Responding to a Negative Say-on-Pay Outcome

David Whissel is Vice President and Director of Corporate Governance at MacKenzie Partners, Inc. This post is based on a MacKenzie Partners publication.

In the fifth full season of the advisory vote on executive compensation (“say-on-pay”), average shareholder support for these proposals remains high—in excess of 91% so far in 2016, according to our research. However, although there have been slightly fewer “failed” votes this year, more than 10% of issuers receive a negative recommendation from at least one of the proxy advisors, and many more spend the early part of the proxy season scrambling to deal with executive compensation issues preemptively to ensure that they do not develop into a negative outcome.

For those companies that believe historical high levels of say-on-pay proposal support makes them less susceptible to shareholder opposition, consider this: More than 25% of the companies with “failed” say-on-pay votes in 2016 received support in excess of 90% the previous year, suggesting that performance issues, substantial one-time awards, and other unique circumstances can strain the patience of investors even if the underlying compensation plan is sound. As institutional investors and proxy advisory firms continue to enhance their scrutiny on executive compensation, it is important for issuers to be prepared for a potential negative outcome and to have a plan in place to respond accordingly.

Fortunately, while there is no one-size-fits-all playbook for navigating a potential negative outcome, our experience in advising clients on corporate governance and executive compensation issues suggests that there is a core set of tried-and-true response tactics that tend to be effective with shareholders and the proxy advisory firms. By planning ahead and tailoring the appropriate response to the particular facts and circumstances of each situation, issuers can overcome the setback of a negative recommendation and earn the support of their investors.

Preparing for Say-on-Pay

Run the Numbers. Because of the sheer volume of say on pay proposals that they have to deal with, proxy advisors and many investors lean heavily on quantitative tools to promote efficiency. Though the mechanics of each screening tool will vary, they often reference substantially similar data points (e.g., total shareholder return).

Issuers should work with their compensation consultants, lawyers, in-house HR and proxy solicitors/corporate governance advisors to determine whether they are at risk of triggering any of the proxy advisory firms’ pay-for-performance alignment tests. Be advised, however, that passing a proxy advisor’s quantitative screen does not necessarily guarantee a favorable recommendation. From 2012 through 2016, 3% of issuers that received a “Low Concern” rating on ISS’ P4P Alignment Test ultimately received an “Against” recommendation; for companies that registered “Medium Concern,” that figure jumped to 22%. [1] Once a company knows that its pay practices will likely be subject to heightened scrutiny, it can begin crafting an investor communications strategy that addresses these potential concerns.

Prepare Your Proxy. Despite an increase in one-on-one dialogue between issuers and shareholders, the proxy statement remains an important communication tool. For some issuers, it is the primary means of showcasing their executive compensation philosophy to shareholders. As a result, issuers are increasingly using innovative features, such as eye-catching executive summaries and infographics. On the other hand, some companies still treat the proxy as a compliance document, and miss the opportunity to sufficiently tell their executive compensation story.

When used effectively, the proxy statement can draw a link between pay and performance, and can explain how a company’s compensation plan furthers its strategic goals. It can serve as a foundation for ongoing dialogue, and can also preempt shareholder concerns by putting potentially problematic pay practices in the right context. And for some smaller companies who may not have the same level of access to shareholders as their larger counterparts, it may represent the primary form of communication with the investor community on compensation issues.

Tell Your Story. The ubiquity of say-on-pay has engendered significant convergence of executive compensation practices over the past several years such that many plans now adhere to a familiar template. The fact remains, though, that the universalized analysis employed by the proxy advisory firms is somewhat at-odds with the notion that each issuer is uniquely positioned to develop an executive compensation structure that is appropriate for its particular long-term strategic plan.

For those issuers whose circumstances render them an outlier—a leadership change, for instance—it is important to craft a message that will resonate with shareholders. In most cases, simpler is better when it comes to corporate messaging, as investors often have limited time to digest arguments and cast their votes accordingly, particularly during the busy proxy season.

Start Shareholder Outreach Early. While the recommendations of the major proxy advisory firms often come in approximately three weeks before an annual meeting, that timeframe is frequently shorter during the busy proxy season, leaving unprepared issuers scrambling to respond to an “Against” recommendation. Fortunately, many potential executive compensation issues and negative recommendations can be anticipated, allowing issuers to plan ahead and begin their shareholder outreach early.

Leading up to an annual meeting, some shareholders prefer not to engage with issuers until the proxy advisory firms come out with their reports. Others, however, are more than willing to have a dialogue during the proxy solicitation period as long as the proxy statement has been filed, and many of the big funds are happy to speak with issuers during the off-season.

