Say-on-Pay Failed Votes Double in 2021: 4 Things to Know - Banner

Say-on-Pay Failed Votes Double in 2021: 4 Things to Know

May 21, 2021

Mandated under the Dodd-Frank Act, say-on-pay is a nonbinding, advisory shareholder vote on the compensation policies and decisions for the company’s executive officers. Companies are required to disclose (usually in their proxy statement) how their compensation strategy has taken into account the results of their most recent say-on-pay vote, but are not required by law to make any changes based on the vote. Still, say-on pay can be a measure of shareholder perception of the company’s executive compensation practices.

Over the decade since Dodd-Frank mandated say-on-pay, companies and shareholders have seen increasing alignment between executive compensation and shareholder reactions – very few companies “failed” their say-on-pay vote in recent years. A failure occurs when the company doesn't obtain majority support from shareholders for the say-on-pay vote.

The rare "nay" on pay vote seemed to be mostly an anomaly, at least until this year, where we are now seeing a significant uptick in the number of failed say-on-pay votes. In fact, the number of failures this year (based on 2020 compensation) is at a record level. Here’s what you need to know about the current lay-of the-land for say-on-pay:

  1. Failure rates in 2021 so far are at least twice as high as 2020 and 2019 levels. ISS reports that 4.7 percent of proposed pay packages among S&P 500 companies have failed in 2021 so far, a jump from 2 percent in 2020 and 1.5 percent in 2019. Similarly, Semler Brossy reports that “The early-season Say on Pay failure rate of 4.2% is twice as high as the 2.1% failure rate observed at this time last year, and the 89.0% vote result is well below last year’s average. These early trends suggest shareholders may be more critical of those who made significant changes to executive compensation without descriptive disclosure for the rationale of those changes.”

  2. Many companies are experiencing a “failed” vote for the first time. Among the companies who’ve experienced shareholder rejection of 2020 pay, representing their first failed say-on-pay vote since inception, are Starbucks, Walgreens, AT&T and Marathon Petroleum Corporation.

  3. The COVID-19 pandemic is expected to drive changes in executive pay. ISS reports that they have “observed companies making a variety of changes to executive compensation programs in response to the pandemic. These changes are likely to figure prominently in the analysis of say-on-pay proposals in 2021.”

  4. Insulating executive compensation due to the pandemic appears to not sit well with shareholders. In cases where shareholders are returning a “nay” vote on pay, there seems to be a significant number of situations where top executive pay increased or was protected, even if the company experienced negative COVID-19 pandemic related impacts.

Companies who do fail to obtain majority shareholder support for their executive compensation plans should solicit shareholder feedback. Particularly in this unusual pandemic year, there are likely to be unique concerns or factors that may have played a role in shareholder dissatisfaction with compensation. It will be worthwhile to determine whether pandemic variables were driving factors and what short or long term adjustments to compensation practices may boost favorable shareholder attitudes.