2022 Brings More “Nays” in Say on Pay

Companies of all sizes faced the lowest Say on Pay support so far this year but the failure rate for S&P 500 companies seems to be breaking the typical pattern seen over the past ten years. In 2022, one-third of S&P companies received lower than 90% support (an increase from an average of 24% during the prior 5 years). This statistic is compared to the average vote for Russell 3000 companies (not in the S&P) which has maintained the same support levels over the same period, creating the widest gap (90.1% versus 87.5%) between the two indices since the inception of Say on Pay.

A Semler Brossy article examines the historical voting “waves”, the factors that influence the ebbs and flows of shareholder support and provides insights into their assessment that institutional investors and proxy advisory firms are holding large cap firms to higher expectations.

The early years of Say on Pay resulted in higher failure rates due to growing pains with investors building and refining their policy framework and companies learning how to better communicate their pay philosophy and programs. As companies adapted to the new expectations and standards became clearer, voting support increased.

But the emergence of ESG governance has resulted in what the article describes as a “stage of chaotic progression.” State Street and BlackRock have weighed in on topics that go far beyond pay for performance, indicating they will vote against directors for issues like EEO-1 disclosure, climate disclosure and board diversity– and they often target the S&P 500 first.  Yet guidance from the investor community and proxy advisors is divergent, with investors such as Alliance Bernstein expecting ESG metrics in executive pay programs while State Street and others are skeptical, warning that metrics must be specific, quantitative and connected to long-term goals. Some investors have suggested it would be inappropriate to tie any ESG goals to pay.

What is clear is that shareholder expectations evolve. The Semler Brossy article discusses whether large companies are under more scrutiny than smaller companies and if so, what this means for future vote results, especially with the 2022 financial downturn.   They suggest the following considerations for companies and boards:

• Be very wary of special awards as a retention tool in response to the volatility of the stock market and a continuously challenging business environment, as investors may question your rationale for repeatedly adjusting during downturns.
  
  
• Ensure you meet the minimum investor expectations for ESG topics and stay current on evolving guidance and implications for Say on Pay voting.
  
  
• Large-cap companies must continue to “lead the way” in responding to changing investor and proxy advisor guidelines as these firms will incur more criticism from all stakeholders and the media for any perceived misstep.