How Much Power Do Shareholders Have Over Executive Pay? - Boardroom News & Insights for Leaders

How Much Power Do Shareholders Have Over Executive Pay?

Just how much influence do shareholders have over the compensation of executive leadership?

Quite a bit, it seems, at least from the recent example of the London-based consumer corporation Unilever.

In 2023, Unilever sought a new compensation plan for its board of directors, one that would grant a 20% salary increase for CEO Hein Schumacher. Shareholders rejected this proposal, which leaves Schmacher’s salary frozen at $1.96 million for two years. According to a company statement, shareholders didn’t object to the size of the salary increase but simply felt that such an increase should be achieved incrementally rather than in a sudden decision.

What does this mean for executive boards? How far can shareholders go in influencing executive compensation? Here’s what boards should learn from the Unilever decision.

The Power of Shareholders: Influence vs. Limit

Bridging the Gap on Executive Pay

It’s important to note that shareholders do not have the direct power to dictate board decisions. Even those with say-on-pay voting rights only exercise these rights in an advisory capacity.

So in one very real sense, shareholders have no actual control over board decisions, including executive pay.

However, shareholders yield considerable influence over corporate decisions. This influence can be wielded through say-on-pay votes, proposals, or direct engagement with the board. That said, shareholders do have the power to vote out or fail to re-elect board members. 

This means that Unilever could have dismissed the concerns of majority shareholders and proceeded with the compensation plan of its own volition. But doing so may have alienated its constituents — or worse, led to shareholders casting votes to eliminate board seats.

How Boards Can Respond to Shareholder Positions

The Unilever decision reveals the tension that exists between shareholders and executive leaders. What should boards do when they are at odds with the will of their shareholders?

Never Disregard Shareholder Influence

First, executive teams should never disregard the opinions of company shareholders. Again, boards have the power to make decisions independent of shareholders, whose votes merely serve an advisory function. But ignoring this counsel can have severe consequences. Had Unilever proceeded anyway, it could have faced future challenges from disaffected shareholders.

Instead, an unpopular shareholder position may signal an urgent need for continued engagement. Board members should seek to understand the reasons for a proposal’s rejection and identify any underlying problems that could create friction in future management decisions.

Engage Regularly With Shareholders

It’s vital that board members meet with shareholders. At the very least, compensation committees should consider some type of meeting with shareholders to get a better sense of shared values and priorities. Doing so prior to an actual meeting or vote can shed light on rising concerns.

Of course, if a vote comes as a surprise, this can likewise be a signal that the board needs to hear from shareholders. Asking for input from company shareholders can broaden a board’s perspective and may even point to an agreeable solution. 

Companies will flourish when they cultivate an atmosphere of trust, so engaging with shareholders should be a regular part of the board’s activities.

Introduce Transparent Pay-for-Performance Compensation Strategies

How Executive Pay Has Changed & Why It Matters

Sometimes, shareholders simply lack the context for a company pay increase.

If this happens, then CEO salary increases may come across as self-indulgent or out of touch with the company’s customer base. This is especially true in an era of high inflation, rising interest rates, and escalating global crises.

Boards can counter this issue by introducing transparent pay-for-performance compensation strategies.

For instance, connecting a pay raise to a specific benefit that a board member brought can help the compensation seem justified.

Alternatively, a pay increase based on a new role for a board member may likewise validate the compensation structure among shareholders.

Seek Avenues for Compromise

In the Unilever case, the shareholders were not directly opposed to the compensation increase. Instead, they were opposed to its timing, preferring a gradual increase rather than the direct pay bump contained in the proposal.

This raises the possibility of compromise between shareholders and compensation committees. Had the board engaged with shareholders prior to the meeting, it may have been able to devise a compensation strategy that allowed for an incremental jump rather than a two-year freeze. 

Granted, not all compromises will be effective, but dialoguing with shareholders can provide alternatives to the kind of shutdown that Unilever experienced.

Don’t Focus Only on Institutional Investors

Institutional investors yield considerable sway, especially with respect to say-on-pay votes. So naturally, boards may be tempted to prioritize these large institutional investors to ensure their interests are in alignment.

But this neglects the power of other company shareholders, whose values may not match those of institutional investors. In fact, in an age of shareholder activism, individual investors who wield charismatic authority can influence other shareholders toward a particular position or decision. 

Companies should take steps to engage a broad cross-section of their shareholders and not simply focus on institutional investors.

Emphasize Third-Party Compensation Consultants

When it comes to executive compensation, it’s not always enough to farm the decision out to your internal compensation committee. Instead, your board might consider a third-party compensation consulting firm, preferably one with the experience to understand your unique industry and situation. 

Outsourcing your compensation decisions to an external firm can help you in several ways. First, you’ll be receiving objective guidance from a trusted professional service. Second, the service will make recommendations based on your business data, current economic conditions, and industry trends. Third, the presence of a third party can eliminate any rumor or speculation that a pay increase is an act of self-indulgence. 

As a result, you’ll be better equipped to bring decisions before your shareholders, who may in turn be more willing to accept the proposal.

Aligning Needs and Values

The relationship between boards and shareholders is vital, both for the subject of compensation as well as the flourishing of the company as a whole. These strategies can ensure smooth conversation and help to bring executive needs and shareholder values into greater alignment.

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