Say on Pays #2 — Analysing executive pay packages
The key mechanics of Say on Pays and what to know when assessing companies’ pay practices.
In this second part of the Say on Pay series, we explore what a “Say on Pay” vote actually is, and highlight a few of the things to look out for when reading executive remuneration reports.
(For a recap on the basics of executive pay packages, see our explainer here.)
What is a Say on Pay?
Every year, most listed companies in the US, UK and Australia are legally required to put forward their remuneration reports for shareholder approval. These votes are what we know as Say on Pays, and take place at the companies’ annual general meetings (AGMs).
While heavily littered with technical terms, remuneration reports tell shareholders how executive pay for the year has been decided. In most cases, this is based on a shareholder-approved pay policy.
While companies take shareholder approval very seriously, arguably the key feature of Say on Pays is this: they are advisory.
They don’t determine whether executives actually get their pay packages; companies use the voting outcome to gauge shareholder approval of their pay practices.
However, that doesn’t mean that they can’t be an effective tool to encourage better pay practices. For example, the backlash against General Electric’s 2021 Say on Pay vote caused its CEO’s annual bonus to be cut by 67% the following year.
Great — how do I approach remuneration reports?
While different stakeholders will have different reasons to support or oppose Say on Pays, there are organisations who hold a great sway over how shareholders vote: proxy advisory firms.
Proxy advisors, like Glass Lewis and ISS, research proxy issues and advise shareholders how to vote depending on their priorities. Their Say on Pay priorities are a useful guide, and include:
Excessive pay levels
“Excessive” requires context when talking about executive pay. Pay packages in the millions are common, with the median average pay of FTSE 100 executives in 2022 reported to be £3.4 million.
What could be a concern for proxy advisors is if large increases in salary and share awards are not reasonably justified — or in fact unjustifiable because of how big they are. Glass Lewis considers this to be a particular concern for American companies in 2022.
A relatively recent example of this is when both Glass Lewis and ISS recommended investors vote “against” Amazon’s 2022 Say on Pay, which contained a share award for the CEO worth $211.9 million. The Say on Pay eventually received 56% shareholder support.
Disconnect between executive pay and company performance
“Pay for Performance” issues were the most common concern ISS had for recommending shareholders vote against Say on Pays in 2022.
This could mean a lot of things, such as
- the CEO pay level exceeding total shareholder return (TSR)
- guaranteed executive pay for several years
- the CEO being paid higher than the median (average) pay received at similar companies
Responsiveness to shareholder concerns
This refers to situations where companies’ Remuneration Committees fail to sufficiently address pay concerns raised by shareholders.
It ranks second in Sullivan & Cromwell’s report as well as Glass Lewis’ report on UK companies.
In summary
Say on Pays are undeniably polarising: while the average shareholder support for Say on Pays at S&P 500 companies stood at 87.5% in 2022, only 32% of Tumelo users (indirect shareholders) supported Say on Pay votes throughout the 2022 AGM season.
But whatever your priorities are, at Tumelo we believe that investors should be empowered to engage with the companies they’re invested in. To find out how Tumelo is working to make this happen, head to our website here.
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