Increase in Proxy Advisory Firm Influence Is the Primary Impact of Say on Pay, Directors Say

October 10, 2014

According to PricewaterhouseCoopers' 2014 Annual Corporate Directors Survey, two-thirds of directors believe say on pay has failed to right-size CEO pay and 80% say that proxy advisory firm policies do not align with investors' interests.  The study was conducted in the summer of 2014 and provides data from more than 800 public company directors, 70 percent of whom serve on the boards of companies with annual revenues in excess of $1 billion.  Other items related to compensation and governance include:

  • Consultant Influence Increases  Directors report that compensation consultants continue to have the most influence among outside entities over their decisions on pay, with 48% of directors describing them as "very influential" (up from 36% last year).  Only 17% of directors described investors as "very influential," compared to 22% last year, perhaps reflecting that many companies are taking a new look at incentive plans.

  • Impact of Say on Pay  The vast majority—83% of directors—believe the "real impact" of say on pay has been to increase the influence of proxy advisory firms.  In addition, directors believe say on pay has encouraged them to "look at compensation disclosure in a different way," with 84% saying they at least somewhat agree with this statement.  Beyond not impacting the level of pay, almost a third believe it has failed to improve investors' understanding of pay practices.

  • Concerns With Proxy Advisors  Not surprisingly, 85% of directors reported they are concerned with proxy advisors' "one-size-fits all" approach to governance while 80% say their policies do not align with investors' interest and proxy advisors' business models have potential conflicts of interest.

  • Director Communications  Director engagement increased across all categories compared to last year, with almost a third (30%) of directors reporting they increased communication with company employees, and 25% reporting increased contact with investors and external auditors.

  • Risks of Director Engagement  Although 73% of directors now believe it is at least "somewhat appropriate" to discuss executive compensation with investors, almost all of them are at least somewhat concerned about the potential for "mixed messages," and 89% worry about "special agendas when investors seek direct communications with the board."