Executive Compensation Complexity

Average Say-on-Pay results tend to be confined to a narrow band on a year-over-year basis, and as a result, small changes in aggregate vote totals may be indicative of broader shifts. According to data from Semler Brossy through June 6, average vote support among Russell 3000 companies ticked up slightly to 91%. However, Say-on-Pay failures at those same companies increased to slightly more than 2.2% of all votes. ISS data released in June indicates that 13.5% of Say-on-Pay proposals voted through May received less than 80% support, the second year in a row that figure has increased from a post-2011 low of 9.4% in 2017.

Feedback from engagement meetings this spring indicated a heightened focus on one-time or supplemental awards and a desire for plan design that is tightly linked to challenging strategic and financial measures. As investors continue to become more sophisticated in their compensation analysis, they have also become more willing to support plans that have moved away from traditional metrics such as TSR and toward those specific to company circumstances and strategy. As a result, compensation plans have generally become more aligned with key performance metrics, with the caveat that unique plan design requires clear disclosure and more in-depth engagements to provide investors with context.

Underlying both voting and engagement trends is the continued search for perceived or actual gaps in pay and performance. Many investors have created proprietary quantitative pay screens to flag potential disconnects that can prompt an engagement request to understand the underlying causes. Companies that faced investor challenges this spring on compensation can expect further discussion this fall into the rationale behind the compensation committee’s decision-making and how investor feedback has informed potential changes to plan design. 2020 should bring further complexity as investors continue to dig deeper into compensation plans and ISS potentially expands its analysis to include Economic Value Added (EVA) in addition to TSR and other financial metrics.