Rejections of executive pay packages in shareholder votes mandated by the Dodd-Frank Act more than a decade ago reached a record high this month as investors judge how CEOs handled the coronavirus pandemic.
Companies’ decisions to exclude COVID-19’s business impact when finalizing the size of bonuses and stock packages for their highest-paid executives are triggering more objections than ever, investor and pay consultants said. The widening divide between CEO and average worker earnings is also impacting how Wall Street views compensation.
“Shareholders have no patience for companies that are insulating executives from the effects of COVID,” said Rosanna Landis Weaver, who authors an annual report urging opposition to CEO pay packages for As You Sow, in an interview.
About 4.7 percent of proposed pay packages among S&P 500 companies have failed in 2021 so far, up from 2 percent last year and 1.5 percent in 2019, according to data provided by ISS Corporate Solutions. Among a broader set of companies large and small, the Russell 3000 index, the rejection rate was at 4.2 percent at the end of April, Semler Brossy reported.
If it holds, that would be the highest rejection rate in the decade since the votes began under a mandate from Congress during the Obama administration. Previously, the most below-majority votes came in 2015 at 2.8 percent of companies.
The votes, which became mandatory in 2011 for most U.S. public companies as part of the Dodd-Frank overhaul, ask shareholders to express views on executive pay packages for the previous year. Failures to win majority approval have been rare over the decade companies have put pay to a vote. As swelling CEO pay and rising inequality emerged as key issues for progressive Democrats, most shareholders in past years maintained a strict focus on links between bonuses and their returns.
Walgreens Boots Alliance Inc., Starbucks Corp., General Electric Co., AT&T Inc. and Marathon Petroleum Corp. are among major corporations where shareholders rejected 2020 pay in recent weeks. For each company, it was the first time pay packages failed to get investors’ support in a decade of votes, according to Proxy Monitor data.
While results are nonbinding, companies typically respond to failed or low-majority say-on-pay tallies. A lack of changes make further investor revolts likely.
Say-on-pay is at its most crucial in an economic downturn, and the pandemic presented the first major test of the practice since it came out of the 2008 financial crisis, said Michael Pryce-Jones, a senior governance analyst for labor union the International Brotherhood of Teamsters. He said shareholders are now flexing their power. The Teamsters led a successful campaign against pay at shipping company XPO Logistics Inc. this year.
“It was a creature of the last recession,” Pryce-Jones said in an interview. “When the tide rolls out, you see who’s naked.”
He said executive pay is often tied to operations in addition to share price targets, so less revenue should mean lower pay even if stocks recover, as the market has from COVID-19. High payouts in 2020 could signal a board may have more loyalty to CEOs than shareholders and raise concern about governance in general, Pryce-Jones added.
More companies moved the goalposts last year on preset plans for how executives could earn bonuses and stock pay. Boards moved to create business goals that could be achieved in the pandemic’s new reality, said Julian Hamud, senior director of executive compensation research for Glass Lewis & Co., a firm that advises investors how to cast votes on pay packages. The firm found companies reported exercising upward discretion on executive pay this year seven times more frequently than in a typical year, Hamud told CQ Roll Call.
Another trend persisted as the pandemic created economic turmoil. Amid the crisis, some companies kept paying executives retention bonuses to beat competitors to talent, a practice underlying years of escalating CEO pay in the U.S., Hamud said.
Now companies will decide how and if they respond to shareholders’ objections. Boards have in recent years become more sensitive to the results of shareholder polls on pay, said Pete Lupo, senior managing director at pay consulting firm Pearl Meyer & Partners LLC. With the U.S. reopening, he told CQ Roll Call it’s unlikely companies will again tweak bonus and stock pay goals, likely resolving that element of investor scrutiny.
Most investors — from large asset managers to public retirement funds — have focused their pay votes since their inception on whether the millions that CEOs of large corporations make each year reflects stock success and other measures of company financial performance. Some advocates say other factors may be starting to play a part in pay calculations, though experts were divided on whether the trend will stick.
The optics of pay have changed with income inequality and CEO compensation a prominent political issue and public attention to layoffs or furloughs of workers. Human capital management, a term used to describe oversight of workforce-related issues, has become a key issue amid the pandemic with heightened focus on worker health and safety and on job security.
Pressure in Washington could intensify again as Democrats convene hearings with CEOs of the largest U.S. banks at the end of the month. Top executives of firms including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. will face lawmakers’ questions on May 26 and 27 before the House Financial Services and Senate Banking committees. The CEO of the biggest U.S. bank, JPMorgan's Jamie Dimon, received almost $31.7 million in fiscal 2020.
Lawmakers on the left have seized on appearances by corporate leaders to press them on executive pay packages and worker earnings. Asked about the rise in say-on-pay opposition and any plans to address executive pay in the coming weeks, Senate Banking Chairman Sherrod Brown, D-Ohio, pointed to the upcoming hearing.
“When the CEOs of the six biggest U.S. banks appear in front of the Committee later this month, we will be taking a close look at the times when they have prioritized stock buybacks, dividends, and CEO bonuses over investments in the real economy and frontline worker pay,” he said in a statement to CQ Roll Call. “Executives shouldn’t be raking in huge paydays while workers, communities, and small businesses get a smaller and smaller share of the prosperity they create.”
Other proposals would use the tax code to target CEO pay. A bill that Sen. Bernie Sanders, I-Vt., reintroduced in March would raise the corporate tax rate for public and large private companies that pay their CEOs more than 50 times their average worker’s earnings. The rate would steadily increase for pay ratios up to 500-to-1 or higher.
Sanders cited a study by the Economic Policy Institute, a liberal think tank, that found CEO pay climbed 1,167 percent from 1978 to 2019, while average worker earnings rose 13.7 percent over the same time.
The proposal is based on a Dodd-Frank mandated disclosure that took effect in 2018, requiring most U.S. public companies to report a median employee’s pay and the ratio of that pay compared to CEO compensation each year.
Some pay multiples have been in the thousands, particularly at companies that employ primarily part-time workers or gave CEOs new, front-loaded pay packages. Tesla Inc. said in 2019 that CEO Elon Musk’s pay of $2.3 billion was 40,668 times an average worker’s earnings for the year. That was because of a package on the books that year and set to be paid over a decade. It helped Musk become the second-richest person in the world.
The optics of inequality and relatively high executive pay are what may concern investors. Widespread income inequality can also be destabilizing and bad for investments, said Weaver of As You Sow, an advocate of social and environmental practices that submits dozens of proposals on behalf of shareholders each year.
Weaver said political focus and CEO pay ratio disclosures are beginning to impact shareholder conversations around pay, even if these factors don’t on their own trigger opposition in say-on-pay votes. Society is increasingly raising the issue of inequality, she said, and investors aren’t immune from those discussions.