How to Fix Low Say on Pay Shareholder Support

Every year, management holds its breath as it waits for shareholders to cast their advisory votes on executive compensation matters. The investor relations teams scramble for weeks before the proxy filing to ensure the disclosure is sound. The compensation committee is carefully scrutinizing the results. Then, the votes are tallied. 70%. What does that mean? Where do we go from here?

Understanding the Say on Pay Vote

The first thing that may trip up companies and even shareholders is the ‘advisory’ designation of the vote. Unlike board elections, compensation plans, and even shareholder proposals, the Say on Pay (SoP) is a matter that does not warrant or require immediate, or even any, response from companies. So does it still matter?

It does to the compensation committee! Even though the SoP takes into account the quantitative and qualitative properties of just the management’s compensation- and more specifically, the CEO, the CFO, and the next three highest paid Named Executive Officers (NEOs)- the most relevant impact from low support levels would befall the compensation committee. If, say, in 2024 and 2025 the SoP support levels were 72% and 71%, sharp shareholders will note this pattern. In 2026, the compensation committee, especially if they’re up for re-election, would anticipate a real risk to their support levels.

In the case of institutional shareholders, whether they rely on a proxy advisory firm such as ISS or Glass-Lewis, would monitor the company’s response to low SoP support levels. A proxy advisory firm would flag the low levels, and depending on why support was low, and more importantly, what actions the company took to rectify those issues, would issue recommendations against the SoP, the compensation committee members, equity plan amendments, or even the whole board of directors. In turn, institutional investors, citing a lack of good corporate governance practices, would either withhold or even vote against the same proposals.

What Causes Low Say on Pay Support

Say on Pay support can dip for a number of reasons, but the biggest and most frequent issues that plague companies are

One-time grants that lack significant performance measures
Golden parachute severance agreements
Pay and Performance misalignment

Of course, from a statistical perspective, there are other causes. Indeed, one may even find that despite a pay program that has not changed in years sees a slow, unexplained dip in support levels.

Furthermore, as indicated by John Skinner in a 2024 report for Hugessen Consulting, lack of shareholder outreach and poor disclosures were, when combined, the second leading cause of shareholders voting against a SoP.

A more recent report by Paul Hodgson and Andrew Jones from the Harvard Law School Forum on Corporate Governance noted that “Large special awards and poor pay-for-performance alignment were the most common concerns, each appearing in 11 cases.” Special awards, regardless of size, are typically off-cycle one-time grants of cash or equity. Typically cash awards are smaller in scale and don’t raise concerns from proxy advisors or shareholders for a variety of reasons. However, equity awards, especially if they lack strong performance metrics or thresholds, draw heavy scrutiny and place the SoP at a major risk of receiving adverse vote recommendations for proxy advisors or receiving “against” votes from shareholders.

Pay and performance misalignments occur due to an analysis of the quantitative state of pay, both by comparing a company’s pay versus its performance, and by comparing a company’s pay and performance against their peers. Institutional investors typically rely on proxy advisory firms to conduct this quantitative analysis, which typically consists of a complex mathematical analysis and a careful selection of peers to compare the company against.

How to Rectify Low Say on Pay Support

Ironically, these latter issues are the easiest to anticipate and rectify. Either through an internal investor relations team, or by contacting an experienced set of advisors, a company can easily boost their communications in both quality andquantity. From Donna, Ackerly, the leader of the Lioness Consulting team of experienced shareholder relations and corporate governance experts,

“Lioness Consulting LLC can support companies with their Say on Pay votes by
reviewing the shareholder composition in advance, help facilitate meetings between
the compensation committee and institutional investors, conduct an outreach
to retail investors by mail and telephone and monitor voting results.”

When confronting disclosure or transparency issues, companies can typically handle the efforts in-house. The executive compensation team, with support from the legal counsel, and approval from management, can typically increase the level of detail in the proxy statement.

