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Governance Advisory Services |Executive Compensation

By Henry Mbom | March 30, 2021

Say-on-pay voting continues to evolve after a decade of mandatory votes

As we move into the 2021 proxy voting season, attention once again turns to executive pay programs and shareholders’ reactions to them via their say-on-pay votes. In addition to long-standing say-on-pay issues, such as proper pay-for-performance alignment and limiting the use of problematic pay practices, pay fairness and human capital effectiveness have been brought to the forefront as potential topics of concern when evaluating pay programs this year. With the majority of 2021 annual meetings still pending, it is too early to tell how the volatile events of 2020 will affect investors’ views on executive compensation programs, but this may yet be the most challenging proxy voting season since the start of mandatory say on pay.

The end of 2020 marked the close of the first decade of mandatory say-on-pay voting for U.S. companies. While voting outcomes remained remarkably consistent annually with minimal opposition to compensation programs on an aggregate basis (see Figure 1 for the 10-year review of average opposition and failure rates), say on pay has unquestionably changed the executive compensation landscape through more acute attention to pay-for-performance elements, the elimination of problematic pay practices, and increased dialogue between companies and stakeholders.

At the close of the first decade of say-on-pay voting, companies and investors have settled into a relatively stable approach to reviewing and voting on say-on-pay proposals. The first few years of voting resulted in companies eliminating problematic pay practices, such as tax gross-ups and personal perks, and pay components that could yield outsize award payouts, such as one-time equity grants or special retention bonuses. Focus then shifted to optimizing pay-for-performance for the regular pay program as companies shifted from using time-based vesting for awards to performance awards linked to total shareholder returns and operational goals. As the decade drew on, most companies had altered pay programs in the face of increased shareholder engagement, but for those companies that were inadequately responsive, the stakes for ignoring significant say-on-pay opposition expanded to include withhold vote campaigns for compensation committee members.

Figure 1. 10-year say-on-pay average support and failure rate
Figure 1. 10-year say-on-pay average support and failure rate

Willis Towers Watson’s Global Executive Compensation Analysis Team recently completed a review of say-on-pay voting outcomes at Russell 3000 companies in 2020 and over the 10-year period since mandatory votes were enacted. Some key findings from the review include:

  • In 2020, there were 56 say-on-pay failures, which is the highest number of failures since 2015. The overall failure rate of 3% has held constant over the past three years. The highest number of failures occurred at smaller companies (those outside the S&P 1500), while S&P Mid-Cap 400 and Small-Cap 600 companies had their fewest level of failures in five years.
  • Over 10 years we observed that following a failure, compensation committee members changed at a rate of 41% (replacement or nonrenewal of the term of one or more committee members following a failure).
  • Since 2016, 41% of first-time failures had a say-on-pay support above 90% in the year prior to their first failure.

The first decade of say-on-pay voting has shown that investors consider a wide range of issues when casting say-on-pay votes. The factors evolve to reflect the environment in which companies make compensation decisions. Compensation decisions in response to the COVID-19 pandemic will no doubt factor into say-on-pay voting decisions in 2021 but likely will be just one of many issues affecting future say-on-pay votes materializing over the next decade.

For a more detailed report summarizing our 10-year review of say on pay and key 2020 proxy season votes, including say on pay, say on golden parachutes and equity plan proposals, please download the PDF (below).

Download full report
Title File Type File Size
U.S. Executive pay votes: 2020 proxy season review PDF .7 MB

Senior Associate, Executive Compensation (New York)

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