Narrow ‘Say on Pay’ majority suggests investors are increasingly willing to challenge executive remuneration policy.
With price inflation outpacing wage growth and soaring energy bills swallowing up a large chunk of our monthly salaries, a US$212 million one-off windfall sounds like the stuff of fairy tales.
It’s a reality for Andy Jassy, the new CEO of tech giant Amazon who replaced founder Jeff Bezos last July. Jassy was granted an eyewatering 61,000 shares of Amazon stock within his first six months at the helm of the company. The stock will vest over ten years.
It’s just one example of the huge remuneration deals gifted on top of already generous salaries to executives at the world’s largest companies. Admittedly, Jassy’s annual salary is an outlier, at a modest US$175,000. But all told, he’s still making 6,500 times more than the median Amazon employee.
Such outsized settlements suggest checks on executive remuneration aren’t working, including those in the hands of investors. First introduced in 2002, the ‘Say on Pay’ initiative gives shareholders an advisory, non-binding vote on remuneration schemes at investee companies’ annual general meetings (AGMs).
In May, Amazon launched its AGM off the back of its first unprofitable quarter in seven years. Fifteen proposals filed by the company and its shareholders ranging across a number of ESG-related issues were put to a vote.
As well as Jassy’s bonus, the Say on Pay vote included Adam Selipsky, who heads up Amazon Web Services, and Dave Clark, in charge of Amazon’s retail and logistics business. They were paid US$81.5 million and US$56 million last year respectively.
According to a regulatory filing with the US Securities and Exchange Commission (SEC), Amazon only secured a 56% majority for the proposed package, with ex-boss Bezos tipping the scales.
“As Bezos controls 12.7% of Amazon’s shares, I doubt he voted against his own bonus,” says Rosanna Landis Weaver, Wage Justice and Executive Pay Programme Senior Manager at shareholder advocacy non-profit As You Sow. “I’d be interested to know what the outcome would have been without his vote.”
Now operating as Amazon’s Executive Chair, Bezos’ annual salary is set at US$81,840, but he continues to be paid an additional US$1.6 million a year for his security arrangements.
The narrow victory highlights investors’ increasing concerns about pay inequality between executives and the wider workforce, according to Tom Powdrill, Head of Stewardship at Pensions and Investments Research Consultants (PIRC).
“There are many more companies out there that need to be challenged over executive pay – and Amazon should continue to be challenged, too,” he says.
Shareholders should nonetheless see the closeness of the vote as something of a success, experts say.
“The message this vote sends out to other companies is that they can’t be complacent,” notes Andrew Speke, Head of Communications at think tank High Pay Centre. “Due to Amazon’s size, the message is likely to resonate even further.”
Although firms aren’t legally required to respond to opposition to management resolutions at AGMs, it is typically expected in a number of countries, and most would argue it’s necessary to stave off further rebellion – such as voting against the election of company directors.
Justifying a bonus
Prior to the vote, shareholder advisory firms Institutional Shareholder Services (ISS) and Glass Lewis recommended that shareholders should vote against the pay packages, on the grounds they were excessive and misaligned with the company’s recent performance.
While investors are free to ignore such advice, the scale of the rebellion suggests these calls were heeded by many of Amazon’s independent investors.
Amazon defended the pay packages in its proxy statement, justifying them in terms of the company’s rate of growth. Its stock price has increased by 30,716% over 20 years and by 122% over the past three years.
Its executive compensation philosophy has allowed for the recruitment and retention of high-quality staff, incentivised the continued growth of the business, and has been effectively tied to Amazon’s social and environmental-related objectives, the company added.
While Amazon acknowledged a “small minority of investors” expressed the view that the company should grant smaller bonuses dependent on achieving “discrete performance goals”, the proxy statement noted that these investors didn’t have “a clear consensus” and the large majority “did not express either a positive or negative position” on Amazon’s executive compensation policy.
Nine days after the AGM, retail chief Clark – who had sunk 23 years into Amazon – announced his resignation. In their joint statement, neither Jassy nor Clark indicated that the resignation was tied to the Say on Pay outcome, but experts questioned the timing.
Glass Lewis and New York City pension fund officials also urged shareholders to vote against the re-election of Board Director Judith McGrath, who Chairs the Leadership Development and Compensation Committee.
Led by New York City Comptroller Brad Lander, a group of institutional investors launched a ‘vote no’ campaign in April, which called on Amazon shareholders to oppose her re-election, on the grounds that McGrath failed to provide satisfactory independent oversight of workforce issues at the company.
Despite this, McGrath resecured her seat on the board, with 78% of shareholders in favour. This is still a marked decrease from the usually high percentage of approval (often well over 90%) that nominated directors typically receive.
What about the workers?
Executive pay has proven to be a “flashpoint” for investors scrutinising investee companies’ performance and policies on social issues like pay disparity and working conditions, which deteriorated in many cases during the of Covid-19 pandemic, says PIRC’s Powdrill.