By understanding their shareholder base, companies can plan their engagement efforts accordingly, allowing for greater flexibility in the event of a negative recommendation. Developing relationships with investors in the off-season can be critical, as it allows issuers to communicate their pay-for-performance philosophy without being defensive or reactionary. And, by planning ahead and staggering in-season engagement over the course of a month (or more) rather than a couple weeks, issuers can avoid the “last minute shuffle” and ensure that all shareholders receive adequate time and attention from the board and senior management.

Responding to an “Against” Recommendation

Gauge Appropriate Volume, Tone, and Audience of Response. A negative recommendation from a proxy advisory firm can be frustrating, particularly if that recommendation is predicated on a factual error or a misunderstanding. However, issuers should generally avoid adopting a defensive or accusatory posture and openly criticizing the proxy advisory firm and its compensation evaluation model. Instead, it is better to counter the proxy advisory firms’ arguments through the careful presentation of countervailing evidence and/or a compelling “story.”

Issuers should also consider the audience of the response. The proxy advisory firms are reluctant to change their initial recommendations unless they are based on material factual or interpretive errors, which are relatively rare. Companies are usually better off spending time engaging with shareholders and addressing the issues directly in these conversations. Though the proxy advisory firm recommendations are influential, most large institutional shareholders have their own guidelines and are tired of hearing why the proxy advisors got it wrong.

Consider a Supplemental Filing. A supplemental proxy filing can be useful in responding to a negative proxy advisory firm recommendation for a variety of reasons. The filing can clarify or draw attention to issues that may not have been adequately explained in the CD&A. Some of these reasons, however, are more subtle. A supplemental filing can provide “cover” and a public record for proxy voting personnel or portfolio managers to override a proxy advisory firm’s recommendation or make their case before a proxy committee. And, a supplemental filing can provide a foundation for shareholder engagement by providing the appropriate context and focusing the discussion on the core compensation issues.

An additional reason for drafting a supplemental filing is that it can be helpful in preparing for next year’s say-on-pay vote. The simple act of looking at your executive compensation plan with a hyper-critical eye and responding to criticism can help uncover possible deficiencies and identify strengths. The information learned during this exercise can then be applied in the future to optimize plan structure, refine presentation in the proxy statement, and guide interactions with shareholders.

Decide Whether to Emphasize Facts or Philosophy. When opting to respond directly to the criticisms of the proxy advisors, there are two general paths an issuer can take: i) a facts-based approach, which seeks to counter the arguments of the proxy advisors though the use of data; or, ii) emphasize its “story,” explaining why its pay-for-performance philosophy aligns with its business strategy.

Either or both approaches may be appropriate depending on the specific facts and circumstances facing the company. For example, a company undergoing a leadership change might adopt a story-based approach, emphasizing the fact that theirs is a special case and carefully explaining why each compensation decision made with respect to the former and new CEO is consistent with its overall pay-for-performance philosophy. On the other hand, a company that disputes its inclusion in a proxy advisory firm’s GICS code-based peer group might do so on the basis that only a small portion of its revenue is derived from a particular segment, or that certain unique factors justify its selection of an “aspirational” peer group.

In order to ensure consistency, the proxy advisors’ policies are generally inflexible by necessity, so issuers should not expect to change their conclusions even with the most convincing and artfully written supplemental proxy filing. Issuers should generally focus their efforts on their shareholders instead.

Highlight the Positives. A point-by-point refutation of the proxy advisory firms’ criticisms can be helpful in correcting misinformation, but should not be the sole focus of supplemental filings. Instead, much of an issuer’s response strategy should emphasize the positive elements of its executive compensation plan and explain how they contribute to a healthy pay-for-performance culture. This should involve a discussion of adherence to compensation “best practices,” such as a robust clawback policy, as well as an explanation of why an issuer’s compensation plan is the optimal one for its particular industry and is aligned with long-term shareholder value.

Some of the practices commonly highlighted include:

  • A track record of consistently high (95% or more) shareholder support;
  • A significant majority of pay at-risk;
  • A close link between pay and performance, as demonstrated through objective performance metrics;
  • A long-term perspective, through the use of equity awards;
  • Rigorous minimum executive stock ownership guidelines;
  • A robust clawback policy;
  • Anti-hedging and anti-pledging policies;
  • Restrictions on option repricing without shareholder approval;
  • Lack of tax gross-ups upon a change in control; and
  • Double-trigger change in control provisions.

