Say on Pay: Approval Slides as CEO Pay Rises

Samar Feghhi is a Research Analyst at Equilar, Inc. This post is based on her Equilar memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein; the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried; and Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried.

Over the past year, COVID-19 has been the driving force behind shifting trends in corporate governance. With large unemployment rates at the beginning of the pandemic (13.8% in May 2020), a declining stock market and vast uncertainty, it has been a historical time to track whether the world’s most powerful executives would feel similar effects to the rest of the population. At the start, it seemed that they would. Executive compensation took a slight hit with CEO pay cuts and changes to long-term incentive plans, but the overarching question remained unanswered: Were these changes significant enough to align with the world’s hardships, or were companies more focused on retaining their highest-paid employees? With 2021 Say on Pay votes well underway, data surrounding executive compensation approval may provide an answer to this question and display if COVID-19 increased the disconnect between the boardroom and shareholders.

Equilar’s early look at 2021 Say on Pay results highlighted that out of the 43 companies in the Equilar 500 with disclosed votes, around 20% received under 70% approval (considered a failure by proxy advisory firm ISS). As of May 20, 247 Equilar 500 companies held their annual meetings with 8.9% in the under 70% mark and 3.6% receiving under 50%, or a failed vote.

Taking a look at the broader picture by analyzing the Russell 3000, 3.1% of companies have received less than 50% support so far, similar to the Equilar 500.

Comparing this data to the past five years, 2021 is projecting the highest failure rate, indicating that a growing disconnect between shareholders and compensation committees may be forming. The median voting results for the Russell 3000 further display this pattern with a slight downward trend in approval percentages.

The median approval for 2021 so far is 94.4%, a small decrease from last year and the lowest value yet. As more companies hold their annual meetings, watching the gap will help determine if companies responded adequately to the pandemic’s trials. If the gap widens, it could exemplify the lack of action by companies to adapt to changing times, confirming Equilar’s previous prediction that 2020’s dip in executive compensation was not enough to appease shareholders.

The current data regarding 2021 CEO pay further emphasizes the lack of sufficient compensatory change and its strong correlation with Say on Pay failures.

Although there’s a slight deviation in median pay in the 80-90% range, the overall trend is that of high median CEO compensation paired with low Say on Pay approval. Median CEO pay was around $17 million for companies that fell under 50% approval. This exemplifies that high pay continues to be a matter of concern for shareholders. Though some companies did lower compensation, the data suggests that shareholders may still view it as too high. It is important to note that though shareholders’ reluctance to approve high pay is not a new phenomenon, zooming in on individual companies provides insight into COVID’s role in intensifying this effect.

One failure this year, Starbucks, shows just that. In 2020, Starbucks paid its CEO $14 million, a drop from $19 million in 2019. Starbucks received a 47% vote this year compared to a passing 84% vote last year, despite the lower pay. AT&T witnessed a similar event, failing its vote regardless of an $11 million drop in pay. Walgreens Boots Alliance joined in with CEO pay roughly $1.6 million lower than last year but over a 35 percentage point drop in approval. Though various factors are possibly at play, it’s likely that the pandemic heightened shareholders’ criticism of unnecessarily high compensation. It seems natural that, with economic uncertainty, shareholders are more willing to express disapproval if companies aren’t bearing their share of the burden.

Though annual shareholder meeting season is ongoing, monitoring these results paints a solid picture of the changing relationship between shareholders and companies. It’s too early to decide whether companies have done enough to curb high compensation, but if the failure rate continues, the answer may become clear. This past year will unveil if a period of great uncertainty can change shareholders’ level of acceptance and affect real change in historically high levels of C-suite compensation.

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One Comment

  1. Memory Nguwi
    Posted Wednesday, July 21, 2021 at 2:02 pm | Permalink

    Am i right to say that when shareholders question CEO pay and executive pay in general they are questioning the value these employees are bringing versus what they are earning. If that is the concern it would be ideal to set a fixed lower base pay for CEO and tie the other components to an indicator such as EBITDA. The variable CEO component could be 0.002% of EBITDA. I do not see boards being agile enough to adjust CEO pay in real time in response to headwinds in the market.