In this snapshot review by Willis Towers Watson of U.S. say-on-pay and other compensation-related votes, WTW found that average support for say on pay remained high at 91%. In addition, where ISS identified “high” levels of concern leading to negative recommendations on say on pay, 84% related to pay-for-performance concerns (compared to 75% in 2017).
WTW analyzed the results of annual meeting votes for 740 companies in the Russell 3000 from January 1, 2018 through May 11, 2018 and compared them against results for the full 2017 year for 2338 companies in the Russell 3000. WTW found that the success rate for say on pay has stayed flat at 91%, with a failure rate of 2% so far in 2018, compared to 1% in 2017. According to WTW, ISS gave 10% of the say-on-pay proposals negative vote recommendations, compared to 12% in 2017; however, those recommendations appeared to have had more impact in 2018, with a difference in average support between as ISS favorable versus unfavorable recommendation at 33% in 2018 compared with only 26% in 2017.
As you know, say on pay was initiated under a Dodd-Frank mandate adopted against the backdrop of the 2008 financial crisis, largely in reaction to the public’s railing against the levels of compensation paid to some corporate executives despite poor performance by their companies, especially where those firms were viewed as contributors to the crisis itself. Say on pay was expected to help rein in excessive levels of compensation and, even though the vote was advisory only, ascribe some level of accountability to boards and compensation committees that set executive compensation levels. The result? Not so much. Instead, say-on-pay votes, which, since inception, have hovered around or over the 90% mark, have served largely as confirmations of board decisions regarding executive compensation and not, in most cases, as the kind of rock-throwing exercises that many companies had feared and some governance activists had hoped.
According to a study by academics from the University of Pennsylvania Law, Rutgers Business and Berkeley Law Schools, while both excess compensation and pay-performance sensitivity have affected the level of shareholder support, “even after controlling for these variables, a critical additional driver of low shareholder support for executive compensation packages is the issuer’s economic performance.” The study found that shareholders were only “somewhat sensitive” to excess CEO pay when stock-price performance was strong: “[e]ven firms in the highest quartile of excess CEO pay receive only 11.4% of votes against their compensation package if they are in the top quartile in terms of stock price performance. By contrast, for firms with the same level of excess pay but that are in the lowest performance quartile, the level of negative votes almost doubles.”
Similarly, “poor stock price performance appears to result in greater shareholder dissatisfaction with executive pay packages even in the absence of excess compensation. In particular, for the firms in the lowest quartile with respect to excess compensation, overall levels of say on pay dissent are quite low. Nonetheless, the percentage of votes cast against the pay package increases by 41% as we move from the highest performing firms to the lowest performers. This increase appears to be driven, not by pay, but by stock price performance. The most compelling situation is the fact that, in our sample, we have 149 cases in which even though the CEO received no excess compensation, the percentage of shares voted against the compensation package exceeded 20%.”
The study concluded that company economic performance may be just as—if not more—pivotal to the outcomes of say-on-pay votes than pay itself: the study’s “key finding is the importance of economic performance to say on pay outcomes. Although pay-related variables affect the shareholder vote, even after we control for those variables, an issuer’s economic performance has a substantial effect and, perhaps most significantly, shareholders do not appear to care about executive compensation unless an issuer is performing badly. In other words, the say on pay vote is, to a large extent, say on performance.” [Emphasis added.] The study also found that companies with poor economic performance were more likely to receive negative say-on-pay recommendations from ISS. (See this PubCo post.)
According to WTW, where ISS raised “high” levels of concern leading to negative recommendations on say on pay in 2018, 84% related to pay-for-performance concerns (compared to 75% in 2017). Of the 2018 say-on-pay failures that had high pay-for-performance concerns, 42% had concerns related to “outsized” long-term compensation. Other common categories of high pay-for-performance concerns included the rigor of incentive plan metrics (45%), a substantial compensation increase (34%), discretionary awards (24%), majority of long-term incentives that were not performance-based (24%), payouts notwithstanding failures to meet targets (23%), and goals reduced from prior years (18%).
Of other topics that led ISS to raise high levels of concern, 17% related to contract concerns, 11% related to responsiveness failures (compared to 20% in 2017), 3% related to concerns regarding non-performance-based pay and 2% related to peer groups. In addition, 18% of the companies that received a negative recommendation from ISS in 2018 had high levels of concern in more than one category.
WTW also looked at the results so far for votes on new or amended equity plans among the S&P 1500, comparing 100 companies in 2018 against 342 companies in 2017. Through May 11, 2018, the average level of support was 90%, the same as in 2017. In 2018, ISS issued negative plan vote recommendations for 11% of the proposals, compared to 10% in 2017. The recommendations from ISS had slightly more impact in 2018, with a difference in average support between as ISS favorable versus unfavorable recommendation at 21% in 2018 compared with 19% in 2017.
In “Should Say-on-Pay Votes Be Binding?,” two executives from the Institute for Governance of Private and Public Organizations in Canada explore the unintended consequences of say on pay:
- The post contends, consistent with the study discussed in the SideBar above, that (based on other studies) shareholder votes tend to be based on stock price performance. According to the post, if a company’s “shares do better than those of its peers, almost any compensation package will be approved. This perverse result tends to increase the pressure on management to focus on short-term stock performance, sometimes through decisions that may negatively affect future performance.” [Emphasis added.]
- Why look to stock price performance? The authors attribute this result in part to the current complexity and sheer length of compensation disclosure, presumably one consequence of disclosure designed for say-on-pay proposals. And given that many investors hold shares in numerous companies, it may be easier for them to base their votes on stock performance rather than try to analyze complex compensation packages as detailed in lengthy proxy statement disclosures. (Of course, maybe they don’t even open their proxy envelopes!) According to the post, “for the 50 largest (by market cap) companies on the Toronto Stock Exchange in 2015 that were also listed back in 2000, the median number of pages needed to describe their executives’ compensation rose from six in 2000 to 34 in 2015, with some compensation descriptions consuming as many as 66.”
- Instead of checking stock prices, it’s even easier for investors to rely on the recommendations of proxy advisory firms, such as ISS and Glass Lewis (which also take into account relative stock price performance in formulating their vote recommendations). As a result, the influence of proxy advisory firms has increased substantially. According to the post, 83% of directors very much or somewhat agree that their influence has increased.
- One consequence of the increase in influence of proxy advisory firms has been a certain similarity in executive compensation packages. The post indicates that, to win the recommendation of these firms, boards, comp committees and consultants find it “wiser and safer to toe the line and put forth pay packages that will pass muster…. The result has been a remarkable standardization of compensation, a sort of ‘copy and paste’ approach across publicly listed companies. Thus, most CEO pay packages are linked to the same metrics, whether the companies operate in manufacturing, retailing, banking, mining, energy, pharmaceuticals, or services. For the companies on the S&P/TSX 60 index, the so-called long term compensation for their CEOs in 2015 was based on total shareholder return (TSR) or the earnings per share (EPS) growth in 85 percent of cases. The proxy advisory firm ISS has been promoting these measures as the best way to connect compensation to performance.”