In 2011, the first Say on Pay (SOP) votes ushered in the modern era of executive compensation governance for U.S. public companies. As a result, today’s compensation committee agenda has become significantly more complex than it was before 2011, including understanding proxy advisor views on executive compensation design and, importantly, engaging with investors on SOP hot button items.
What has been the quantitative impact of this increased shareholder democracy on executive pay and the resultant compensation governance focus by institutional investors and corporations?
This Viewpoint provides an analytically quantitative update on how SOP has affected S&P 500 CEO pay more than a decade into the modern era of executive compensation governance using CEO target total direct compensation (TDC) pay data from proxy filings.
As we summarized in our 2017 Viewpoint “Did Say-on-Pay Reduce and/or ‘Compress’ CEO Pay?” , the impetus for including the SOP vote in the Dodd Frank Act was articulated at the time as a means to control executive compensation , with a clear focus on quantum of pay. Proponents at the time theorized that giving shareholders a vote on executive pay would give voice to a chorus of objections over pay levels that commentators panned as outsized. Our 2017 Viewpoint examined the quantitative impact of the new SOP vote in the pre- and post-SOP period and found that giving voice to shareholder views on executive compensation did not reduce market median CEO pay. However, it did result in a compression of CEO pay around the median, as a result of higher CEO pay increases at the bottom and middle of the S&P 500 pay distribution — 10th, 25th, and 50th percentiles. We also observed a decline in CEO pay after SOP at the 90th percentile relative to pre-SOP CEO pay.
We updated our research in this Viewpoint to look back at the full 13 years after the first SOP votes to understand the impact of increased shareholder voice on executive pay by answering several key questions:
Pay Governance examined CEO pay for a constant-company sample among the S&P 500 index, comprising 166 companies over the 15-year period from 2008-2022. Chart 1 below plots CEO target TDC over the 15-year period, representing the three years before implementation of SOP and 11 years post-SOP. The chart shows that CEO pay has increased at every percentile post-SOP, although increases were less pronounced at the 90th percentile, as we will discuss below.
(1) Reflects time series for years included in our data set of 166 constant-companies from 2008 through 2022.
These increases were consistent with continued revenue and market cap growth over the period. Table 1 below shows that sample company market cap at all percentiles more than doubled and revenue at all percentiles increased more than 30%. This greater scoping of companies across the S&P 500 sample is a significant factor in explaining the increases in CEO pay over the period, as CEO pay is closely correlated with the size and complexity of organizations.
As shown in Table 2 below, while CEO pay increased at all percentiles over the study period, increases at the 90th percentile were significantly lower than increases at other percentiles. At the 90th percentile, annualized CEO pay increases were just 1.2%, compared to annualized increases ranging from 3% at the 75th percentile to 6% at the 10th percentile over the period from 2008 to 2022. The large cumulative increases of ~100% at the 10th percentile show how pay for the CEO role at smaller/lower-paid companies are catching up to the overall median.
These observations indicate a continued trend towards CEO pay compression at large public companies. Before SOP, a CEO paid at the 90th percentile was paid 4.5 times a CEO paid at the 10th percentile of the S&P 500; more recently, a 90th percentile CEO is paid 2.5 times the 10th percentile CEO.
This observation is consistent with our consulting experience and our observation of a historical “$20M soft cap” on CEO pay in which companies with total annual CEO pay above $20M were likely to draw significant scrutiny. This created an increased risk of receiving an “Against” SOP vote recommendation from proxy advisors. The continued growth in the rest of the S&P 500 CEO pay distribution is also consistent with our consulting experience as other S&P 500 companies become larger and more complex. Companies in the 10th percentile of the study sample are now twice as large on a revenue and market cap basis as they were before SOP.
We note, however, that our data sample shows a weakening of the historical “$20M soft cap” as an increasing number of companies have moved CEO pay above this level in connection with increased scale and competition for talent, particularly within the financial, healthcare, and technology sectors. Depending upon industry, company size, and absolute and relative total shareholder return (TSR) performance, that soft cap is now closer to $30 million, based on our research.
In addition to the continued compression in CEO pay observed above, SOP has changed how compensation is delivered to top executives. The clearest observable impact of SOP is a moderate shift of the total CEO pay mix towards incentive compensation (an increase from 84% of total pay to 90% of total pay) and an even more significant shift in the mix of long-term incentive (LTI) vehicles away from stock options and towards leveraged long-term performance plans: PSUs, on average, comprised 34% of total LTI before SOP and now represent 63% of total LTI.
