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As U.S. “say on pay” proposals face mounting opposition year-on-year, investors are making clear that they expect U.S. companies to enhance their compensation-related disclosure.
In 2021, average support for S&P 500 “say on pay” proposals dropped to 88.9% from 90.3% and 89.7% in 2020 and 2019, respectively. Last year, 17 “say on pay” proposals failed to win majority support from shareholders, compared to nine and 10 the previous two years, according to data from Insightia’s Voting module.
“[In 2021] we saw increased failures on ‘say on pay’, particularly among companies within the S&P 500,” Brian Valerio, vice-president in the proxy solicitation group at Alliance Advisors, told Insightia in an interview. “The reasons for the failures were diverse, but some common themes emerged, with shareholders strongly opposing disconnects between pay and performance, adjustments to long-term incentive plans (LTIP), and overall pay magnitude.”
If the first few months of 2022 are any indication, pay revolts are likely to continue. Average support for S&P 500 “say on pay” proposals dropped to 85.1% in the first two months of 2022. Glass Lewis endorsed 80.8% of remuneration reports over the same period, compared to 85.7% and 87.1% in 2020 and 2021.
Opposition towards executive pay packages has become so significant that the Securities and Exchange Commission (SEC) is considering making amendments to pay disclosure policies. On January 27, the U.S. regulator reopened the comment period on proposed “pay versus performance” rules, which form part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Investors have flocked to share their thoughts with the U.S. regulator on what form mandatory remuneration disclosure should take, but the question remains as to whether the SEC will prioritize investor needs in its new policy?
A difference of opinion
Under the SEC’s current policy, U.S. issuers are required to provide shareholders with an annual advisory vote on their executive compensation plans. Companies must disclose their total shareholder return (TSR) and CEO-median employee pay ratios in both their annual reporting and proxy statements.
Emerging growth companies, companies with a public float of less than $700 million, and foreign private issuers are exempt from the CEO-median employee pay ratio disclosure requirement.
The U.S. regulator’s proposed changes to Dodd-Frank Act would require issuers to disclose additional performance measures beyond TSR, including pre-tax net income and a tabular list of the five most important performance measures used by a company to determine compensation actually paid.
SEC Chair Gary Gensler said the proposed rule would “strengthen the transparency and quality of executive compensation disclosure,” providing shareholders with the information they need to evaluate a company’s executive compensation policies.
Not all SEC commissioners were in favor of the proposed amendments. Republican Commissioner Hester Peirce argued that these supplemental requirements would “increase the burdens of public company reporting but seem likely to be of dubious use to investors.”
Shareholder comment letters, however, suggest different. Proposed compensation disclosure amendments will be both rigorous and far-reaching if investors have anything to say about it.
In its comment letter to the SEC, the Council of Institutional Investors’ (CII) argued that in order for the regulator to “fully capture” the original intent of the Dodd-Frank Act’s provision, the final rule must require companies to disclose all the quantitative metrics and thresholds they use when determining named executive officer (NEO) pay.
The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) similarly called for disclosure of quantitative performance metrics, as well as numerical formulas that compensation committees use to set executive pay, while Ohio Public Employees Retirement System (OPERS) seeks disclosure of individualized executive officer compensation to discern whether companies are taking suitable steps to “retain talented non-executive officers.”
ESG joins the debate
Investors were also eager to tout the importance of ESG metrics, especially those related to a company’s climate strategy. As You Sow, Oxfam America, and Ceres urged the SEC to mandate disclosure of non-financial performance metrics.
According to a 2021 report by consultancy firm Semler Brossy, 57% of the S&P 500 companies included ESG metrics in either their annual or LTIP between March 2020 and 2021. As such, Ceres argued that executives “should be incentivized via clear, transparent, and publicly disclosed compensation packages, where achieving sustainability goals has a meaningful impact on the proportion of compensation awarded.”
“This year, executive compensation resolutions will face even more investor pressure to embrace ESG-related measurements, in particular, with climate change metrics,” Domenic Brancati, global chief operating officer at Georgeson, told Insightia in an interview. “It is especially important to keep investors apprised of the progress of various ESG initiatives such as the reduction of emissions, new challenges, and mitigating factors that may cause misalignment or a change in criteria.”
Since the appointment of new SEC staff, following President Biden’s election, the U.S. regulator’s policy changes have acted largely in investor interests. The SEC no longer permits the exclusion of shareholder proposals from proxy statements that can be considered “socially significant” and its recently announced climate change policy will only further aid investors in their efforts to accelerate corporate engagement with ESG.
As such, it wouldn’t be surprising to see investor desires once again become reality, whenever “pay for performance” rule amendments are finalized.