Responding to a Sudden Decline in Support for Your Say on Pay Proposal

Responding to a Sudden Decline in Support for Your Say on Pay Proposal

February 6, 2017

By Bob Romanchek and Ron Rosenthal, Meridian Compensation Partners

Most U.S. companies fare very well on their Say on Pay (“SOP”) proposal with typical support levels of upwards of 90%. However, every year a small minority of companies struggle with the SOP vote. An unexpected and/or temporary decline in share price is oftentimes the culprit. In 2016, approximately 7.5% of Russell 3000 companies received less than 70% support for the SOP proposal. There are a number of factors that can contribute to a sudden decline in support, including:

  • A decline in financial results;
  • Low relative total shareholder return for the most recently completed one- and three-year periods;
  • An adverse vote recommendation from one or more of the large proxy advisory firms on the SOP proposal; and
  • Institutional shareholder concerns about a misalignment between pay and company performance

No companies are immune from a sudden decline in support; it can happen (and has happened) to companies that have historically received strong and otherwise consistent support (>90%) for their SOP proposal. Eventually, stock prices will correct, and not continually increase forever. So, even the best-run companies will hit a period with negative TSR (or lower TSR relative to peers or broader market indices) and, thereby, create potential SOP vote implications.


When a company experiences a significant decline in support for its SOP proposal, the compensation committee needs to determine how to respond. For many compensation committees, this may be a novel situation. What should the committee do? First, it is important for the compensation committee to demonstrate responsiveness to the concerns of shareholders. For example, Institutional Shareholder Services (“ISS”) will evaluate the responsiveness of the compensation committee to the prior year’s SOP proposal if support was less than 70%. If ISS determines the compensation committee’s actions were not responsive to the vote, it may recommend a vote “Against” a company’s SOP proposal.


Second, companies should adopt a structured and measured approach to responding to the SOP voting results. Below is an approach that some of our clients have used to gather critical input, consider and approve responsive changes to the NEO compensation program and effectively communicating those changes to shareholders and proxy advisory firms.

  • Gather feedback from your largest shareholders. It is imperative to conduct additional outreach with shareholders following a decline in support for the SOP proposal in order to understand specific concerns about the NEO compensation program. Even if management met with the investors in the prior six months, and the feedback about the NEO compensation program was positive, the shareholders’ perspectives may have changed and the committee needs to understand current views. Extend invitations to the top 25 largest institutional shareholders. Not all shareholders will accept the invitation, but many will. Develop a cross-functional team from HR, Legal, Finance and Investor Relations that will conduct the meetings. The compensation committee chair, or lead director, may also participate.
  • Evaluate feedback from investors and proxy advisory firms and identify potential enhancements to the program. Feedback from the shareholder outreach, and the ISS and Glass Lewis proxy reports, should be summarized so that senior management and the committee can understand the key areas of concern. Management and the committee’s consultant should work together to develop and evaluate potential design changes that could be implemented to the NEO compensation program to respond to the concerns identified, yet keep the executive pay program aligned with the business strategy. However, simply changing incentive plan designs to meet ever-changing expectations of shareholder advisory groups is often not the right answer.
  • Schedule compensation committee meetings to review findings from the outreach process and discuss appropriate changes to the NEO compensation program. Once investor feedback has been gathered, management and the committee’s consultant should work together to identify potential program design changes. It is important to review the feedback, and potential responses, with the committee to obtain additional input. After receiving feedback, management should develop its recommended plan design changes and present its recommendations to the committee at a subsequent meeting. Proposed changes should be responsive, but the compensation program should continue to support the company’s strategy and be aligned with its compensation philosophy. Keep in mind that most changes will be prospective in nature, since the compensation program for the current year was likely already approved before the annual meeting.
  • Once changes are approved, conduct outreach with large shareholders and the proxy advisory firms to explain the changes and tell a compelling story. This additional outreach will build support for the enhancements to the NEO compensation program and should occur before the shareholders and proxy advisory firms are inundated with their work for the next proxy season (e.g., ideally late summer or fall for calendar-year companies).
  • Clearly articulate the Committee’s approach and response in the following year’s proxy statement. Include a section in the Executive Summary of the CD&A that clearly identifies the committee’s response to results of the prior year’s SOP proposal. Summarize the outreach process that was undertaken, and what the committee heard from shareholders. Highlight, with a well-articulated rationale, the specific actions taken to address shareholder concerns.

 

If your company experiences a significant decline in support for its SOP proposal, don’t despair. Many companies have realized a significant increase in sustained support for the SOP proposal by following these recommendations.

 

 

About the Authors

Bob Romanchek is a Partner and Ron Rosenthal is a lead consultant at the executive compensation consulting firm Meridian Compensation Partners, LLC in Lake Forest, IL.