The 2021 corporate shareholder proxy-voting season, in which shareholders vote on proxy reports looking back at 2020, is providing a window into executive pay in the U.S. and how that pay is viewed by shareholders and other stakeholders—which ultimately reflects on a company's brand and reputation.
So far, the data suggests that companies need to be as clear and explicit as possible when communicating about executive compensation.
As the annual period when public companies issue their proxy statements and hold nonbinding shareholder votes on executive pay packages (commonly known as say on pay) got underway in April, there were signs of shareholder impatience with some executive pay practices used in 2020 during the height of the pandemic.
An analysis by consulting firm Semler Brossy in Los Angeles found that 3.3 percent of companies that reported their 2020 proxy votes by mid-May failed to gain the support of a majority of shareholders for the company's executive pay package. That was "well above the failure rate at this time last year (1.9 percent)," the firm noted, indicating that shareholders are becoming more assertive when it comes to executive pay.
Similarly, an analysis by law firm King & Spalding noted that Institutional Shareholder Services (ISS), an influential shareholder advisory firm, "has been more critical of executive pay this year than last, especially at larger companies." ISS recommended a favorable vote on 77 percent of say-on-pay resolutions for S&P 500 companies during this year's proxy voting, down from the 89 percent it recommended a year ago.
Weak ties between pay and performance is by far the most common reason for shareholders to withhold their support for executive pay arrangements, including widespread COVID-19-related changes to executive pay packages that "moved the goalposts" during the pandemic so that CEOs no longer had to meet pre-pandemic business targets to receive big bonuses and equity grants.
Some corporate boards that adjusted executive goals said pandemic lockdowns weren't something CEOs could control, while critics of those moves contend that CEOs should have shared the pain with employees who experienced pay freezes, cut hours or layoffs.
"Shareholders have no patience for companies that are insulating executives from the effects of COVID," Rosanna Landis Weaver, who writes an annual report on CEO pay packages, said in an interview with Roll Call.
Still, changing metrics in midyear can be defensible, depending on how goals were shifted.
"In determining 2020 incentive award payments, companies that have been significantly impacted by the pandemic may choose to exercise compensation committee or board discretion to adjust performance metrics set earlier this year," law firm Ogletree Deakins advised last November. "For instance, some companies may change financial performance metrics to strategic metrics (such as satisfying diversity, equality, and inclusion objectives) to address the economic uncertainty."
Explaining Pay Decisions
Chief HR officers have opportunities to get involved in shareholder outreach in advance of proxy disclosures and shareholder votes. Working with the chair of the board's compensation committee, head of investor relations and other key stakeholders, a CHRO can help craft executive pay communication.
CHROs and other HR board liaisons should keep in mind that although negative say-on-pay votes are rare, companies still need to make sure that their executive pay disclosures provide a clear rationale for CEO compensation, especially any changes made during the year and the thought process behind those changes.
Shareholders are looking at executive pay this year "very much on a case-by-case basis," said Brian Myers, governance team lead, North America, and director of executive compensation with consultancy Willis Towers Watson in Arlington, Va. "They are open to accepting and understanding the facts and circumstances as long as the disclosure is there."
If companies don't make a serious and well-documented case for executive pay in their proxy reports, particularly if they made midyear adjustments to executive pay targets, it "could create a cascading effect on how scrutinized say on pay will be in the future," Myers said.
The discussion around say on pay has also changed. "The focus is now more specific and nuanced," said Peter Lupo, senior managing director with executive pay advisory firm Pearl Meyer & Partners in New York City. For example, shareholders are more apt to seek details on the metrics selected for long-term executive incentives.
[Related SHRM article: 5 Executive Pay Issues for 2021]
Top Brass vs. Typical Worker
The CEO pay ratio may also see renewed scrutiny and discussion in 2021.
Research by compensation and governance data firm Equilar found that the median ratio of CEO to worker pay jumped to 227-to-1 in 2020, up from 191-to-1 in 2019, meaning that the typical company CEO earns $227 for every dollar the median worker in that company earns, up from $191.
The analysis noted that "there is a steady increase in interest to see more robust disclosure of the ratio and how companies tell their stories."
These stories should go beyond compensation design.
"What is the organization trying to do?" Myers asked. "Provide detail, context and the rationale for these decisions and the thought process of the organization."
If current trends lead to changes in executive pay practices, it would not be the first time say-on-pay votes led companies to put guardrails around executive pay practices. "In the beginning, we saw more of a focus on problematic pay practices with shareholders targeting high-profile companies," Myers said.
Within a few years, many practices deemed excessive by shareholders—such as executive payouts following a change in control of the company, tax gross-ups on certain payments, supplemental executive retirement plans and one-time rewards—had become much less common, he noted.
[Related SHRM article: Executive Pay Measures Shift Toward Fairness, Social Responsibility]
ESG Metrics Gain Prominence
Looking ahead, experts also expect to see more pressure during say-on-pay votes regarding the company's environmental, social and governance (ESG) practices and their inclusion in executive pay design and metrics.
A fall 2020 Willis Towers Watson survey of board members and senior executives at 168 organizations found that 41 percent plan to introduce ESG measures, such as reducing the company's carbon footprint or increasing workforce diversity, into their long-term incentive plans over the next three years; 37 percent plan to introduce ESG measures into their annual incentive plans.
Companies are focusing "on a stronger alignment of executive compensation plans and ESG priorities, particularly with climate change and environmental measures, inclusion and diversity matters, and overall human capital governance," said Shai Ganu, global head of executive compensation at Willis Towers Watson.
While many progressive-leaning groups advocate increasing ESG-related goals and priorities in executive pay metrics, some stakeholders favor limiting performance targets to traditional financial metrics, such as business growth and shareholder return, mirroring the debate over whether retirement plan fiduciaries should consider ESG factors when selecting plan investments.
[Related HR Magazine article: Should Employers Tie Executive Compensation to DE&I Goals?]
Joanne Sammer is a New Jersey-based business and financial writer.