This list is not exhaustive by any means, but encompasses the basic “best practices,” many of which have become commonplace over the past five years.

Engage Effectively. While the negative proxy advisory firm recommendation may sting, the shareholder vote is what matters, so getting your message in front of investors is critical. Proxy solicitors can be instrumental in these situations, helping to identify which shareholders can be swayed, crafting a communications strategy based on the preferences and policies of each shareholder, arranging meetings with proxy voting personnel and portfolio managers, and projecting potential voting outcomes.

In preparing for shareholder engagement, it’s important for issuers to determine in advance the personnel that will spearhead the outreach efforts. Different shareholders and topics of discussion will require different representatives and different skill sets. For example, an issuer that has received a negative recommendation from the proxy advisory firms will generally be expected to include the chair or a member of the Compensation Committee in dialogue with shareholders, as investors will want to discuss the thought process behind certain compensation decisions.

It is likewise important to determine who to engage with. At some institutions, portfolio managers make the bulk of the proxy voting decisions. Other institutions rely on a proxy voting committee, and the larger institutions may have specific in-house corporate governance personnel to analyze and cast votes. Every investor has a slightly different approach to proxy voting, and it is important for issuers and their advisors to be mindful of these differences to ensure that engagement efficiently reaches the key decision-makers at each firm.

Planning Ahead for Next Year

Make Changes, If Necessary. The shareholder communications feedback loop would be incomplete without responsive action, and it’s easy to see why. It would likely reflect poorly on management and the board if they listened to investors’ and proxy advisory firms’ concerns, but did nothing. Issuers that fail to generate an adequate response to a negative outcome are likely to face similarly low levels of shareholder support the following year, and also risk having shareholders vote against the reelection of Compensation Committee members.

What exactly the appropriate action should be will vary by issuer. For some, additional disclosure and clarification will be enough. For issuers faced with a negative proxy advisory firm recommendation and/or voting outcome, deeper structural changes to executive compensation may be necessary to avoid a similar issue in the future. Issuers should carefully consider which shareholder-driven changes align with its executive compensation philosophy and thoughtfully discuss the consequences of those changes with their outside counsel, compensation consultant, proxy solicitor, and other advisors.

Don’t Forget the Proxy Advisors. Direct dialogue with shareholders should be the focus of any off-season engagement efforts. However, some issuers use the off-season as an opportunity to engage with the proxy advisors as well. The research teams of the proxy advisory firms are inundated during proxy season, and it can be nearly impossible for even the largest corporate issuers to secure an audience during the traditional proxy solicitation period in the spring. During the off-season, however, the major proxy advisory firms generally welcome the chance to engage on a variety of compensation and governance issues. This can represent an important opportunity for companies to develop relationships with the analysts at proxy advisory firms, and to gain additional perspectives on their policies.

Disclose Engagement. An effective shareholder outreach program is, to some extent, its own reward, as the benefits gained (i.e., insight into investors’ policies and concerns) can be invaluable. But in order to receive “full credit” for off-season engagement efforts, issuers should carefully disclose the details of the program in the following year’s proxy statement.

The most fulsome disclosures typically describe how many shareholders the company contacted, how many responded, the topics of discussion, and any actions taken in response. For investors, the general rule around disclosure is, “The more, the better,” so companies should consider adding a detailed description of shareholder concerns (“What We Heard”) and any corporate governance enhancements that followed (“What We Did”), particularly if the previous year’s say-on-pay support was less than 75%.


For issuers and their boards that devote a significant amount of time every year to calibrating their executive compensation plan, a negative recommendation from one of the proxy advisory firms can be demoralizing, but a failed vote should not necessarily be viewed as a foregone conclusion. Our research suggests that the average impact of a negative recommendation from ISS is approximately 25%, but that the overwhelming majority of say-on-pay proposals that receive an “Against” recommendation from ISS still pass.

A winning shareholder communications strategy can and often does overcome a negative proxy advisory firm recommendation and prevent a weak or failed say-on-pay vote. A strong shareholder engagement plan enables issuers to convey their executive compensation philosophy to investors in a compelling manner and, importantly, understand concerns that they can address in the off-season.

Ultimately, consistent and meaningful dialogue is the best way to strengthen relationships between issuers and shareholders, and these outreach efforts can pay dividends in the event of a negative proxy advisory firm recommendation or other contentious voting situation.


1 “2016: United States Proxy Season Review—Compensation.” Institutional Shareholder Services. September 22, 2016. Available for ISS subscribers here.(go back)

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