Over the last several years, companies have come under increased scrutiny from shareholders regarding many aspects of executive pay, such as rising total compensation, performance incentives, buybacks and more. Paralleling these trends, shareholder activism has reached a fever pitch, and in 2015 a new activist campaign was launched at a rate of nearly one per day.
Not all investors are activists, but all shareholder feedback should be taken seriously as a matter of corporate risk. Compensation matters, and particularly Say on Pay, are often a bellwether for deeper investor concerns. Being a universal vote across public companies, Say on Pay stands in as an annual gut-check of the board and management, and thus is one of the most visible manifestations of a company's relationship with its investors.
Since the SEC regulated the mandatory--though non-binding-- shareholder vote on executive compensation, the level of approval ratings from investors has continued to increase each year. For example, 77.4% of S&P 500 companies received more than 90% approval on their Say on Pay votes in 2015, up from 64.6% in 2011.
Though few and far between, the consequences are serious for those that fail:
* Of the 60 companies in the Russell 3000 that failed Say on Pay in 2015, median support for comp committee chairs was 84.8%, with committee members slightly above that group at 86.5%--other board members at these companies had a median approval rate of 96.4%.
* Of the companies that failed their Say on Pay votes at least once within the last five years, nearly 25% saw their CEOs resign--the average time frame being within a year of the shareholder meeting. Even proposals that pass but receive weaker support merit a discussion by boards. While less than 2% of companies actually receive less than a majority approval, over the years about 8% of the Russell 3000 and just over 5% of the S&P 500 receives less than 70% shareholder support on executive pay. Notably, that figure increased for the S&P 500 and decreased for the R3K this year.
And even when the votes pass with flying colors, high-level results showing shareholder support of proxy proposals often fail to illuminate the deeper dialogue that occurs between most company boards and shareholders. It could be a 'yes, with...