Say-on-pay support increases for first time in five years

Investors have shown their support for shifting company pay policies, with say-on-pay approvals increasing for the first time in five seasons.

Enhanced disclosure and fewer out-of-plan pay awards helped boost investor support, according to new data. Investors also responded well to compensation cuts driven by the 2022 down market.

‘In 2022, the S&P 500 index’s total return was -19.4 percent and companies generally responded as investors would expect, with average granted compensation for companies in the index decreasing to $15.7 mn in 2022, down from $17.5 mn in 2021,’ according to analysis from Diligent.

With investors responding positively to more modest CEO payouts, 2023 marks the first proxy season in five years where support for advisory say-on-pay proposals at S&P 500 companies increased in comparison with the previous year. This year, S&P 500 firms enjoyed, on average, 88.9 percent support. This is up on a recent ‘bottoming out’ of 87.7 percent in 2022 – and the first year-on-year increase in five proxy seasons – but remains below the 92.1 percent average seen in 2017.

‘You’re seeing the fruits of the labor of company engagements,’ says Brian Valerio, senior vice president at Alliance Advisors, in an interview for the Diligent Market Intelligence report. ‘Companies have been engaging with shareholders to understand their compensation philosophies and craft plans that align with company needs, but also drive value for investors.’

Moving away from one-time awards

One of the changes to have most impacted investor sentiment around executive compensation is a shift away from one-off payments, which previously resulted in some outsized pay packets that investors saw as misaligned with performance. BlackRock, the world’s largest fund manager, also notes a move away from out-of-plan awards. Its 2023 season review records a drop from 427 such payments in 2022 to 323 this year.

One of the biggest pay revolts of 2022 ‘due to significant one-time equity awards’ also became one of the biggest turnaround stories of the 2023 season at technology giant Intel.

‘Intel’s 2023 pay plan was opposed by just 8.1 percent of votes cast, compared with 65.9 percent a year prior,’ notes Diligent. ‘The rise in support was largely attributed to CEO Patrick Gelsinger’s 90 percent pay cut in 2022 from $178.6 mn to $11.6 mn.

‘BlackRock was among the many investors to oppose the 2021 pay plan, noting in a voting bulletin that Gelsinger’s 2021 one-time equity award and base pay were ‘misaligned with shareholders’ long-term interests.’

While Intel’s pay revolt was at the more extreme end of the scale, ‘similar situations presented themselves at both CenterPoint Energy and JPMorgan Chase’s 2023 annual meetings, where say-on-pay plans won higher support than seen in previous years, after CEOs took [granted pay cuts of] 63 percent and 59 percent, respectively,’ according to researchers.

Pay vs performance

A new rule adopted by the SEC in August 2022, requiring US-listed companies to disclose specified executive pay for the past five fiscal years, has reportedly had little impact so far. The pay-versus-performance disclosure rule also requires companies to report total shareholder return, net income and between three and seven financial or non-financial measures considered when aligning executive pay with company performance.

Valerio tells researchers it remains ‘too early to tell’, with shareholders largely uninterested in discussing the rule change. Bruce Kistler, managing director at Okapi Partners, adds: ‘These disclosures likely would have had significantly more value 10+ years ago when they were originally contemplated under Dodd-Frank. But many investors and advisers have developed and refined their own models since then.’

The regulation is, however, having an impact on pay support, says Diligent, reporting that in its US 2023 season review, Vanguard revealed it supported 95 percent of US management pay proposals, ‘thanks to companies being more open about ‘how they planned to modify their disclosures’ to aid investor decision-making’. It attributed this to the new pay-vs-performance legislation.