The data showed that post-correction support was somewhat correlated to the number of changes the company made to its pay plan, and the biggest jump in support came at companies that were able to win a positive recommendation from ISS in the year following the failure. Specifically:

The number of changes did not matter nearly so much as whether these changes were in line with ISS criteria (see Exhibit 11). This finding is consistent with recent scientific research showing that proxy advisory firm recommendations contribute to standardization in CEO compensation.

The study poses a few key questions that warrant follow-up. It asks whether this process reflects a healthy dynamic of market correction or simply a standardization process that doesn’t substantively improve managerial incentives. It also observes that while special awards are the biggest drivers of a negative say-on-pay vote, it isn’t outside the realm of possibility that special awards may be appropriate in some circumstances, and it’s unclear from the high-level data whether shareholders are distinguishing between appropriate vs. inappropriate situations. I’ll leave you with this excerpt, which hits the nail on the head regarding the complexity of executive pay programs:

It is very difficult for third-party researchers to understand and digest the pay structure and issues regarding pay among even a relatively small sample of companies. How can a portfolio manager analyze pay across an entire portfolio and make informed decisions? In theory, proxy advisory firms serve this market need. However, it is also not clear that proxy advisory f irms can digest and analyze this information. How effective are proxy advisory firms at identifying companies with “inappropriate” pay practices? Are the companies that fail their say-on-pay votes the most egregious offenders, or “unfairly” caught up in somewhat arbitrary compensation guidelines?

– Liz Dunshee