Record Say-On-Pay Failures In 2022 Raises Compensation Concerns For Boards

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The optics of CEOs receiving big pay increases is not playing well at a time when investors are worried about an uncertain global economy and a looming recession.

Investor pushback against increasing compensation continues to be an issue for corporate boards as Say-on-Pay (SoP) failures reached a new record in 2022. Corporate board members will need to determine how to respond to potential investor concerns about CEO pay that may arise during the 2023 proxy season.

According to a report from Willis Towers Watson (WTW), there were a record 78 SoP failures for companies in the Russell 3000 in 2022 – the previous high of 71 SoP failures was achieved in 2021. Additionally, the report revealed that the overall rate of SoP proposals failing to receive majority support increased to 4% and the average level of shareholder support for SoP proposals fell below 90% for the first time in 10 years.

Similar to what took place during the Covid-19 pandemic, the optics of CEOs receiving massive pay increases during a crisis is not playing well at a time when investors are worried about an uncertain global economy and recession fears.

“The first nine months of 2022 have seen global economic uncertainty and enormous market volatility, yielding sustained and deep TSR losses. For companies with non-calendar fiscal years, the perfect storm of CEO pay increases confronting bear market territory has led us into SoP failure territory,” the report states.

Brian Myers, Governance Team Lead, North America & Director, Executive Compensation and Board Advisory for WTW who co-authored the report, gave three main points he thought corporate board members should take away from the numbers in the report:

• The Covid grace period has ended, and we’ve seen a back-to-business approach to applying scrutiny to typical areas of focus. These include poor disclosures, one-time special awards, and changes to in-cycle Long Term Incentives (LTI).

• Equally as important is shareholder engagement and responsiveness, particularly when faced with low vote say-on-pay vote support. Those that do not take this engagement and responsiveness opportunity with the appropriate level of seriousness risk future vote recommendation issues for compensation committee members.

• We’re also starting to see say-on-pay used by investors as a tool to send messages on topics beyond CEO pay (the original intent of the rule), such as broader NEO pay actions and ESG / Inclusion & Diversity.

The points Myers raises present major challenges for corporate boards and must be taken seriously by each company’s compensation committee.

Scrutiny of poor compensation disclosures, one-time special awards and adjustments to long-term incentives is intensifying. Myers pointing out the current trend toward greater scrutiny is correct. Investors want to make sure boards are not allowing executives to enrich themselves at the expense of the company. Pay-for-performance is a higher priority for investors, so boards must be sure that any special awards or long-term incentives don’t appear to be rewarding executives when stock price performance is below expectations.

Boards will need to be especially prepared to provide explanations on how compensation decisions were reached with investors. Companies facing low say-on-pay vote support are essentially being put on notice that investors are not in agreement with the compensation being handed out to top executives. If such a situation continues for an extended period, compensation committee members and even the board chair may find themselves facing “against” votes when they are up for re-election to the board. In fact, the entire board may be at risk of being ousted if investors don’t believe directors are serious about implementing pay-for-performance when considering compensation.

Rejection of CEO pay raises other questions about pay. Unfortunately, if investors are questioning the validity of the CEO’s pay, it may lead to questions about other compensation. As Myers alludes to, the pay of named executive officers, including members of the board, may also come under scrutiny when CEO pay is rejected. If investors believe the board is incapable of determining appropriate pay increases, the entire board may be at risk. Furthermore, investor interest in fair pay for employees (women and minorities) and on golden parachutes for executives may also come into play. Proposals for greater transparency on compensation metrics can also come from displeasure with CEO pay. Ultimately, calls for tying executive pay to ESG concerns, such as diversity numbers or climate change measures could come out of the growing concern over compensation.

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