April 6, 2022 Executive Compensation Shareholder Voting & Say on Pay Articles

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Shareholder Voting & Say on Pay

Post-Pandemic? What to Look for the 2022 Proxy Season

The wrenching Covid-19 pandemic is far from over, but investors will see something of a return to business as usual in the 2022 proxy season.

Last year, most companies refrained from split performance years, discretionary awards, liquidity-focused metrics, and other pandemic-induced responses of 2020. This proxy season will revert toward the pre-pandemic focus on financial metrics and conventional pay-for-performance structures.

Rather than a complete reversion, however, investors should expect a “new normal.” We’re seeing some likely permanent pandemic-influenced changes, as talent market considerations and ongoing uncertainty prod boards to challenge traditional practices. We expect flexible reward structures, more room for structured discretion, and greater consideration of non-financial metrics—the latter from governance conversations related to environmental, social, and human capital concerns. We urge advisors and investors to keep an open mind about these changes.

Compensation Challenges from the Market for Talent

The pandemic directly and indirectly affected the market for executive talent in all companies, not just high-growth businesses. Covid-19 accelerated a number of corporate trends, especially in e-commerce and other digitization. It also unleashed a new wave of entrepreneurship, with startups both competing for talent and disrupting established businesses.

The result has been a strong market for tech and growth-oriented executives, with boards raising the urgency for transformation. Directors are also eager to recruit and retain people in all areas as they see windows of strategic opportunity, though pay boosts here are more likely in 2022 and future years. Overall, investors will see more companies leaning in to pay increases than in the past, in order to stay competitive in the talent market. Those developments are generally separate from pay issues at “tailwind” companies with higher revenue and profits due to the pandemic.

We also expect continued “de-risking” of performance-based stock awards. In 2020, many boards went from a 60/40 split of performance- and restricted-stock units to 50/50, and we expect that ratio to stay as companies approach compensation cautiously. In making compensation more flexible and resilient, Boards are also moderating award curves. Executives are taking less of a hit if business falls, but they also need to stretch farther for maximum awards. Investors will also see more discretion on pay than was the 2019 norm.

While still a sidelight, some boards have gone in the opposite direction, influenced by “moonshot” mega-grants at venture capital-backed firms. Most of these packages are at fast-growing startups offering one-off multi-year (seven-plus) incentives with extreme targets and extreme awards. However fascinating, these developments are still in the early phase, and different rules apply here. We expect investors to assess each package on its own merits, considering the pay and performance relationship—assessing the risk, and also the returns to shareholders if targets are hit.

Together, these trends have reignited debates on the magnitude of executive pay, dating from before 2019. We are seeing Boards grant awards that set new standards for what top-performing leaders can command. All of these awards will need to be assessed in the context of shareholder value created, other stakeholder experiences, future performance requirements, and ongoing grant expectations. Controversies also continue as to whether larger equity awards should include restricted stock units and options: these are generally not awarded based on specific performance achievements, even though they still align with shareholder interests.

Covid Overhang

Some 2021 Covid-related actions boards took to address retention and motivation in the face of reduced incentive opportunities in 2020 will be reported for the first time. In some cases, companies provided additional equity awards, or used greater discretion, so executives still saw compelling opportunities for gain.

Other boards may have adjusted long-term incentives in ways that first appear only in the 2021 proxies. They did so to maintain executive motivation in difficult times, but the move ran counter to investor guidance on preserving LTI plans despite short-term events. Because of accounting rules, those adjustments will look like new grants and will inflate levels in the Summary Compensation Tables.

Investors will see those responses now. A closer look at the proxy will give investors the context for assessing whether the structure appropriately links pay and performance.

ESG and Human Capital

The pandemic also heightened inequalities of income and wealth, exacerbated by inflation. Activists calling for greater attention to social and environmental issues see the pandemic as a turning point. With most companies’ businesses coming back strong, they are pushing for substantial change, and have won the support of some institutional investors.

The 2022 proxy season should therefore feature greater attention to non-financial incentives in executive compensation, particularly metrics on DE&I and reducing carbon emissions. All of these efforts foster constructive conversations about the purpose of corporations and whether they primarily serve investors or all stakeholders. It’s still important that boards balance these goals with other strategic priorities. But we’ve been amazed at how quickly ESG topics generally have become a priority in compensation committees.

More prosaically, boards are giving greater attention now to human capital issues. The pandemic-induced “Great Resignation” is forcing companies to improve their employee value proposition. Recruitment and retention are priorities now across the organization, not just in the C-suite. Investors can expect some experimentation in pay packages to help make companies more of a talent magnet.

These topics may generate the most discussion at shareholder meetings, as investors evaluate the responses and weigh in on the role they see executive compensation playing in successful human capital management.

Say-on-Pay Voting

We also expect lower approvals on non-binding “say-on-pay” resolutions, continuing a trend from 2021. Semler Brossy found last year’s average vote results to be among the lowest ever, with an average favorable vote of 88.3% for the S&P 500 and 90.4% for the Russell 3000. Rather than revert to 2019 levels, the 2022 votes are likely to be at least as low as 2021. We expect the outright failure rate (favorable votes below 50%) to again hover around 3%.

Some of the “no” votes and abstentions come from the issues discussed above, with larger companies held to a higher standard. But even before the pandemic, investors were becoming sophisticated about compensation practices, and now they have high expectations on design features and outcomes. Also contributing to lower approval rates was the decision of many asset managers, separate from the pandemic, to drop centralized voting—which freed up shares for individual fund-holder votes.

A new trend this year was investors’ concern with boards’ responsiveness to low say-on-pay approvals. When a company’s approval falls below 70%, and especially when the vote actually fails, investors expect substantial outreach from directors—with explanations of what they heard and what they are doing about it, including redesigning compensation packages. Proxy advisors have faulted several boards for their inadequate response, and have asked for limits on one-time actions going forward. Investors are thus elevating responsiveness to such concerns in their list of expectations.

Rethinking Stability and Efficiency

Covid-19 may be shifting from a crisis to an ongoing hazard. But the tumult it unleashed isn’t likely to go away soon, especially with the geopolitical and macroeconomic volatility. Just as supply chains were starting to improve, the Russian invasion of Ukraine showed that our interconnected world is less robust than we thought—and future pandemics are now a worry. It’s still hard for companies to plan. Covid significantly tested traditional compensation practices, and boards are now likely to continue challenging the accepted wisdom. That’s especially likely in emphasizing resilience over efficiency.


A full return to 2019-style normal is unlikely. At least for 2022, the pandemic will continue to cast a long shadow. We encourage investors to be open to some divergence from 2019’s expectations, especially in greater board discretion. Yet, investors must still insist on transparency for that discretion, and boards would do well to clearly disclose their rationale for changes. As always, executive compensation should link to strategies that drive long-term overall performance.

View the full article as it was originally published.

Blair Jones

Austin Vanbastelaer

This article was originally published in Harvard Law School Forum on Corporate Governance.

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