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May 21, 2021

Support for say-on-pay votes continues to erode in US, warn compensation advisers

Where pay is misaligned with performance – either due to Covid-19 or not – large asset managers are more willing to oppose CEO pay packages

While investors are increasing their scrutiny of executive compensation packages again this year, the pandemic may not be playing a meaningful role, according to executive compensation experts.

Investors are increasing their scrutiny of executive compensation packages again this year, but the focus continues to be on pay for performance, rather than other impacts of the Covid-19 pandemic. 

A number of large companies in the US have received significant opposition to their executive compensation packages during this proxy season. At least 14 companies in the S&P 500 – including AT&T, GE, IBM, Johnson & Johnson and Starbucks – received less than 65 percent support during the non-binding say-on-pay votes this year, according to Farient Advisors’ say-on-pay tracker. In a number of these instances, BlackRock and State Street Global Advisors voted against executive compensation packages. 

But even for the large-cap companies that didn’t generate headlines with a significant percentage of shareholder votes against executive compensation packages, support is gradually decreasing. 

Between 2016 and 2020, average support during say-on-pay votes at S&P 500 companies decreased by almost 3 percentage points, from 92.34 percent to 89.45 percent. While there are still plenty of proxy meetings to come, the average level of support for 2021 meetings so far is lower again, at 88.24 percent. 

A similar downturn trend is occurring at mid-cap companies, according to Farient Advisors’ say-on-pay tracker, while small-cap companies may actually be garnering greater support. 

Percentage of companies that received more than 80 percent support during say-on-pay votes, year on year

  S&P 500 S&P MidCap 400 S&P SmallCap 400 Russell 3000
2016 92.34% 90.15% 86.59% 88.72%
2017 91.52% 91.01% 87.35% 89.20%
2018 90.09% 87.50% 85.26% 86.82%
2019 88.09% 86.93% 89.14% 86.25%
2020 89.45% 90.72% 89.77% 88.97%
2021 (so far) 88.24% 88.95% 93.97% 89.50%

Source: Farient Advisors

Heading into this proxy season, questions were asked about whether the business impact of Covid-19 would be reflected in executive compensation packages – whether due to decreased financial performance, employee lay-offs and safety or other factors. 

Marc Hodak, partner at Farient Advisors, says this year’s results so far indicate a continuation of scrutiny on pay for performance. To the extent that performance was affected by the pandemic and executive compensation isn’t aligned, that will likely be reflected in shareholder voting activity, he adds. 

‘At a high level, we’re seeing a continuation of a long-term trend of slightly less support for slightly more companies over time,’ Hodak says. ‘The specific reasons we’re seeing companies doing poorly on say-on-pay votes are the same as reasons in the past, where a significant amount of pay is disconnected from the performance of the company.’ 

The proxy advisory firm ISS amended its voting guidelines in the US ahead of this proxy season to allow for some adjustments to executive compensation packages in response to the pandemic. The guidance was open-minded with regard to adjustments for short-term performance goals, but asked that the board provide expanded disclosures around why adjustments needed to be made – for instance, if the pandemic had made initial targets unattainable.

ISS said its voting policies would be generally unsupportive of amendments to long-term performance targets, but that it would evaluate incidents on a case-by-case basis. 

Hodak says that in reality, very few of Farient Advisors’ clients felt it was necessary to amend performance-based targets in compensation plans.

‘In our work, we generally want to establish incentive plans that provide the opportunity for executives to do well when the company is performing well and not do well when the company is not performing well,’ he explains. ‘When we encounter a situation where the company is not performing well for reasons that are outside of management’s control, our general view is to let the situation play out. Our bias, and the bias we communicate to directors, it to let the plans play out. In bad years, let management take its lumps and in good years, take its rewards.’ 

The Canadian perspective

But Michael Caputo, managing partner at Lane Caputo, says boards in Canada were a little more circumspect when it came to discussing executive compensation this year, in light of the pandemic.

‘In our experience, there has been greater sensitivity to public criticism,’ Caputo says. ‘In previous Black Swan events, boards had a different outlook – that it was out of the control of management. But this year there was a deep concern for optics. Where performance was impacted, there was a lot of discussion about what the perception would be of paying target or above target, regardless of what may happen with peers. Directors were asking themselves what the perception would be and would their obligations are in this heightened period of focus on ESG.’

Caputo says that historically in instances where companies have received poor say-on-pay results, it’s often been related to the quality of the explanation, rather than the structuring of the compensation plan.

‘We saw a couple of companies last year that failed the say-on-pay vote and the interesting thing from going back and dissecting the outcome is that, almost universally, they’re really associated with poor disclosure of the company’s compensation plans, rather than there being something egregious in the plans themselves.’ 

With that in mind, Caputo recommends that this year and next year – when Covid-19 will likely still have an impact on companies’ financial performance – boards consider adding additional context to the compensation discussion and analysis that goes into proxy statements. 

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...