Executive pay plans are coming under greater scrutiny from investors.
From 2022 onward, shareholders have actively pushed back against pay increases for C-level executives, revealing a disconnect between investors and corporate leadership.
What might that mean for your board moving forward?
Investors Pushing Back Against Executive Pay
As part of the shareholder advocacy group As You Sow, Rosanna Weaver analyzes executive compensation shareholder proposals. She tells Time Magazine that shareholders are “getting frustrated with the excessive pay given to executives.… We’re seeing a shift in that some shareholders are flat out saying this pay is too much.”
Time likewise reports that the median CEO compensation package has climbed virtually every year since 2011. These figures would seem to support the notion that executives are overpaid, or that pay increases are a form of self-indulgence.
Shifting Perspectives on Corporate Pay Structures
What’s driving these perceptions? Recent years have seen a rise in three trends that have contributed to greater public scrutiny of corporate pay packages. The following trends don’t exist in isolation but serve to reinforce one another and drive public sentiment downward with regard to executive pay.
Concerns of Fairness and Justice
In part, investor concerns are a reflection of a broader public concern about the gap in pay between company executives and the average worker. Shareholders may be concerned that corporate leadership is being granted rewards or protections that don’t apply to their employees.
Investors are also concerned about how their companies are handling evolving ESG criteria. More specifically, investors are wondering how executive pay might align with ESG concerns, which may be a larger issue than a vote on pay increases.
Pay and Company Performance
Finally, shareholders may be particularly concerned about the relationship between the company performance and executive compensation. If a company is not performing as favorably as expected, shareholders may be less eager to affirm a corporate pay increase.
Avoiding a Negative Say-on-Pay Vote
While executive boards are not bound by say-on-pay votes, ignoring the voice of company shareholders can have disastrous consequences. What can companies do to prevent negative votes when it comes to executive pay? Here are some of the best practices for communicating clearly with shareholders prior to the actual vote.
Improve Your Compensation Discussion & Analysis (CD&A)
Prior to any shareholder meeting, companies should focus on the disclosure they make in the compensation discussion & analysis (CD&A). This has two benefits:
- This communication channel has the greatest potential to reach a wide range of shareholders, which makes it a great tool for disseminating information.
- The CD&A is your opportunity to present clear rationale for any pay recommendations. A clear CD&A invites investors into your board room, so to speak, so that they understand the decision-making process that went into the salary recommendations.
This may not eliminate all negative votes, but it will address any shareholders who might be unclear about the basis for a pay adjustment.
Engage Proactively with Major Investors
Companies can avoid negative votes by engaging frequently with major investors. This can be accomplished through frequent meetings outside of the annual shareholders meeting.
These separate meetings can become places to hear shareholder questions, address concerns, and gauge the sentiment of your core or institutional investors.
Don’t think of these meetings merely as preparation for the “real” annual meeting. Instead, allow these sorts of meetings to become part of your natural cycle of strong corporate governance.
You may succeed in developing stronger relationships with influential investors, which can go a long way to swaying your shareholders as a whole.
Communicate Plans Surrounding ESG Criteria
Investors are concerned about more than just financial data. They’re also concerned about how your company’s salary programs fit into a broader strategy surrounding ESG regulations. Is your company satisfying its stated claims regarding sustainability initiatives or DEI programs?
For that matter, there may be additional questions about how exactly your company satisfies ESG criteria. After all, “social” initiatives can be broad, and not all shareholders will necessarily agree with every social policy. That’s why it’s vital to educate investors on exactly what the company is doing (or plans to do) and how your current budget aligns with these goals.
Address Concerns Regarding Shareholder Return
Total shareholder return (TSR) is one of several metrics surrounding a company’s performance. But for many shareholders, it’s the most important. After all, TSR relates directly to the benefits of being an investor in the first place.
It’s important to communicate two things to shareholders. First, find ways to align compensation packages with TSR. In some cases, a pay increase may reflect positive performance in the past, or a pay increase may reflect a new set of initiatives for the future.
Second, investors should understand that TSR is influenced by a constellation of factors, including performance of the industry or market as a whole. Shareholders can’t always expect to see perfect alignment between TSR and company compensation — this may raise the need to provide other sources of data to explain what success looks like for your company.
Focus on Building Trust
Recent pushback against executive compensation reveals a disconnect between shareholders and the companies they’ve invested in. Boards should consider ways to cultivate a greater atmosphere of trust between leaders and shareholders as well as pursue greater transparency regarding their internal decisions.
For example, frequent meetings can create greater transparency between boards and investors. But it’s vital that boards demonstrate empathy by returning to investors’ concerns and asking follow-up questions.
At the very least, this type of frequent, active engagement can help shareholders feel seen and heard, and this may foster greater trust and engagement moving forward.
Bridging the Gap
Ultimately, concerns about executive pay stem from a gap between shareholders and the boards that govern today’s companies. But as in any relationship, it ultimately comes down to communication. The strategies above provide a clear path toward greater transparency and dialogue between investors and board members, which can encourage greater and long-term engagement.
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