Most indicators of shareholder support for executive pay programs remain strong, with the number of companies whose 2019 executive pay plans failed to receive majority support at 2020 annual meetings as of July 24 one shy of failures as of this time last year (57 vs. 58). But this could change in 2021 given many companies are considering modifications to in-flight awards and special grants in response to the impact of the pandemic on incentives. How receptive proxy advisers and investors will be to these actions is still unknown but Institutional Shareholder Services (ISS) is currently seeking input from investors and other stakeholders on this topic.
Reasons for failures. At least one investor continued to take a hard line on say on pay: the California Public Employees’ Retirement System (CalPERS) voted against pay plans at more than half of its portfolio companies that held votes. CalPERS voted against pay plans at 1,165 firms (52% vs. 53% in 2019), according to the Financial Times. The CalPERS votes were based on an analysis of executives’ realizable compensation, which measures how a pay package grows or shrinks in value depending on whether goals are achieved and how the shares move, relative to the company’s stock return over five years. It then compared those figures with companies of similar size or type. Of note, the fund also voted against 2,716 directors in 2020 under a new policy to vote against compensation committee members of the companies whose pay programs it voted against.
Reasons other investors cited for voting against say on pay at the nine S&P 500 company failures, aggregated by Proxy Insight, were also driven by pay-for-performance disconnects, including:
No surprises despite pandemic. Executive pay decisions for 2019 predated the market gyrations brought on by the COVID-19 pandemic and say-on-pay vote results have been generally unaffected. Most indicators of shareholder support remain strong so far and consistent with prior years:
Looking ahead. The reasons for the say-on-pay failures indicate areas of concern investors are likely to focus on when they next vote on say on pay, including actions companies take to address the volatile market and global pandemic. Companies whose fiscal year ended June 30 will be the first to see the impact, and should engage with shareholders and ensure their proxy disclosure explains the rationale for pay decisions.
ISS’s just released annual global policy survey seeks input from its investor clients and other stakeholders that the proxy adviser will consider when it updates its voting policies for 2021. For pay actions, the survey seeks feedback on the following:
Mercer resources. For more information on alternatives to address nonperforming incentive plans, see Managing incentives during uncertain times and When performance shares are not performing for discussions of 2020 compensation decisions in response to COVID-19 and Proxy advisers weigh in on COVID-19's impact on pay and governance.
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