Executive Pay Centre Stage for US 2023 Proxy Season

Say on pay votes, climate, and board oversight all expected to be key themes for shareholders this year.  

Despite reduced growth rates, executive pay levels are still expected to attract intense shareholder scrutiny at the upcoming AGMs of US corporates. Ahead of the 2023 proxy season, there was decelerated overall growth in CEO pay, with Glass Lewis reporting a fall from 41% in 2021 to 29% last year.  

The “most aggressive” percentage growth is happening among companies with smaller market capitalisation, according to Maria Vu, Senior Director of North American Compensation Research at proxy advisor Glass Lewis, with 75% of the companies that gave their CEOs more than a 30% increase in pay having market caps of less than US$4 billion.  

Vu said that that shareholders will likely be “looking for the potential reasons why companies are providing executive pay increases of that magnitude”.  

Nine companies have provided their CEOs with more than 100% increase in their pay, the report noted. This includes American sustainable bitcoin mining firm Cleanspark which gave a 670% increase to its CEO.  

Say on pay 

Due to heightened shareholder opposition to executive pay increases, 2022 saw a record number of failed say on pay votes, according to a report by insurance services firm Willis Tower Watson (WTW).  

The report noted 86 say on pay failures were recorded in 2022, surpassing the 71 failures recorded in 2021 – marking the highest number of failures since the vote on compensation programmes became mandatory in 2011.  

Glass Lewis’ Vu said key S&P 500 companies will be attempting to “earn forgiveness” from shareholders in 2023 and attempting to avoid a third consecutive set of failed say on pay proposals. “We expect to see failed say on pay proposals express intentions not to repeat problematic pay decisions,” she added. 

WTW’s report showed a spike in the number of failures, with smaller companies responsible for 37% of these failures. It also said average shareholder support was “marginally lower” than previous years at 89%.  

The main concerns from the 2022 proxy season flagged by the report were the “rigour” of incentive metrics, substantial compensation increase, lack of disclosure, discretionary nature of awards, special awards and outsized long-term compensation.  

WTW highlighted key items for say on pay success in 2023 as being rigorous pay programmes, strong engagement and responsiveness campaigns, and clear compensation discussion and analysis disclosure.  

The report recommended companies align themselves to an “ambitious and rigorous strategy to generate long-term value for investors”, as well as being “proactive” on setting efficient pay programs, and leading engagement and responsiveness strategies. 

Glass Lewis flagged a number of meetings to watch in 2023 on issues relating to executive pay. Bianca Castro, Senior Director of US Research, highlighted Norfolk Southern as one that “shareholders want to pay close attention to given it is a rapidly developing issue”, following a train derailment in Ohio in that saw hazardous substances spilled.  

Vu noted that the derailment occurred after the company’s executive compensation programme was finalised, adding that “shareholders should consider that Norfolk Southern’s incentive programmes don’t really account for safety performance in a clear measurable way”. 

She added: “It’s reasonable for shareholders to ask the question whether there’s material risks that are not adequately accounted for in the executive pay programme. 

“What we’ll be looking for from Norfolk Southern this year is any plans that they might have for the 2023 pay programme.” 

Opioids and grants 

Glass Lewis will be monitoring CVS after the retailer and Walgreens agreed to pay more than US$10 billion to settle lawsuits over the nationwide impact of opioids.  

Vu suggested this could spark a debate on how much executives will be or should be penalised for the settlement charges in terms of their pay. There is precedent for penalty from McKesson, which was part of the Johnson & Johnson AmerisourceBergen, and the Cardinal Health settlement, which saw payouts to their executives cut regardless of their direct involvement in the events leading up to the opioid settlement. 

Glass Lewis also flagged Sarepta Therapeutics, which gave a large grant to its new CEO, performance options tested over five years. The company valued the grant at US$44.5 million, while Glass Lewis valued it at nearly US$100 million.  

In order for the performance awards to vest, Sarepta’s stock price needed to increase at least 438% and exceed a compound annual growth rate of the Nasdaq Biotech index by at least 5%. However, less than two months from the end of the performance period, the stock price had only increased by 136%. Nevertheless, the company entered into a letter agreement with their CEO to allow for the vesting of a third of the award. 

“We found a lot of multiyear grants last year,” said Vu. “Sarepta’s say on pay proposal saw significant shareholder opposition the year that the grant was announced. It remains to be seen if shareholders are going to see the revised terms as needed in order to retain the executive or if the company should have led the awards expire.” 

Transparency on lobbying 

Investee firms’ political expenditure and lobbying activities are also expected to be on the ballot this US proxy season. A report from data and analytics provider Morningstar showed 48 shareholder resolutions in the 2022 proxy year requesting greater transparency on lobbying and political activity at US companies, with resolutions gaining a “solid” 35% average overall support from shareholders.  

It also said 12 of the 149 resolutions on US companies’ lobbying and political activity in the last three proxy years focused specifically on climate-related lobbying. Climate specific resolutions saw a higher level of shareholder support, at 49% on average over the three years, peaking at 61% in 2021. However, support fell to 31% in 2022, reflecting the pullback in support for “prescriptive” resolutions. 

The top 10 US asset managers showed considerably stronger support for climate-related lobbying resolutions compared with those on lobbying and political activity more broadly, according to the report.  

Courtney Keating, Senior Director of ESG Research at Glass Lewis, said that continued focus on climate and say on climate has “somewhat fizzled out” in North America. But she said there is shareholder interest in explicit board oversight of climate related issues, as well as “whether or not they provide reporting aligned with the Task Force on Climate-related Financial Disclosure”, especially for large oil and gas companies, large extractive companies, and companies with significant emissions. 

Gender and diversity 

Glass Lewis expects there to be greater shareholder focus on the expansion of gender diversity policies, said Castro, with shareholders targeting increased gender diversity directors on boards, and more focus on board racial and ethnic diversity. It also forecasts focus on greater disclosure from companies on board composition metrics, including racial and ethnic diversity and also diversity considerations.  

Keating added that “there’s a lot of focus not only around the diversity of the board, but also around the diversity of the workforce and how companies are ensuring that their workforces are as diverse as possible in order to attract the best kind of employees, employee. engagement and effectiveness of their workforce”. 

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