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WORKSPAN
WORKSPAN DAILY |

Sizing Up a Decade of Say on Pay

Figure

                                                                                                                                                                     Tinpixels / iStock

COVID-19 arrived early in 2020 and hasn’t stopped creating economic upheaval in the 13 months since.

It seems the average CEO hasn’t felt the same type of financial strain that so many others have in that time, though. 

In fact, CEO compensation appears to be on the way up, despite a still-shaky business environment. For example, a Wall Street Journal analysis saw median pay for the chief executives at more than 300 of the biggest U.S. companies increase to $13.7 million in 2020. Among these same organizations, the average CEO compensation package totaled $12.8 million in 2019, according to the Journal.

Given current conditions, shareholders are not necessarily pleased with this trend. With annual advisory vote season just beginning, 80% of the S&P 500 have yet to hold their votes, according to Equilar, and shareholders at organizations such as Starbucks and Walgreens have already expressed their disapproval of proposed CEO pay arrangements.

The Dodd-Frank Wall Street Reform and Consumer Protection Act guarantees that shareholders can share such sentiments about executive pay packages.

2020 marked the 10-year anniversary of President Obama’s signing of the Act. And, while say-on-pay (SOP) votes were proposed at a handful of American organizations as early as 2006, Dodd-Frank expanded say-on-pay to require all public companies to provide shareholders the opportunity to vote at least once every three years on the compensation of executive officers.

So, with a decade’s worth of say-on-pay data at their disposal, Willis Towers Watson’s global executive compensation analysis team recently completed a review of SOP voting outcomes at Russell 3000 companies in 2020 as well as the 10-year timeframe since mandatory votes were enacted.

The team’s review found 56 say-on-pay failures — a lack of the necessary shareholder votes to affirm executive pay packages — among this group in 2020. This figure represents the highest number of SOP failures since 2015, with the overall failure rate of 3% remaining constant over the past three years, according to Willis Towers Watson.

The highest number of last year’s SOP failures took place at smaller companies outside the S&P 1500, Willis Towers Watson found, while S&P Mid-Cap 400 and Small-Cap 600 companies saw the fewest level of failures in five years.

In analyzing the 10 years since SOP votes became mandatory, Willis Towers Watson also observed that compensation committee members changed at a rate of 41% following a failure. And, since 2016, 41% of first-time failures had a rate of say-on-pay support above 90% in the year before their first failure.

While compensation committee responsiveness to ongoing concerns is under increasing scrutiny, misalignment between pay and performance remains “a primary driver of negative vote recommendations,” said Brian Myers, Willis Towers Watson’s governance team lead for North America and director of executive compensation.

“For those that failed to receive majority support for say-on-pay proposals, we commonly saw rigor of incentive plan metrics questioned — goals set below prior year actual results without supporting rationale, consistent above target achievement — substantial compensation increases and lack of responsiveness to concerns previously noted by proxy advisors and shareholders, such as shareholder engagement feedback and compensation plan changes.”

Of course, there are key steps that total rewards and HR leaders can take to ensure that say-on-pay votes receive the requisite percentage of shareholder approval.

Say-on-pay truly is a year-round consideration, as opposed to just an item to be reviewed when drafting the proxy, said Myers.

“To put a best foot forward in heading off future issues, we suggest everything from ongoing review of compensation design and levels relative to market, development of compensation discussion and analysis content to provide contextual detail and tell the overall compensation story,” he said. “Tell the story in your own words before others tell it for you. [Be] proactive and [foster] ongoing shareholder engagement to understand small concerns before they become major vote-worthy issues.”

If the need arises to respond to a previous year’s vote that came in lower than expected, Myers suggests a “targeted shareholder outreach effort” to engage and discuss concerns with the compensation program.

“We believe a multi-step engagement effort is best,” he said, “with the opening discussion centered on listening to shareholder concerns, and the follow-up focused on summarizing what was heard and what actions are being taken.”

About the Author

Mark McGraw Bio Image

Mark McGraw is the managing editor of Workspan.


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