A Decade of Say on Pay
By Ryan Colucci and Stefanie Kushner

Say on pay launched in 2011, born out of the SEC’s efforts to reform corporate governance under Dodd-Frank. This non-binding advisory vote, which is an annual event at most companies, allows shareholders to cast votes for or against named executive officer (NEO) compensation. Although it’s a non-binding vote, it serves as an avenue for shareholders to publicly express their views on compensation programs at the company. Directors take these votes into account when designing compensation programs and if there is a lack of support for consecutive years it could lead to reputational harm for the company and the board.

While earning simple majority is technically a passing result, most companies strive for and receive much greater support. Investor support of compensation programs is influenced by many factors, primarily magnitude of pay, pay practices and stock price performance.

In 2020, COVID-19 significantly disrupted the global economy, causing many companies to re-evaluate their compensation programs. Proxy statements filed in 2021, allowing companies to discuss their executive compensation story during the COVID pandemic year, will depart from previous norms. In anticipation of these filings, Compensation Advisory Partners (CAP) has reviewed say on pay voting at Russell 3000 companies tracked results of the votes from inception to 2020 to gauge the current landscape and suggest what may occur with 2021 say on pay results.

Russell 3000 historic results

To date, say on pay voting results have generally been very consistent. Median support among Russell 3000 companies has been approximately 95% for a decade. Most companies receive support from more than 90% of shareholders and an average of 74% of companies receive support in the 90-100% range. There are consistent vote at both the top and the bottom end of the range.

Only 2.2% of companies failed to receive majority support for say on pay votes in 2020, also a number that has been consistent over 10 years, as has the number of companies who have failed (2%). For companies that failed in 2020, the median level of support was approximately 38%, mirroring historical results.

Proxy advisor impact

Proxy advisors have a substantial impact on the say on pay vote. The most influential proxy advisory firm, Institutional Shareholder Services (ISS) grades companies on a pay-for-performance scale to determine if, in their view, CEO pay and company performance are well-aligned. ISS then issues its impactful recommendation “for” or “against” the NEO compensation program.

The two main inputs that ISS examines are CEO compensation and total shareholder return compared to an ISS-defined peer group based on company size and industry. Companies will then receive a “low”, “medium” or “high” concern level that determines whether ISS will perform a qualitative evaluation of the compensation program. The overall concern level drives ISS’ ultimate recommendation for or against the say on pay resolution. Approximately 95% of companies with a low concern receive support from ISS, compared to about two thirds of companies rated medium concern and roughly half of high concern companies. Often, shareholders will reference the ISS recommendation when casting their vote on say on pay though many institutional investors have their own proprietary tests to evaluate compensation programs at companies.

ISS has consistently recommended against say on pay for approximately 12% of companies per year, over the last decade. Of those companies who failed the say on pay vote, 96% on average over 10 years, had received an “against” recommendation.

The percentage of companies with an ISS against recommendation, at each support level range, has been generally consistent since the say on pay vote was established.

Expectations for 2021

Proxy statement disclosures this year will reflect the impact of COVID-19 on company performance which influenced both executive compensation in 2020 and the development of 2021 incentive programs. While the degree of impact will vary by industry and company, many more companies than usual will disclose adjustments to their compensation programs than in past years. During 2020, shareholders and proxy advisors provided some general guidance on how they will be assessing and evaluating these unique circumstances.

Institutional shareholders and proxy advisors have both stated that they recognize that 2020 was a more challenging year than most due to the impact of COVID-19. Because of this, they will review companies on a case-by-case basis when determining their say on pay vote recommendation, evaluating the facts and circumstances that went into any incentive plan adjustments that were made. Guidance has generally encouraged proactive, enhanced disclosure that clearly explains the situation and rationale for COVID-related changes as opposed to generic descriptions of a challenging year, which may be viewed as insufficient.

How shareholders and proxy advisors interpret and assess the COVID-related disclosures and adjustments will ultimately influence say on pay votes and recommendations. While ISS and Glass Lewis did not make wholesale changes to their pay-for-performance evaluations for 2021, ISS called out key disclosure items that would help investors evaluate COVID-related changes. This indicates that there may be more discretion and flexibility applied for companies with more robust disclosure. Even with greater flexibility in the qualitative evaluations, pay-for-performance misalignment will continue to be the main driver for Against recommendations from ISS in the broader market.

CAP expectations

The implementation of the say on pay rule has had many benefits for external stakeholders. For example, the rigor of disclosure around executive compensation programs has increased significantly over the past 10 years. This vote also encourages more dialogue between shareholders and the compensation committee. It is also an additional safeguard against extreme actions being taken with regard compensation. Due to these main benefits, we do not foresee the say on pay advisory vote going away any time soon.

Since pay-for-performance is expected to remain the primary driver for proxy advisor recommendations, say on pay results will continue to depend on the magnitude of pay, pay practices and stock price performance. For companies that may have a pay and performance misalignment, we expect reduced shareholder support if a company has not provided sufficient rationale for the following actions:

  • Annual and long-term incentive plan adjustments
  • Major employee actions (e.g., layoffs)
  • Performance that is dramatically below investor expectations
  • Low relative financial performance
  • Above-target discretionary adjustments to payouts that previously missed threshold performance
  • Awarding one-time special cash/equity grants 

Shareholder outreach will be more important in 2021 as companies can use these discussions to supplement their required disclosures. Proactive outreach may help to prevent a significant impact on the say on pay result even if proxy advisors recommend against a company’s compensation program. There will also likely be more disclosure on go-forward incentive programs, as the impact of COVID-19 lingers into 2021. These conversations may likely include more holistic dialogue, beyond purely executive compensation, as shareholders maintain certain expectations relating to pay equity, treatment of employees during the pandemic, and the like.

Say on pay results in 2021 will likely test the “steady state” seen over the previous 10 years. Even if the percentages of against recommendations and companies passing remains relatively consistent with historic levels, we expect to see a downward shift in the median level of support and in the percentage of companies receiving at least 90% support. For companies that do receive an against recommendation from proxy advisors, the level of support may decline compared to historic norms if disclosures do not sufficiently justify the COVID-related actions taken.

Ryan Colucci is a Senior Associate with Compensation Advisory Partners, LLC. His work involves the development of competitive compensation levels for senior executives, annual and long-term incentive plan design, board of director compensation, pay vs. performance analyses and employee benchmarking. Stefanie Kushner is a Senior Analyst with Compensation Advisory Partners, LLC. She has experience working on the development of competitive compensation levels for senior executives and non-employee directors, annual and long-term incentive plan design, pay vs. performance analyses and employee benchmarking for both public and private companies.


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