Beyond the clearly observable compensation mix evolution post-SOP, we observe the following trends that were influenced by the SOP vote and proxy advisor pay program preferences and which have now become typical executive compensation practice:
Our updated research on CEO pay in the period after the implementation of SOP shows a continuation of our findings in 2017, indicating that the CEO labor market is robust. CEO pay increased across the distribution but at a slower rate among the most highly compensated S&P 500 CEOs (90th percentile). SOP did not “freeze” or significantly alter the dynamics/robustness of the market for CEO pay. Rather, CEO pay across the distribution continued to increase in line with significant growth in the size and scope of the sample companies. While the influence of proxy advisors has likely held down compensation at the 90th percentile of the market, the highest-paying S&P 500 companies have exceeded the “$20M soft cap” on CEO compensation in recent years, particularly in the finance, healthcare, and technology sectors.
CEO pay is now significantly more “shareholder-friendly” and performance-based than it was before SOP, with more dollars of compensation linked to long-term performance goals than ever and arguably more challenging performance-vesting goals. Shareholders, in turn, approve of compensation plans at S&P 500 companies with about 90% support, on average, validating the model for executive pay including the historical increases and the continued shift towards performance-based pay since the passage of Dodd-Frank.
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In our prior Viewpoint, “Recap of the 2024 Say on Pay Season,” 1 we reported that Institutional Shareholder Services (ISS) opposed 7.7% of S&P 500 Say on Pay (SOP) proposals, an unprecedented low. Prior to 2024, ISS opposed about 11% of S&P 500 SOP proposals, on average, each year. In this Viewpoint, the second of our 2024 SOP series, we explore the trends that may have led ISS to recommend against SOP at a historically low rate.
Through careful review of the S&P 500 companies that received 2024 ISS SOP opposition as of August 31, 2024,2 we identified two areas of improvement compared to 2022 and 2023. These changes likely contributed to the overall reduction in 2024 ISS against SOP recommendations.
We discuss each area of improvement in detail below.
The three primary ISS quantitative pay for performance (P4P) tests are the Relative Degree of Alignment (RDA) test, the MOM test, and the Pay-TSR Alignment (PTA) test. We examined the distribution of concern levels on each of these three quantitative P4P tests for the companies that received ISS SOP opposition. According to ISS, “Low concern generally indicates long-term alignment between CEO pay and company performance. A Medium concern indicates a moderate misalignment and a High concern indicates a more severe misalignment.” 3
The ISS quantitative P4P tests are highly predictive of ISS SOP recommendations. There is a greater likelihood of ISS SOP opposition when receiving an overall concern level of “High” or “Medium.” In 2024, 71% of the companies that received SOP opposition from ISS scored an overall concern level of “High” or “Medium” on the quantitative P4P assessment. This is similar to the number of companies opposed by ISS that had elevated P4P concern levels in both 2023 (77% of companies) and 2022 (75% of companies).
When we examined the individual primary quantitative P4P test outcomes from 2022 to 2024, different patterns emerged. Among companies that received ISS SOP opposition, we observed the greatest improvement in the MOM results. We also observed improvement in PTA results, but most companies continued to receive a “Low” concern. Outcomes of the RDA fluctuated between 2022 and 2024 but generally did not improve. Our conclusions for each of the P4P tests are as follows:
In determining its SOP recommendations, in addition to the quantitative P4P tests, ISS conducts a qualitative assessment of executive compensation programs and practices. We compared the qualitative assessments cited in the ISS against SOP recommendations for 2022 through 2024 across six categories. Our objective was to determine if there were significant improvements in the categories over the three years that could have contributed to the decline in adverse SOP recommendations.
The largest improvements observed in the qualitative reasons for ISS opposition of S&P 500 SOP proposals between 2023 and 2024 were (1) better Compensation Committee responsiveness and (2) fewer sizable one-time/special awards.
As another way to evaluate the level of Compensation Committee responsiveness to poor SOP outcomes, we examined the prevalence of consecutive ISS against SOP recommendations. In the 2024 SOP season, the number of companies receiving repeat ISS SOP opposition in two consecutive years (i.e., against in both 2023 and 2024) is tracking below historical levels. The 2022 SOP season featured a historically high 24 companies with against recommendations in consecutive years (or 40% of the total companies opposed by ISS in 2022). The roster of consecutive against recommendations declined significantly in the 2023 SOP season to 13 companies and has further decreased to 9 companies so far in the 2024 SOP season.
