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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with over 450 companies annually, are a team of nearly 75 professionals in the U.S. with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Current Issues in Executive Compensation

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Featured Viewpoints

The Impact of Say-on-Pay on S&P 500 CEO Pay

Introduction

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:

  • How did S&P 500 CEO pay change after the implementation of SOP through the current period?
  • Has the distribution of S&P 500 CEO pay continued to compress since our 2017 Viewpoint?
  • How has the structure of CEO pay changed since the first SOP votes?

How did S&P 500 CEO pay change since the implementation of SOP?

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.

CEO Pay Continues to Compress/Flatten at the Top of the Range

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.

Post SOP Changes Focused on the “How” in Addition to the “How Much”

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:

  • Broad adoption of pay-for-performance assessment methodologies measuring “after the fact” executive compensation (realizable pay, SEC Compensation Actually Paid/TSR, and realized pay).
  • Increased implementation of policies for the treatment of equity awards upon executive retirement versus use of Committee discretion.
  • Near universal movement toward double-trigger equity vesting and elimination of 280G excise tax gross-ups upon a change in control.

Conclusion

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.

General questions about this Viewpoint can be directed to Ira Kay (ira.kay@paygovernance.com) or Blaine Martin (blaine.martin@paygovernance.com).

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Featured Viewpoint

Record Low ISS S&P 500 Say on Pay Opposition: The Trends Behind the Decline

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.

  1. Significantly better performance on the ISS Multiple of Median (MOM) test. The MOM test evaluates the ratio of 1-year CEO pay to the median CEO pay of the ISS-selected peer group and has historically been (and continues to be) a meaningful predictor of adverse ISS SOP recommendations. The average MOM outcome was 1.7x in 2024, compared to 2.2x in 2023 and 2.4x in 2022, demonstrating a migration of CEO pay toward peer median levels and fewer outlying pay packages.
  2. Improvement in Compensation Committee responsiveness to proxy advisor and shareholder concerns over executive pay. We observed fewer Compensation Committees being criticized by ISS for poor responsiveness to shareholder concerns and fewer cases of significant one-time awards that led to an against SOP recommendation. In addition, the number of companies that received ISS opposition to SOP in two consecutive years declined, demonstrating that companies are getting better at addressing investor feedback.

We discuss each area of improvement in detail below.

1. Significantly Better MOM Performance

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:

  • RDA: measures alignment of 3-year relative CEO pay and 3-year relative TSR. Half of all S&P 500 companies that received SOP opposition from ISS scored a “High” or “Medium” concern on the RDA, showing that RDA outcomes continue to be a primary determining factor of SOP recommendations.
  • MOM:evaluates the ratio of 1-year CEO pay to ISS peer median CEO pay.In 2024, only 21% of S&P 500 companies receiving an against SOP recommendation received an elevated concern under the MOM test (an elevated concern is assigned for MOMs that are above 1.69x). This starkly contrasts with 2022 and 2023 results, in which nearly half of all companies opposed by ISS scored an elevated concern on the MOM. Examined another way, the average MOM ratio was 1.7x in 2024, compared to 2.2x in 2023 and 2.4x in 2022. This suggests that CEO pay for FY23 has migrated closer to the median of ISS peers for most companies that were opposed by ISS. In recent years, the MOM test has become increasingly predictive of ISS SOP recommendations. Thus, as companies have shifted their CEO pay quantum towards the “safe middle,” there have been fewer against SOP recommendations overall.
  • PTA: measures the absolute alignment of 5-year CEO pay and 5-year indexed TSR. In 2024, nearly all companies (94%) that received SOP opposition from ISS had a “Low” concern on the PTA test. This is an improvement over 2023 and 2022 levels (72% and 81%, respectively) but illustrates a consistent trend that PTA outcomes are not a key driver of SOP recommendations.

2. Improvement in Compensation Committee Responsiveness

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.

  1. Improved Compensation Committee Responsiveness:Both the percentage and number of companies in 2024 that received ISS SOP opposition primarily due to poor Compensation Committee responsiveness decreased compared to 2023 and 2022 levels. The sustained decline suggests companies continued to take active measures to directly engage with major investors to address their concerns following a SOP proposal that received low support the prior year.
  2. Reduction in Sizeable One-Time/Special Awards:There was a decrease in the percentage and number of companies that received adverse ISS SOP recommendations due primarily to the grant of special or one-time awards. The practice of granting one-time awards is now strongly disfavored by both proxy advisors and institutional investors. The decline in the use of such awards is consistent with our observation of companies being increasingly responsive to investor and proxy advisor preferences. In addition, the reduction in the use of one-time awards may have contributed to the decrease in “High” and “Medium” concern levels for the MOM test in 2024 — the P4P test focused on 1-year CEO pay quantum.

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.

Conclusion

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.

General questions about this Viewpoint can be directed to Linda Pappas (linda.pappas@paygovernance.com).

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1.Perla Cuevas, José Lawani, Linda Pappas, and Olivia Wright. Recap of the 2024 Say on Pay Season. Pay Governance. August 29, 2024. https://www.paygovernance.com/viewpoints/recap-of-the-2024-say-on-pay-season
2.Reflect ISS SOP vote recommendations available through August 31, 2024, collected from ISS Corporate’s Voting Analytics database.
3.Institutional Shareholder Services. United States, Pay-for-Performance Mechanics, ISS’ Quantitative and Qualitative Approach. December 8, 2023. https://www.issgovernance.com/file/policy/active/americas/Pay-for-Performance-Mechanics.pdf?v=2

Featured Viewpoint

Recap of the 2024 Say on Pay Season

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.

Background: Say on Pay 2011-2024

Figures 1-3 below include the history of S&P 500 company SOP outcomes beginning in 2011 through July 31, 2024.

Figure 1: Unfavorable S&P 500 SOP Proposals by Year1

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.

Figure 2: S&P 500 Historical 1-Year TSR 1 & SOP Outcomes 1

Figure 3: S&P 500 Historical 3-Year TSR 1 & SOP Outcomes 1

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.

Glass Lewis SOP Recommendations

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.

Figure 4: S&P 500 1- and 3-Year TSR 1 & Proxy Advisor “Against” SOP Recommendations 1 ,4

Conclusion

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.

General questions about this Viewpoint can be directed to Linda Pappas (linda.pappas@paygovernance.com).

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1 TSR data for the S&P 500 were collected from S&P’s Capital IQ database.
2 ISS vote recommendations and SOP vote outcomes were collected from ISS Corporate’s Voting Analytics database.
3 Perla Cuevas, Jose Lawani, Joe Mallin, and Linda Pappas. The 2023 Say on Pay Season – Outcomes and Observations. Pay Governance. September 14, 2023. https://www.paygovernance.com/viewpoints/the-2023-say-on-pay-season-outcomes-and-observations.
4 Glass Lewis vote recommendations were collected from the Diligent Market Intelligence database.

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