Larger companies facing headwinds in 2022 

Last year saw the highest number of say-on-pay vote failures since say on pay took effect in 2011, with larger companies facing more executive pay program challenges than smaller companies. The rate of all-size companies whose 2020 executive pay failed to receive majority support in 2021 was 2.5%, up from 2.2% in 2020. And the rate for S&P 500 companies was 4.2% compared to 2.4% for 2020.

It’s early in the 2022 proxy season, but this year has kicked off with S&P 500 companies facing significant opposition from proxy advisors and investors to executive pay programs. Support at all-size companies is on track with prior years (averaging 91.3%), while support at S&P 500 companies is averaging 85.2%. Favorable votes of at least 90% at individual all-size companies is 72.3% but only 48.3% at S&P 500 companies. And ISS has recommended shareholders vote against say-on-pay proposals at all-size companies at a rate of 9.0% (the lowest rate since 2011) but 13.8% at S&P 500 companies (the highest rate since 2011).

Detailed stats

Failure rates were somewhat higher than for all of 2020 for all-size companies and significantly higher for S&P 500 companies:

• Out of 3,037 all-size companies, 2.5% (76) received less than 50% support, compared to 2.2% (68 out of 3,109) in 2020. This exceeds the highest number of failures in a full year since say on pay took effect in 2011.
• Out of 476 S&P 500 companies, 4.2% (20) received less than 50% support, compared to 2.4% (12 out of 495) in 2020. This exceeds the highest number of failures in a full year since say on pay took effect in 2011.

Other indicators also show S&P 500 companies fared less well than all-size companies:

• Support at all-size companies averaged 90.3%, slightly up from 90.2% in 2020. But support at S&P 500 companies averaged 88.1%, slightly down from 89.7% in 2020.
• Favorable votes of at least 90% at individual companies were up at all-size companies (73.2% compared to 72.1% for all of 2020) but down at S&P 500 companies (70.2% compared to 76.2% for all of 2020).
• ISS recommended shareholders vote against say-on-pay proposals at all-size companies at a rate of 12.1%, up from 11.6% in 2020. At S&P 500 companies, the “against” recommendation rate of 11.3% was up from 10.5% in 2020.
• Failures where ISS issued an “against” recommendation were higher at both sets of companies and significantly higher at S&P 500 companies:
  
      - 20.7%, up from 17.2% in 2020 at all-size companies
      - 37.0%, up from 23.1% in 2020 at S&P 500 companies

Reasons for failures

Many companies experienced significant financial and operational challenges due to the impact of the COVID-19 pandemic that in some cases resulted in a failure to meet annual and long-term incentive plan performance goals. In response, some companies adjusted short- and long-term incentives or granted special awards that may have impacted say-on-pay vote results. For example, several of the S&P 500 companies that failed say on pay made a material COVID-related executive pay adjustment.

In general, proxy advisors and investors were wary of compensation decisions that insulated executives and their pay outcomes from poor company performance, especially if shareholders lost considerable value. However, most companies that made adjustments still received high levels of support.

Non-COVID-related rationale cited by investors for voting against say on pay included the following, consistent with prior years:

• Poor alignment between pay and performance
• Problematic severance and change-in-control provisions
• Lack of responsiveness to shareholder concerns after a previous year's low say-on-pay vote
• CEO pay exceeding four times the average pay of the other proxy named executive officers
• One-off awards, especially when discretionary or not sufficiently performance-based
• An insufficient portion of total pay being tied to performance conditions

Early stats

Failure rates reported as of March 18, 2022, are as follows:

• Out of 166 all-size companies reporting results, two received less than 50% support.
• Out of 29 S&P 500 companies reporting results, one received less than 50% support.

While it’s still early in the proxy season, a few indicators show S&P 500 companies are significantly lagging all-size companies:

• Support at all-size companies is averaging 91.3% while support at S&P 500 companies is averaging 85.2%.
• Favorable votes of at least 90% at individual all-size companies is 72.3% and 48.3% at S&P 500 companies.
• ISS has recommended shareholders vote against say-on-pay proposals at all-size companies at a rate of 9.0%. At S&P 500 companies, the current “against” recommendation rate is 13.8%.

Proxy advisor voting policy updates

2022 updates and clarifications to ISS and Glass Lewis pay-for-performance tests are modest but the proxy advisors have signaled they expect companies to return to pre-pandemic pay programs and decisions and are scrutinizing COVID-19-related adjustments and special awards.

Download the full article to see of note, ISS updated its COVID-related FAQs.

Glass Lewis

• Continues to examine the quantum of awards on an annualized basis over the vesting period but will also consider the impact of the overall size of awards on the dilution of shareholder wealth;
• Considers adjustments to GAAP financial results in its assessment of the effectiveness of tying executive pay to performance, including the basis for any adjustments to the plan metrics or results (which must be clearly disclosed); and
• Is neutral on including environmental and social metrics in short- or long-term incentive plans but expects companies to disclose the metrics selected, performance target rigor, determination of payout opportunities, and how qualitative metrics are assessed.

As always, companies whose pay programs received low say-on-pay support in 2021 (<70% for ISS and <80% for Glass Lewis) need to demonstrate responsiveness to investor concerns in their 2022 proxies to avoid an “against” recommendation from the proxy advisors.