As originally observed in 2023, the continued decline in companies with consecutive ISS SOP opposition demonstrates increased mindfulness of proxy advisor and investor preferences and a willingness to address shareholders’ concerns.
In the 2024 SOP season, we observed a notable decline in ISS opposition of S&P 500 SOP proposals. Based on our review, the main catalysts of the decrease in ISS opposition appear to be (1) improved performance on the MOM quantitative test as CEO pay quantum shifted toward the “safe middle” and (2) continued growth in Compensation Committee responsiveness to proxy advisor and shareholder preferences. In our next Viewpoint in our 2024 SOP series, we will dive into how S&P 500 companies demonstrated responsiveness by examining the actions taken after receiving ISS SOP opposition.
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Pay Governance has compiled information on Say on Pay (SOP) outcomes and related total shareholder returns (TSR) for S&P 500 companies since the dawn of the SOP era, which dates to the 2011 proxy season. Based on our analysis of these data, this article places into context the recent results of the 2024 SOP season compared to historical trends. We find that companies have had greater success in the current SOP season, with ISS opposition to SOP proposals and the number of companies failing SOP at record lows.
Figures 1-3 below include the history of S&P 500 company SOP outcomes beginning in 2011 through July 31, 2024.
As of July 31, 2024, our analysis of the current SOP season reveals a significant decrease in the number of failed proposals among S&P 500 companies. The failure rate of 0.9% is trending towards the low rates last observed in 2015 and 2016. After reaching a peak of 22 failed proposals in 2022, the number of failed proposals dropped to 13 in 2023 and has further declined to just 4 so far in 2024 (equal to the all-time low observed in 2015). The current decline in failed SOP proposals may be attributed to improved 1- and 3-year TSR performance, company attention to shareholder feedback on executive pay programs, and positive shareholder sentiment towards the market in general.
Additionally, the percentage of SOP proposals receiving ISS opposition in 2024 year-to-date reached a historic low (7.7%) following a recent uptick in 2022 (12.5%) and a return to “normalcy” in 2023 (9.5%). The decline in ISS “against” SOP recommendations is also likely contributing to the decline in failed SOP proposals in 2024. This said, we will continue to monitor SOP outcomes through the end of the proxy season.
Findings from our previous Viewpoint titled, “The 2023 Say on Pay Season – Outcomes and Observations,” 3 showed that the 2022 and 2023 SOP seasons ran counter to the premise that TSR performance should be correlated with SOP proposal success. Although TSR performance was strong for the period ending in 2021
(1- and 3-year TSR of +27% and +24%, respectively), the number of failed SOP proposals in 2022 spiked to 22. Failed SOP proposals in 2023 unexpectedly decreased to 13 when TSR performance declined relative to the prior period (1- and 3-year TSR ending in 2022 was -19% and +6%, respectively).
However, for 2024 the linkage of TSR performance to SOP proposal success holds true. For the period ending in 2023, 1- and 3-year TSR results (+24% and +8%, respectively) improved over the prior period and failed SOP proposals dipped to just 4 companies.
With the unprecedented decline in failed SOP proposals and reduced ISS opposition to SOP proposals observed in the current season, we also reviewed Glass Lewis SOP vote recommendations to assess if a similar trend would be identified.
As expected, Glass Lewis 2024 SOP recommendations (12%) are tracking below 2023 levels (17%). However, an anomaly was observed during 2023 when Glass Lewis opposed SOP proposals at a higher rate than recent history. Unlike ISS, the spike in Glass Lewis “against” recommendations in 2023 tracks with relatively worse TSR performance during the corresponding period.
Prior to 2023, the Glass Lewis SOP “against” rate consistently ranged from 12% to 14%. Given that the Glass Lewis 2024 opposition rate of 12% tracks with historical levels, it appears that Glass Lewis’s recommendations are not particularly correlated to the decline in failed SOP proposals in 2024.
There is a notable decline in the number of failed S&P 500 SOP proposals in 2024. This may be associated with improvement in TSR performance compared to the prior period, company responsiveness to shareholder feedback, and the decline in ISS opposition likely resulting from the prior two factors. Given that the Glass Lewis opposition rate in 2024 is similar to historical levels, Glass Lewis’s recommendations appear to be less correlated to S&P 500 company SOP success this year. We are continuing to monitor the rate of failed SOP proposals through the remainder of 2024 and in future years to determine if this year’s trends are part of a new normal of increased shareholder satisfaction with executive pay programs or an aberration that will reverse course.
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