Since 2024 has wrapped up, we observed a similar number of equity proposals and shareholder support levels as in calendar year 2023. Approximately 24% of the Russell 3000 (over 700 companies) submitted an equity plan proposal for shareholder approval between January 1, 2024, and December 31, 2024. Companies have received significant support from shareholders on their 2024 equity plan proposals, about 88% support on average, and only 1% of equity plan proposals failed in 2024.
Figure 1. Summary of Equity Plan Shareholder Proposal Outcomes in 2023 and 20241
While 2024 shareholder support levels are similar to 2023 results, and the majority of companies received shareholder support in the 90% to 100% range, we observed a year over year decrease in the number of companies receiving support in the 80% to 89% range and the 70% to 79% range. Overall, the 2024 shareholder vote results continue to demonstrate companies receiving overwhelming support when an equity plan proposal is submitted to shareholders for approval. See Figure 2 for year-over-year details (please note two companies in 2024 and one company in 2023 did not report their vote outcomes and have been excluded from the chart).
Figure 2. Equity Plan Shareholder Proposal Vote Results in 2023 and 20241
The majority of Russell 3000 companies received favorable recommendations from proxy advisors on their equity plan proposals (71% received support from Institutional Shareholder Services (ISS) and 85% received support from Glass Lewis (GL)). Companies that received ISS or GL opposition, on average, received lower shareholder support by about 17 percentage points and 12 percentage points, respectively. However, the equity plan proposal failure rate increases very modestly (to 1.9% when ISS is in opposition and to 3.7% when GL is in opposition).
Figure 3. 2024 Proxy Advisor Vote Recommendations1,2
When taking a closer look at companies’ average shareholder support results based on market capitalization (market cap) and industry sector (based on the 2-digit global industry classification standard (GICS)), we observed the following:
Figure 4. 2024 Proxy Advisor Against Vote Recommendations by Market Capitalization 1,2
Figure 5. 2024 Proxy Advisor Against Vote Recommendations by Industry Sector 1,2
Both ISS and GL utilize proprietary models that consider quantitative aspects of shareholder dilution and equity plan share usage as well as qualitative aspects such as shareholder friendly plan provisions. Despite the complex nature of the proxy advisors’ models, shareholder vote recommendations appear to generally come down to how costly the equity plan is in terms of the potential dilutive effect to shareholders and how companies have been managing equity spend.
Figure 6. Median Potential Dilution Percentages, as of June 30, 20243
Potential dilution measures the impact on shareholder ownership of a company from the issuance of equity awards to employees. The dilution calculation assumes that the company grants equity awards using all available shares under the equity plan pool and that all awards are exercised/vested and settled by issuing additional shares. Median potential dilution for Russell 3000 companies is about 10%, with significant variability across industry sectors due to differences in capital structures (higher total common shares outstanding generally results in lower dilution levels), equity grant practices (e.g., award type, award size, eligibility, etc.), pay mix, and other factors. The highest median potential dilution is observed in the health care sector (18%), which includes pharma and biotech companies, while the lowest median potential dilution is found in the utilities sector (3%).
ISS will automatically recommend that shareholders vote “against” an equity plan proposal that results in dilution of greater than 20% for S&P 500 companies or greater than 25% for Russell 3000 companies. A company’s potential dilution resulting from a requested share pool increase is an important factor considered by shareholders when voting on an equity plan proposal. Some institutional investors have specific dilution thresholds that are used as a guideline when determining how to vote as well as other factors. For example, The Vanguard Group’s Proxy Voting Policy for U.S. Portfolio Companies (effective February 2024) states it is likely to vote against a proposal when “total potential dilution (including all stock-based plans) exceeds 20% of shares outstanding”4; and Amundi Asset Management U.S.’s proxy voting guidelines state it will “reject plans with 15% or more potential dilution”.5 Other institutional investors state in their proxy voting guidelines that they consider dilution when determining how to vote on an equity plan proposal but do not disclose a threshold and/or state their evaluation of dilution depends on the company’s size, industry, lifecycle, etc.
A company’s potential dilution in comparison to its peers and industry is a helpful data point when trying to predict whether a company’s new equity plan proposal will be approved. To test the impact of potential dilution levels, we analyzed potential dilution levels at Russell 3000 companies that received low shareholder support (which we defined as less than 70%) for their equity plan proposals in 2023 and 2024. For this subset of companies, median potential dilution was 20%, or double the median of the Russell 3000 potential dilution of 10%. The size of the new share pool requests was 6% of common shares outstanding, at median, and ranged from less than 1% to 26% in our total sample across all industry sectors. Potential dilution levels in the year of the equity plan proposal were about 8 percentage points higher than the median of the respective industry sector, on average.
Figure 7. Median Potential Dilution Percentages based on Industry Sector and Low Shareholder Equity Plan Support as of June 30, 20243
In addition to evaluating potential dilution levels, we analyzed the frequency of equity plan proposals over the last 10 years among the Russell 3000, which resulted in the following conclusions:
We also reviewed the correlation between frequency of equity plan proposals and average shareholder support and observed the following (refer to Figure 8 for more details):
Figure 8. Distribution of Average Shareholder Support by Equity Plan Proposal Frequency1
While the majority of companies with equity plan proposals over the past two years have received majority shareholder support, we thought it would be helpful for readers to understand the characteristics of equity plan proposals that failed obtaining shareholder support. Based on reviewing the 13 proposals that failed to obtain shareholder support of the new share request in 2023 and 2024 (with one company failing two years in a row), we note the following:
As companies are preparing for equity plan proposals, there are several things that can be done to increase the likelihood of a successful shareholder vote outcome. We highlight some of these considerations below:
1. Analyze the share reserve pool under various stock price scenarios to help determine how many shares are needed over the next 1 to 3 years.
2. Calculate current and potential dilution levels and share usage levels on an absolute basis and relative to your peer group and overall industry sector.
3. Understand the voting guidelines on new share requests of your largest institutional shareholders, including any brightline policies such as excessive dilution thresholds. Also, understand how likely your institutional shareholders might follow a vote recommendation from ISS and GL.
4. Understand what the proxy advisor “dealbreakers” are (e.g., allowing for option repricings or cash buyouts without shareholder approval, “evergreen” provisions that automatically replenish the share reserve pool). Estimate the likelihood of proxy advisors’ vote recommendations on the proposal. If opposition is anticipated, consideration should be given to engaging with the largest shareholders well before the annual shareholder meeting.
5. Ensure the proxy disclosure of the equity plan proposal is clear and complete. Within the equity plan proposal disclosure, highlight shareholder friendly design features and practices (e.g., reasonable dilution and share usage levels, requiring shareholder approval of option repricings or cash buyouts) and the role equity plays in attracting, motivating, and retaining employees as well as why it is important to the success of the company.
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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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