June 13, 2024 Executive Compensation Shareholder Voting, SOP, and Proxy Results Articles

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Shareholder Voting, SOP, and Proxy Results

How Should Compensation Committees View 2024 Say on Pay Results?

On the surface, there is no standalone trend in this year’s Say on Pay voting that would create an interesting headline for compensation committees. The Russell 3000 failure rate thus far in 2024 is below 1%, marking the lowest since the 2017 voting season. Additionally, average Say on Pay support among Russell 3000 and S&P 500 companies has reached its highest level since 2017.

One could look at these results and walk away confident that Say on Pay has been “figured out.” Neither ISS nor Glass Lewis made sweeping changes to their proxy voting guidelines for 2024, and most investor pay-and-performance assessment frameworks remained largely the same year-over-year. However, this takeaway ignores the dynamic nature of shareholder voting, which is subject to continuous influence from proxy advisors, investors, activists, the media, and countless other forces.

The most compelling trends of this proxy season emerge from a deeper analysis of companies that received less than 75% support in addition to those that failed. Insights from this group reveal where investors, proxy advisors, and other stakeholders may have heightened expectations in the future.

Still Heightened Pressure on S&P 500… But a Rising Tide Lifts All Boats

Institutional investors and proxy advisors continue to appear more critical of large-cap S&P 500 companies than their smaller counterparts, as average Say on Pay support for S&P 500 companies is 240 basis points lower than average support for the Russell 3000x (i.e., excluding the S&P 500 constituents). Despite this apparent higher standard for S&P 500 programs, a general increase in overall vote support this year has been observed across companies of all sizes and scales.

Investors expect S&P 500 companies to have the resources to ensure dedicated shareholder outreach touchpoints and more sophisticated conversations on governance topics. Investors also expect large-cap companies to use their deeper resources to draft market-leading disclosures that effectively convey the rationale behind pay program design and decision points over the course of the year. The divergence between the average vote support for the S&P 500 and Russell 3000x began in 2019 and 2020 and has persisted ever since.

YEARRUSSELL 3000XS&P 500
2024 YTD92.3%89.9%
202390.4%88.7%
202289.7%87.2%
202190.9%88.3%
202090.8%88.3%
201990.6%90.0%
Table 1.

The 240 basis point spread between the S&P 500 and Russell 3000x is consistent with the spread observed between 2021 and 2023. You can read more about the factors influencing this vote dynamic in our 2022 white paper.

On-The-Ground Trends in Say on Pay Voting

As noted up-front, the Say on Pay failure rate this year is at a historic low. Most of the interesting takeaways from this season are buried deeper in the results for companies receiving support below 75%. We interpret many of this season’s low vote examples as compensation committees exercising situational judgment in when and how to step outside of the well-established “rules” set forth by investors and proxy advisors. However, a subset of examples stands out to us where investor expectations may be slightly heightened relative to prior years.

The first interesting takeaway is the rate of “split” ISS and Glass Lewis recommendations among the group of companies receiving less than 75% support (i.e., one proxy advisor recommending “For” and the other “Against”).

We identified 80 Russell 3000 companies that received Say on Pay vote support below 75% and had available ISS and Glass Lewis recommendations through May 21st. 40 of these cases (50%) had split recommendations between ISS and Glass Lewis (versus 33% in 2023, n=237). Further, a majority of companies (58%) receiving support below 75% thus far in 2024 received a “For” recommendation from at least one proxy advisor.

These two data points from 2024 illustrate the nuanced differences in the assessments of ISS and Glass Lewis. Gone are the days when securing a “For” recommendation from at least one proxy advisor could put the compensation committee at ease.

Table 2. Say on Pay Less Than 75% (n=80)
Table 3. Say on Pay Greater Than 75% (n=1052)

On a more granular level, this year’s results include companies that received depressed votes (i.e., <75% support) due to one-time awards, non-rigorous incentive goals, adjustments to incentive plan outcomes, and the use of pay models employing “guided discretion.” Some key themes we have noticed this year are:

