After a proxy season with the lowest say-on-pay failure rate since 2017, compensation committees could be forgiven for being relatively optimistic about the 2025 voting season. However, scrutiny of investor compensation practices remains weak. A closer look at the 2024 proxy season highlights how investors and proxy advisors continue to have high expectations of companies of all industries and sizes when it comes to paid program design and decision-making. .
Research into the outcomes of companies that have struggled to receive Say on Pay support this year shows the need for stronger disclosures around remuneration, particularly in scenarios where investors could see them as departing from best practice. I started to see my sexuality. Kathryn Neal, managing director of Semler Brossie, told directors attending a recent general meeting that today's shareholders increasingly want to know not only the 'what' but also the 'why' and 'how' of remuneration decisions. He said he was looking forward to it. corporate director A roundtable discussion was held in partnership with Semler Brossie.
Common issues contributing to say-on-pay failure in 2024 include one-time bonuses, recognition of less rigorous performance targets, and lack of discretion or qualitative evaluation to adjust or determine incentive payments. use, etc. “Disclosure expectations are much higher in these scenarios,” Neal said, noting that compensation committees may be so focused on executive compensation design and process that they spend less time on disclosure. “When I talk to companies that didn't do well with Say on Pay, their biggest regret is how the committee made its decision, what factors it considered, what analysis it did. , the advisors they consulted and the process they went through, even if things had changed or their goals had changed from the previous year, they didn't think to explain it.
proxy power
Conversely, companies that leverage their power of attorney to proactively address potential vulnerabilities may be able to avoid investor ire. For example, when railroad company CSX was taking a compensation action that it recognized as potentially controversial, the company's compensation committee worked closely with its communications team to draft a comprehensive compensation disclosure statement. Board member Steve Halverson said the company was able to allay investor concerns. Chairman of CSX's compensation committee.
“We've been frustrated in the past because we thought we were doing the right thing for the right reasons, but it just didn't seem to resonate with our proxy advisors or with certain shareholders.” he explained. “So we played a key role in drafting a draft that went deeper into not just what we did, but why and what we thought. And it led to dramatic changes. We got very positive results from our shareholders. Sometimes things that seem obvious need explanation.”
His views resonate with Luis Caldera, director of Granite Construction, Meritage Homes and Dallas News Corp., who believes companies in cyclical industries are adjusting their performance benchmarks to adapt to changing market realities. He said that the need to do so is easily misunderstood by investors. “It's important to clearly articulate how performance-based compensation metrics are tied to strategy, especially in a cyclical business,” said Caldera, chair of Meritage's compensation committee. Yes,” he said. “If you're setting a different benchmark than in the past, when in fact there's a very good and rational reason for it, to people who aren't paying close attention, you're just lowering the bar for maximum dividends. It may look like that. That's what I'm doing.
Ideally, large companies would not only take the time to create compelling proxy disclosures that clearly communicate how the company's compensation design and decisions align with strategy, but also provide shareholder Neal said resources will also be devoted to outreach efforts. “Investors increasingly expect large-cap companies to engage with shareholders and have conversations that clearly connect the dots to justify compensation decisions.”
Robust information disclosure combined with shareholder outreach can also help avoid costly and time-consuming shareholder proposals. Common themes in shareholder proposals in the 2024 proxy season include calls for clawback provisions, stock ownership requirements, and stock ownership guidelines, and in some cases, companies that have already adopted such measures. Sometimes proposals were put to a vote. “The counter-argument from some companies was basically, 'We already have this practice in place,'” Neal said. “In at least some of these cases, we found that the disclosures were not that clear, but this is an opportunity because it is cumbersome for companies to receive shareholder proposals and have to go through that process.” Looking ahead to the 2025 proxy season, looking back at 2024 proposals can be a useful exercise for compensation committees to look for and fill disclosure gaps.
Although a powerful tool, clear communication has its limits, several roundtable participants noted, making it difficult for compensation committees to do what's right for the business or consult with proxy advisors and shareholders. He pointed out that there are times when it is necessary to choose between passing and passing.
Some actions, even if justified, will always receive a negative vote from agents who take a no-exception stance to some say-on-pay decisions. That is why it is necessary to ensure thorough communication with stakeholders. “We all spend a lot of time thinking about our advisory firms because these unusual behaviors tend to be scrutinized,” said Gary Culler, director of Hillenbrand and Hyster Yale. Ta. “But no matter what Glass Lewis or ISS say, there is an opportunity to talk to the actual shareholders involved and make sure they understand where the decisions we have come from. At the end of the day, What really matters is the relationship with the shareholders whose votes will make a difference.”
