Early Say-On-Pay Results Sending Directors A Message

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If shareholders continue to be dissatisfied with CEO salaries, directors who sit on compensation committees may come under greater scrutiny.


Early-season say-on-pay voting results suggest that shareholders may be scrutinizing executive pay far more critically than in the past. According to a recent report released by executive compensation consultants Semler Brossy, while the vast majority of companies continue to pass say-on-pay votes with a significant majority, the current rate for companies failing say-on-pay votes is twice as high as it was at the same time last year. If shareholders continue to be dissatisfied with executive salaries, corporate directors who sit on compensation committees may come under greater scrutiny as well.

According to Semler Brossy, the say-on-pay failure rate at this time in 2020 doubled from 2.1% to 4.2% this year. Additionally, the average vote results of 89.0% for the Russell 3000 and 87.1% for the S&P 500 so far in 2021 are below the average vote results at this time in 2020. The results of say-on-pay votes by shareholders have typically averaged 90% and above in previous years.

The report also suggests that proxy advisor ISS is paying close attention to whether companies made adjustments to their executive compensation plans in response to the Covid-19 pandemic. ISS cast “Against” recommendations for 13.6% of companies so far this year, which is “nearly as high as any full-year ‘Against’ rate observed since 2011.”

Apparently shareholders and proxy advisors are more disappointed with the compensation plans being presented this year than they have been in the past. Some news reports have detailed how many CEOs have received large pay raises this year even though their companies suffered significant revenue losses during Covid-ravaged 2020. The New York Times recently reported that Boeing, Norwegian Cruise Line and Hilton suffered losses of $12 billion, $4 billion and $720 million respectively, yet their CEOs each received compensation of $21 million or more.

The revelation that a number of CEOs received raises at a time when their companies are losing money has drawn additional attention to say-on-pay votes this year. It is possible that the trend toward higher “Against” votes will continue through the end of the year, which should give corporate directors something to think about as they consider whether to adjust their executive compensation models as the economy emerges from the stagnation imposed by lockdowns and safety concerns during the pandemic.

Be prepared to defend the company compensation model.

Of course, there are reasons why compensation for some CEOs went up while their companies lost money, so boards may need to explain their compensation models to avoid shareholder angst. Since pay for performance has been emphasized as a best practice over the last few years, companies that seem to deviate from that concept may feel more heat from investors.

Boards can always use their discretion when approving compensation but approving pay raises when performance is lacking will likely be frowned upon. Boards that defend approving higher pay on poor performance (for any reason) open themselves up for criticism from dissident shareholders who may file shareholder proposals or seek to oust directors in the future. Explaining how current pay policies or changes management will implement would prevent unfair compensation from being awarded in the future might be needed to satisfy shareholders.

Investigate and determine if your compensation model worked as designed.

Sometimes corporate directors must be willing to evaluate moves the board makes in order to ensure goals are being met. If there are questions about the compensation plan, directors must be able to make a hard, honest assessment of whether the plan performed as expected. Did the plan incentives produce the desired outcomes? Was the compensation fairly awarded? Was the level of compensation awarded truly in the best interest of investors? Are there aspects of the compensation plan that need to be adjusted?

Demonstrate accountability by determining if the board should use its discretion to cut salary in proportion to losses suffered.

If the board can approve a CEO’s tough decision to cut workers during a pandemic, it can also make the hard decision to cut executive salaries during a pandemic. Granted no one wants to do either, but refusing to limit compensation for C-suite executives who are presiding over massive losses may give the impression that the board won’t stand up to the CEO under any circumstances. That may place the entire board in jeopardy.

Withholding compensation is one of the few ways boards can hold CEOs accountable short of firing them, so boards mustn’t be afraid to use that course of action when appropriate. And if the board has hired a CEO who would vehemently protest accepting lower compensation when the company is losing money on his or her watch, perhaps the board should seek a leader with a higher level of integrity and willingness to accept responsibility for the extremely difficult job of producing profits at a publicly-traded company.

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