Contained with the Compensation Discussion and Analysis (CD&A) section of a proxy filing, investors typically find most of their narrative information. It is, as they say, a chance for the company to tell their story. In the case of one-time awards, severances, mid-cycle changes to performance targets, discretionary changes by the compensation committee to incentive programs, or even lack of performance targets can be discussed in this section. Each company finds itself in unique positions that force them into adopting certain actions, pay philosophies, or compensation programs. If there were significant retention issues regarding the CEO, the company may lay out as many details as allowed to justify a retention award. If a one-time equity grant was made to the full NEO team, the company may explain that it is tied to a specific product launch with set payout benchmarks that, if disclosed, would pose a competitive risk.

There are many ways to frame the narrative, qualitative disclosure of the CD&A to buoy a SoP that may otherwise suffer. If an internal team needs additional help with either writing or approving that a redraft of a CD&A is acceptable or efficient redraft, one could consider relying on a firm that excels in reviewing draft proxies.

Strategies to mitigate pay and performance misalignments, concerns regarding one-time equity awards, and issues such as golden parachute agreements, warrant a more thorough and significant response from the company, as these issues are more frequent and draw a stronger reaction from shareholders. Techniques to raise SoP support levels typically require a more thoughtful and strategic approach, usually with the support of a team of experienced proxy solicitation and review experts.

Efficient Management Responses to Shareholder Concerns

From experience, I can also say that one of the most important parts of boosting low SoP support levels comes in the form of the management’s response to low vote levels. An acknowledgement and an earnest effort to solicit feedback and fix specific concerns is one of the strongest ways to indicate to shareholders that, despite the Say on Pay’s advisory nature, their votes matter. Even if it may not avoid negative vote recommendations from proxy advisory firms, voters can make their own independent choices and votes if they find the disclosure to be robust and sufficient.

We’ve discussed these tactics before, but in a nutshell, both proxy advisor firms and shareholders look for, largely, three things:

The scope and breadth of efforts taken to engage with shareholders
What feedback, comments, or concerns were raised by shareholders
What the management will do, has done, or cannot do, to mitigate those specific concerns

What Constitutes a Low Say on Pay Result

Luckily, there is a very succinct answer to this question. Depending on whose perspective has the most impact on your shareholder engagement efforts, there are a few places you can look to see if the SoP is low enough to warrant concern or action.

If there are one or more institutional investors who hold the most sway on your election results, their voting policies are typically available online. Usually, these institutional investors will also note their specific threshold for what constitutes a low SoP outcome, after which their votes for other ballot items would also begin to be impacted.

Most companies will look to proxy advisory firms for their guidance on which levels are considered acceptable or not. For example, from ISS’s Compensation Policies FAQ, “When a say-on-pay proposal receives less than 70% support of votes cast (for and against), ISS will conduct a qualitative review of the compensation committee’s responsiveness to shareholder opposition at the next annual meeting.” Glass-Lewis has a similar outline for low SoP support.

Internally, proactive board members or management may also have their thresholds for when they consider it necessary to take action to low SoP outcomes. It is not unheard of for a company to step up its investor relations if they note an uncharacteristic dip, or even a steady decline. Of course, it’s always better to identify and fix shareholder concerns when support levels are at 92%, rather than when the compensation committee’s election results are under threat and the SoP outcome hasn’t increased about 80% in the last three years.

Conclusion

When Say on Pay advisory vote support levels drop, it is a cause for concern for management and the board alike. Institutional investors and proxy advisory firms, depending on their specific thresholds, expect direct responses from companies in response to the low SoP support levels. If a company does not or cannot meaningfully implement the many ways to mitigate those concerns, proxy advisory firm vote recommendations and actual votes will then spill over onto compensation committee member elections, equity plan proposals, and, ultimately, to the full board of directors.

At Lioness Consulting, we can help you navigate the world of corporate governance and executive compensation disclosures and policies, along with shareholder outreach, proxy voting practicalities, and proxy solicitations for both public and private corporations.