Executive compensation has been a hot button issue as of late. Not only has executive compensation come under increased scrutiny from politicians, regulators and the public at large, it is an issue that is also top-of-mind for shareholders, analysts and proxy advisory firms. For example, the Financial Post published an article earlier this year entitled “Canadian shareholders increasingly aggressive on ‘say-on-pay’”, which reports that institutional investors and the public are taking an increasingly hard-nosed and critical approach to evaluating corporate compensation decisions.
Executive compensation can be a flashpoint between a company and its shareholders, and it is thus critical that companies consider the agenda and viewpoints of all stakeholders, including activist investors, as they structure and review executive compensation plans. A recent post by explores these same issues.
Shareholder discontent about the management of a company may first manifest itself as low levels of support for a company’s “say-on-pay” vote. In his post, Mr. Goldstein cautions that in the period after a failed “say-on-pay” vote, a company may be particularly vulnerable to an activist attack, as activists may capitalize on the divisive nature of executive compensation issues to further their agenda. Companies can head off these attacks by understanding how its approach to executive compensation differs from industry norms and actively engaging with its shareholders on pay and governance issues.
Although executive compensation is a focal point for shareholder activists, it is difficult to generalize as to what type to pay programs activists favour. Mr. Goldstein notes that activist guidance usually makes “vague reference to pay for performance disconnects”, the main purpose of such comments being to use pay as a wedge issue. The most effective way for companies to address such criticism is to actively engage in shareholder and stakeholder dialogue, and to ensure that executives are rewarded for “achievement of stated strategic and operational goals and that such goals are consistent with the company’s attempt to achieve sustainable, long-term growth.” Andrea Brewer also discusses the importance of implementing an effective executive compensation plan and an effective communication strategy in her post on the Special Situations Law blog.
Companies should treat their approach to executive compensation as part and parcel of any dissident readiness strategy. Shareholder activists often exploit the divisive nature of executive compensation issues to garner broader support, and the attitudes and reactions of stakeholders towards a company’s executive compensation practices can serve as a barometer for shareholder discontent and a company’s vulnerability to an activist attack.