  • Heightened Scrutiny of Special Awards: the proxy advisors appear more interested in the performance-based weighting, goal rigor, and vesting cadence of one-time awards than in prior years (in addition to their continued focus on the magnitude of these awards). The historical preferences for one-time awards were that they be 100% performance-based, vest over a timeframe of three or more years, and be sized at less than 1x an annual equity grant. It may no longer be sufficient to expect a “For” recommendation for a majority performance-based one-time award with only a three-year performance period, particularly if the performance hurdles are deemed non-rigorous. It is also no longer a safe bet to assume that a one-time award to a non-CEO officer will go without a critical evaluation.
  • Continued Emphasis on Goal Rigor: this trend is a continuation of themes from prior proxy seasons, but ISS, in particular, appears to be looking closer at the rigor of incentive goals relative to prior year actual outcomes and whether proxy disclosure comprehensively describes the goal-setting process (and any relevant information or judgment companies use in setting performance targets). Investors and proxy advisors have historically commented unfavorably when target payouts are provided for median performance in relative Total Shareholder Return (TSR) incentive designs, but it appears that this goal-setting approach may now be a stronger “swing factor” that sways a recommendation from a “For” to an “Against.”
  • Re-Emerged Focus on Non-CEO Pay: we previously wrote about how competitive CEO pay alone does not always provide a “free pass” in Say on Pay voting. This holds true in 2024, and it appears that assessments of non-CEO NEO pay have become more rigorous since we wrote our 2018 paper. In 2024, companies received criticism for the lack of performance-based NEO equity grants (where the CEO received performance-based grants), one-time grants to NEOs (and not to the CEO), high average pay for the proxy-disclosed executive group (rather than just elevated CEO pay), and the acceleration of awards upon an NEO’s retirement. Some of these items have been focus areas for proxy advisors in recent years (e.g., severance treatment), but it does appear that one-time NEO pay actions that used to fly under the radar are receiving heightened scrutiny. Companies that receive low concern on quantitative evaluations of CEO pay and performance are still at risk of Say on Pay scrutiny from NEO pay actions. We suspect that the increasing levels of executive pay, for roles other than the CEO, are partly driving the additional focus as the overall cost of management grows for many companies.
  • Increased Pressure on Guided Discretion: this bucket is perhaps the most expansive, as it takes several forms. First, there is continued pressure on the “total rewards” pay model employed by some banks, asset managers, and other firms, particularly when a pay-and-performance disconnect is identified under proxy advisor/investor frameworks. The pay model is intended to allow for “guided discretion” that considers performance holistically, which, in theory, should help mitigate pay-related risks and reward for investments in the future. However, this framework is inherently (partially) qualitative in nature, and it does not fit neatly into proxy advisor frameworks that value formulaic incentive programs, incentive targets placed above prior-year actual results, etc. Second, companies making discretionary adjustments to incentive program outcomes continue to face heightened scrutiny, even where disclosure is deemed comprehensive and sufficient.

Say on Pay is non-binding, so while there are repercussions to a depressed or failed vote, pay actions are not automatically “unwound.” Instead, most companies that receive a depressed Say on Pay vote will demonstrate “responsiveness” in the year following the vote—either through direct shareholder outreach conversations, go forward pay program changes, or a combination of the two. Glass Lewis evaluates whether a company was sufficiently responsive following a vote outcome below 80%, whereas ISS’s responsiveness assessment follows a vote outcome below 70%. Individual investors will also have their own expectations of sufficient “responsiveness” following a depressed vote.

What Does the Future Hold?

We hypothesized in our 2017 paper, “Cycles of Say on Pay,” that changes in the shareholder voting ecosystem would cause the failure rate to rise and fall like a wave over time. This hypothesis generally has been accurate for the Russell 3000x since voting began in 2011. (Fig. 1) The S&P 500 has followed a similar pattern, albeit with greater variability in the peaks and valleys.

The decline from the historic high Russell 3000 failure rate of 3.7% in 2022 to the 0.8% failure rate through May 21st has been the most dramatic cycle of this Say on Pay wave trend. Now, we predict that something in the shareholder voting ecosystem will evolve. The question is whether it builds on the modest trends observed this year or if the evolution will be significant enough to generate the same dramatic shift in failure rate that we observed in 2022.

At a minimum, we can expect proxy advisor voting guideline updates will continue to be a force of change in the shareholder voting landscape. Other influential shareholders will undoubtedly also update their policies and voting guidelines, creating a new set of expectations for companies to review and consider. Say on Pay vote results are often a lagging indicator of changes to these policies, as companies need time to address the new investor preferences in the period after they go into effect.

Furthermore, many companies are likely to face weaker outcomes on investor and proxy advisor pay-and-performance models in 2025. These models use three-year TSR as a primary performance measure, and the latest data shows that, as of June 3rd, about half the S&P 500 companies are trading at prices lower than their last closing price in 2021. By comparison, only 30% of the same companies ended the 2021-2023 period with a lower stock price (i.e., the period being voted on in this year’s Say on Pay voting).

Fig 1.

We suggest compensation committees and management teams ask themselves three questions now to get ahead of next year’s proxy season:

  • How does trending three-year TSR performance for the 2022-2024 period fare under the current investor and proxy advisor pay and performance tests?
  • Do pay actions and anticipated incentive plan outcomes appropriately align with trending company performance?
  • Does the CD&A sufficiently explain the decision-making and rationale or compensation actions and justify pay outcomes?

Companies can begin preparing for next proxy season now. The first step in preparation is to review the themes from this year’s proxy season, which we have started here. If a trending incentive plan outcome was identified as being misaligned with performance in the questions described above, then begin a dialogue at the compensation committee level sooner rather than later. What are the levers to address the disconnect? Should comprehensive pay program changes be considered, or is the disconnect driven by point-in-time circumstances? How will the outcomes be described in the upcoming proxy in a way that ties to the overarching pay philosophy and trajectory of company performance?

The next steps, which are critical to staying ahead of trends and current issues, are to engage shareholders and ask for their perspectives on pay and human capital management topics. Companies can test potential pay-and-performance misalignment “remedies” with shareholders proactively to help guide decision-making.

Companies can then assess the efficacy of existing disclosure relative to the headline topics of this year’s Say on Pay cycle. Transparent, comprehensive, and concise disclosure are highly valued by shareholders (even if these objectives seem to be competing at times). It is essential to stress-test whether all  aspects of pay actions—goal-setting, NEO pay levels, pay program alignment with strategy, and how outcomes align with performance—shine through disclosure to effectively convey a logical and compelling story.


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Blair Jones

Austin Vanbastelaer

Justin Beck

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