2023 Say on Pay Surprisingly Favorable Despite Declining TSR

Say on Pay failures “unexpectedly decreased” in 2023 despite struggling TSR, according to a recent Pay Governance analysis.

Conventional wisdom states that in years with positive TSR performance, Say on Pay failures should be low, while in years with declining TSR, failures should increase. However, Pay Governance points out, this truism did not hold true in the 2022 and 2023 seasons. 2022 saw a record high of 22 failures, while 2023 has seen that number cut in half despite a 19% decline in 1-year TSR.

ISS “Against” Recommendations Down. A major factor was undoubtedly a decrease in ISS “against” recommendations from an average of 11.6% to 9.7% this year. The article delves into three key drivers:

• Fewer companies with consecutive “Against” recommendations. Companies receiving an “Against” in 2022 took decisive action to avoid repeating the experience, and made changes such as reducing discretion, removing overlapping metrics, increasing performance-based equity, eliminating single trigger vesting and excise tax gross-ups, and even (in a minority of cases) agreeing to target the 55^th percentile in relative TSR plans.
  
  
• Better relative alignment. Compared to previous years, especially 2022, companies performed better on ISS’s Relative Degree of Alignment test, reflecting that pay levels may have been better aligned with TSR performance.
  
  
• Better qualitative test results. There were fewer companies that received “Against” recommendations due to qualitative reasons such as P4P misalignment, paying severance upon voluntary termination, etc. However, it’s worth noting that there was an increase in companies cited for granting special one-time awards, reflecting ISS’s increased scrutiny of this practice. ISS does not support the use of one-time awards in almost any circumstance.

Outlook. On the one hand, we might expect ISS “Against” recommendations to decrease over time, as companies study the methodology and make changes calculated to please proxy advisors (and by extension, investors). On the other hand, ISS almost certainly will not allow the number of total “Againsts” to fall below a certain level, even if the methodology has to be changed to ensure this. We have seen “moving of the goalposts” before – if the normal tests don’t result in the appropriate level of failures, ISS may focus more attention on things like rigor of goals, target-setting, or equity plan proposals (see story below).