Drivers of decision making
Several participants noted that while the focus of compensation design and decision-making should always be on developing practices that drive long-term value creation, that philosophy is not always embraced by agents and investors. pointed out. Raj Gupta, a former director of Delphi, Aptiv, HP, and Tyco, says, “Nobody knows that the majority of executive compensation comes from long-term earnings, growth, and stock price appreciation, not from annual incentive plans.'' I am aware of this.” He questioned a compensation program that places too much emphasis on the performance of business units. “Unfortunately, a lot of the pressure on quarterly profits and other things is short-term driven…When it comes to compensation, companies need to think about not just business unit performance, but business unit performance and leader performance. The question is how to promote this through corporate performance.”
“It's our job to pursue long-term value,” Collar agreed, adding that a lack of a long-term view by shareholders could undermine retention efforts. “When you have a bad year and you're trying to balance what you need to do to keep your team going, you sometimes get visits from shareholders who don't necessarily have the long term in mind.” Compensation committees However, companies may need to risk a negative vote on pay if they consider exercising their discretion to adjust bonus payments to be essential to retention.
Some directors also view the recent backlash from investors against compensation programs that tie incentive pay to diversity and inclusion metrics as short-sighted. “In the next 10 to 20 years, we will reach a time when the majority of people living in America will be people of color, and organizations will have to decide who makes their products, who sells them, and who will continue to sell them. to buy them,” said Herman Bulls, director of USAA, Host Hotels, Fluence Energy, and Comfort Systems. “It's like a frog in the water. What you do with it isn't going to make a difference today, next week, next month. But when you think about what's going to happen over the next few years. , without the foundation of having a diverse leadership team, you're not going to be as successful.”
Like many companies, CSX plans to continue the practice of including such metrics in its compensation programs. “We're not going to take a step back,” Halverson said, acknowledging that the decision could put the company at risk of litigation. “Frankly, we have a 180-year history of not being kind to women and not being kind to our race, so we felt it was strategically important not to retreat. It was an easy conversation. It's even more difficult. The conversation was, “How much should we talk about?” We came to the conclusion that we need to talk about this the way we always do, because muting our voices sends the wrong signal to our team. ”
Decisions regarding CEO pay are also a controversial area. Caldera cited the Delaware Court of Chancery's decision to revoke Elon Musk's pay package as an example, citing Musk's friendships and business relationships with Tesla's independent directors as a factor in why the plan was reconsidered. It was pointed out that it became. “The directors were reminded that if they failed to meet the independence test, the business judgment rule would lose its value,” he said.Tesla shareholders eventually recovered the package, but the ensuing dispute pointed out that the underlying theme is an extension of the problem. The long-term value dilemma. “The divisive shareholder opinion on this package goes back to the conversation that compensation is about creating long-term shareholder value, but what percentage of shareholder value goes to CEOs and executives, or what percentage of shareholder value goes to CEOs and executives? It's also a question of whether it will be returned to the world in some form or another. ”
proactive proxy statement
Equipped with the knowledge that today's shareholders are demanding more information about process and rationale, boards can look ahead to the upcoming proxy season with clarity on compensation program design and decisions made throughout the year. You can prepare by disclosing to In some cases, the drafting of proxy compensation disclosures may need to be supervised more closely. “In most cases, the person who prepared the disclosure document was sitting in the legal department and was not present when these decisions were made,” Neal said. “Typically, you don't ask a finance person to write about why a performance metric changed, or you don't ask a CHRO to write about the process that was followed to assess the retention value of key executives' compensation.”
To ensure clear and sufficient disclosure, remuneration committees are task-managed by highlighting areas of the proxy that are most likely to be scrutinized, and the rationale for decisions behind remuneration actions. It may be necessary to discuss how to communicate this effectively. This process is also a useful exercise for boards to determine whether shareholder outreach is warranted and, if so, be prepared to proactively engage with investors.
“While there may be situations in which a ‘no’ vote is unavoidable, providing a solid explanation as to why a metric was removed from an incentive program or given a special award, for example, may be “Decisions that could help shareholders understand and accept some decisions,'' Neal said. “There is no sure-fire silver bullet approach. [guarantee] Say on Pay support. But the more good reasons you provide, the more convincing your case is, the more people will actually vote for stocks that don't align with the ISS or Glass Lewis recommendations. The more ammunition you give them, the better. Because they have something to point out. to justify that decision. We must keep that in mind as we head into the 2025 proxy season. ”
