The history of shareholder engagement in corporate governance has many origins and has taken many paths. In large part, investor scrutiny toward executive compensation and its link to company performance and shareholder value permeate much of these discussions.
Just over a decade ago, the U.S. Congress passed Dodd-Frank, which was aimed largely at reform among financial institutions following the Great Recession but subsequently had a significant influence on corporate reporting through mandates levied upon the Securities and Exchange Commission (SEC). As part of that Act, a mandatory requirement for a shareholder vote on executive compensation, better known as Say on Pay, initiated a dialogue on pay practices that has continued to deepen.
Starting with Say on Pay, a number of additional executive compensation disclosure rules have been passed or proposed by the SEC, bringing greater attention to the matter (Figure 1). These provisions have empowered shareholders to gain a greater understanding of executive pay practices, and with that knowledge and clarity, they have felt more confident voting against a pay plan when they feel it is warranted.
In the past five years, the percentage of companies receiving at least 95% approval for Say on Pay has declined quite sharply, according to Equilar data. In 2020, just 29.1% of Equilar 500 companies earned such high marks from their investors. This was a significant drop from nearly half of all companies, 48.4%, that received 95% approval or higher in 2016.
While most of the shift has been to the 90%–94% range, the share of companies receiving 70%–90% and less than 70% approval has steadily grown. Approximately three in 10 companies received lower than 90% approval, up from about 25% in 2016 (Figure 2).
The data for 2021 so far looks to be trending in a similar direction, with a small number of Equilar 500 companies holding annual shareholder meetings as of March 24 (at the time of writing of this article).* However, when companies did not receive over 90% approval so far this year, a groundswell of support against Say on Pay has been much more likely. Nearly 20% of the companies that have held annual meetings in 2021 have received less than 70% approval, which is widely considered failure. Given the small sample size of 2021, it’s difficult to predict how this early trend toward higher “danger zone” votes will track, but considering the turmoil of 2020, it’s not unreasonable to believe this may continue.
While very few Equilar 500 companies receive minority approval, the number of companies that have received a failing vote has ticked up steadily over the years. A brief outlier from the smooth growth curve in failures occurred in 2018, which may have been related to the first year of the CEO Pay Ratio disclosure rule (Figure 3).
The ultimate question is how much Say on Pay voting trends will affect compensation levels. To date, the rule has not curbed a rise in the quantum of pay. While CEO pay trends show that overall executive pay is likely to dip for 2020, it’s unlikely to be significant. Amidst mass unemployment and budget cuts during the pandemic, civil unrest with respect to racial inequity, and perpetual and increasing income inequality, investor reaction to a perceived gap between corporate leaders and rank-and-file workers will be an important trend to watch over the next 10 years.