“Amazon, and similar companies, benefitted greatly throughout the pandemic, in large part due to its frontline workers who were not shielded from financial, physical or mental burdens during that time,” agrees Michael Yamoah, Director of Engagement for EOS at Federated Hermes.
Last year, the New York Times published an investigative report looking into allegations that Amazon had been systematically short-changing workers, one of several controversies around working conditions that have made headlines and concerned investors.
Activist investor group Tulipshare filed a resolution which called for an independent audit and report on Amazon’s warehouse workers’ wages and working conditions.
Despite investors, such as Schroders, throwing their weight behind it, the resolution fell short, receiving 44% of the vote.
“Whilst we are disappointed that our proposal did not pass, this vote was just the beginning of the fight for workers’ rights,” said Tulipshare Founder and CEO Antoine Argouges. The group intends to resubmit the motion next year.
Investor pressure on social-related issues has nonetheless yielded some results.
A shareholder proposal filed by the New York State Common Retirement Fund ahead of Amazon’s 2022 AGM called for an independent audit to look into “disparate racial impacts” from its employment practices. Amazon responded that it had already commissioned an audit – the results of which will be published, although a timeline has not been confirmed.
The decision to commission a racial equity audit is one step in the right direction, according to Yamoah. “Additionally, we hope to encourage the company in the long term to work towards offering the living wage, and in the short term, encourage the Compensation Committee to consider disclosing how the CEO-to-employee pay ratio is taken into consideration when setting executive pay.”
A measured approach
Many argue that executive bonuses can only be justified by beneficiaries meeting or exceeding underlying KPIs.
“Investors have always been concerned that executive remuneration should reflect genuine performance, so that management teams are rewarded for their achievements and not rewarded when performance is below expectations,” says Nic Stratford, a Partner in investment consultant Mercer’s Executive Rewards Team.
However, there is no consensus on what should be measured. Increasingly, investors have been pushing for investee companies to adopt ESG-focused KPIs, such as carbon emissions reduction targets and reducing usage of single use plastic.
Last year, the UK-based Investment Association (IA) urged FTSE 350-listed companies to tie executive pay at least partially to ESG metrics.
“There is a concern that some ESG KPIs are too easily achievable, and therefore don’t justify a bonus – for example, making sure a woman has been appointed to the company board,” As You Sow’s Landis Weaver points out. “There’s a discussion that needs to happen between investors and companies about what KPIs are being set and why.”
It is not uncommon in industries such as mining for companies to tie remuneration to health and safety KPIs, meaning an executive’s bonus could be cut because of a worker fatality. One of the many issues this throws up is whether executives should be incentivised through remuneration structures to carry out tasks that should be fundamental to their roles. Another is whether linking bonuses to health and safety encourages firms to under-report incidents.
“Health workers on the frontline during the pandemic weren’t awarded a bonus for showing up to work, even though they were putting their own health on the line,” Powdrill points out. “Why do executives need to be financially incentivised – beyond their already above-average salaries – to deliver on targets to bolster business growth or ensure the workforce is more diverse?”
To challenge the status quo, some investors are going beyond AGM votes. As You Sow launched the Executive Compensation initiative to help investors utilise their influence over investee companies to create greater equity and “proactive change in a broken [compensation] system” across US-listed companies.
It engages with shareholders to help drive companies to develop new social and environmental performance criteria, identifies the most overpaid executives, and encourages foundations and public funds to adopt more stringent voting guidelines concerning disconnects between pay and performance.
“More and more, investors are recognising how broken the executive compensation system is,” Landis Weaver says.
Taking a stand
Amazon isn’t the only company to be challenged by its shareholders.
Only 31% of investment bank JPMorgan’s shareholders backed CEO Jamie Dimon’s 2021 remuneration plan in May, which included a collective US$201.8 million bonus to be doled out amongst six of the firm’s executives. Dimon himself stands to make US$50 million.
This was the first time the bank’s board lost a Say on Pay vote since 2009.
British pharmaceutical company GlaxoSmithKline managed to clinch a shareholder majority for its proposal to raise the annual bonus for executives from two times their base salary to three, but 38.2% of shareholders opposed it.
The Church of England (CoE) Pensions Board also recently said the executive pay system is “broken”, following UK retailer Next’s decision to reward CEO Simon Wolfson £4.4 million. Again, the pay package achieved a shareholder majority, but the CoE Pensions Board voted against.
Adam Matthews, Chief Responsible Investment Officer for the CoE Pensions Board, wrote on LinkedIn: “Let’s be clear this can’t be about tinkering around the edges. Fairness and societal license need to be at the heart of a rethink, otherwise we will continue to be complicit in a remuneration system that is fundamentally unfair and contributing to social inequality.”
The more frequently pay battles make the headlines at AGMs, some believe, the more the pressure will build for change. While Say on Pay votes may be advisory and non-binding, their growing adoption has meant that pay disagreements “have become more visible to the outside world and individual pay decisions are therefore more open to scrutiny”, says Stratford.