What Do Shareholders Say on Pay?

In spite of a 2011 federal rule that allows public-company shareholders to weigh in on CEO compensation, a recent study found that executive pay at large public companies has continued to increase. The 2018 Equilar CEO Pay Trends report nevertheless found that companies tended to lower CEO pay after shareholders disapproved of compensation in multiple years.

Investors weigh in

The Dodd-Frank Act passed after the 2008 financial crisis requires public companies to provide investors a “say on pay.” In January 2011, the SEC published Release No. 33-9178, Shareholder Approval of Executive Compensation and Golden Parachute Compensation. This rule aims to curb excessive pay by allowing shareholders to vote on executive compensation at least once every three years.

Although such votes aren’t binding, they let shareholders show boards what they think of executive compensation arrangements. In the year following a say-on-pay vote, companies must disclose in proxy statements how they responded to that vote.

Does it make a difference?

Equilar, a corporate research firm, analyzed filings by the 500 largest-revenue companies to determine the effect, if any, that the say-on-pay rule has had. The study, published in February 2019, found that compensation has continued to rise since the rule took effect eight years ago.

“Intuitively, it seems possible that CEO pay should decrease since it is under the scrutiny of a large number of shareholders. However, the data reveals a different story,” said Equilar.

The study revealed that median CEO compensation from 2011 to 2018 was $9.5 million, while the median pay before Dodd-Frank was signed into law in 2010 was $6.6 million — a 43.9% increase. The research firm attributed higher pay to economic growth after the financial crisis.

However, the analysis also showed that, when a company fails its say-on-pay vote multiple times, it usually tries to align CEO compensation with industry standards. In fact, at companies that failed multiple say-on-pay votes, average CEO total compensation decreased 44.9% from 2011 to 2017.

The study highlights Bed, Bath & Beyond Inc. as an example of the “moderating effect” multiple say-on-pay failures can have over time. In 2014, Bed, Bath & Beyond shareholders voted down its CEO’s compensation, but it nevertheless increased the executive’s option and stock awards for 2015. Unsurprisingly, the vote was thumbs-down again in 2015. In response to recurring shareholder disapproval, the company then decreased CEO compensation by 20.9% from 2015 to 2017.

“This shows that [Bed, Bath & Beyond] made a concerted effort to gain approval in the eyes of its shareholders,” Equilar said.

Incremental corporate change

Initially, Equilar’s study concludes, had little influence over increasing executive compensation. Now that public companies are accustomed to receiving shareholder feedback on pay, though, changes are noticeable.

“Over time, compensation professionals realize the power of [say-on-pay votes] and take appropriate actions,” concludes the study. Although say-on-pay votes may not have a direct influence, “the continuity of attention by shareholders and proxy advisors over the executive pay issue is an increasingly significant feature of the corporate governance and executive compensation landscape, and will likely continue to be so.”

What next?

Does your company have a plan for managing and reacting to shareholder votes on executive compensation? Contact Weaver  for help balancing everyone’s interests, so that you can achieve the best outcome over the long run.

© 2019