Activists at the gate of executive pay: why activists are concerned with executive pay and what boards and their compensation committees should be doing now to respond to these concerns.

• Author: Brossy, Roger
• Position: EXECUTIVE COMPENSATION

Activists have become prominent and often divisive figures in corporate boardrooms and in the public eye. Activist campaigns are on the rise--a pace of increase of 35% from 2014 alone and 60% since 2013. Their impact is profound: over 15% of campaigns since 2013 have resulted in board seats for activist designees. Among activist areas of focus, executive pay has not escaped unscathed; in fact, we predict activism will be one of the key influencers of the executive compensation dialogue in the near future. Activism will magnify pay and performance conversations, spotlighting the alignment of pay design and decisions with activist business theses and using new information from the soon-to-be-released Dodd-Frank requirements to further reinforce their views.

So, is this good news or bad news, or maybe a little of both? This article explores the targets and impact of shareholder activism and reflects on what can be learned and applied by companies that want to forge an executive pay program that drives results and speaks to all stakeholders.

Dramatists vs. Constructivists

There are claims for and against the impact of activists on company performance. But it is unfair to clump all activists together. Shareholder activism comes in many forms and agendas. Some, such as public pensions and labor unions, focus on promoting social, political and environmental causes. The most significant rise in activist activity, however, has come from the class of investment managers concerned with shareholder value creation.

The modus operandi can vary even among the shareholder value focused group. On one end of the spectrum is the "dramatist," or overtly public campaign. Such activists specialize in the public forum and target management or board members directly, or use populist issues like executive pay to draw in other shareholders for support. These campaigns are replete with headlines and seemingly personal charges against incumbents.

But there are also constructive activists who seek a low profile and approach companies with the intent of avoiding a public fracas. The "constructivists" hold strong views on corporate actions that should be taken, but, at least initially, they will seek collaboration and only escalate publicly if unsuccessful.

Why activists are concerned

While executive pay is frequently a prominent theme in activist campaigns, it is often not the central reason for activist involvement. Activists are concerned with executive pay for two...