US investors revolt against executive pay in record numbers

Executive bonuses in the United States have received record investor support this year, after the board decided to relax performance targets during the pandemic.

So far, in 2021, shareholder support for US executive bonuses is at its lowest since 2011, the year “say on pay” votes were made mandatory, according to Equilar, a salary data company. This year, average support for salary packages fell to 87.6%, from 91.8% in 2015.

This year, six S&P 500 companies – including General Electric, AT&T, IBM and Starbucks – failed to garner a majority of shareholder support for the compensation packages. This compares to 10 cases in 2020 where a majority of shareholders voted against a company’s bonus plan, according to ISS Corporate Solutions.

Some asset managers have said they expect this year to be a record of failed salary votes at S&P 500 companies. For Russell 3000 companies, the failed salary vote rate up to ‘early May was higher than in 2020 and 2019, the ISS said.

BlackRock, the world’s largest asset manager, doubled its votes against executive compensation proposals in the Americas in the first three months of 2021 compared to the previous year, according to a report released last week.

More companies are at risk of failing the pay vote as the annual meeting season in the United States gains momentum in the coming weeks. Barry Diller’s media and internet conglomerate IAC Group raised objections to executive bonuses from proxy advisory firms ahead of the company’s May 14 meeting.

Altria, the Marlboro cigarette maker, and Union Pacific, the railroad group, are also at risk of failing pay votes in the coming weeks, according to a report released last week by Morgan Stanley.

“The fact that there was a pandemic last year has potentially increased awareness of compensation against things like layoffs and general suffering,” said Lisa Edwards, president and chief operating officer at Diligent, a provider of corporate governance software.

The scrutiny of bonuses was “likely to remain reasonably high,” Edwards said, adding that the failed pay votes were “potentially the start of a trend.”

Although these salary votes are advisory and not binding, they can be detrimental to companies. From 2017 to 2019, most companies that failed pay votes underperformed the S&P 500 and their industry peers, Morgan Stanley said.

Additionally, activist investors saw the failure of paid votes “like blood in the water,” said Lawrence Elbaum, partner at Vinson & Elkins.

“A bad opinion on the salary vote is one of the clearest early warning signs that an activist is going to knock on your door because they have seen shareholders are upset,” Elbaum said.

Many of the notable negative reactions to wages this year stem from changes to the bonus plan designed to help executives earn big bonuses during the stock market crisis of the pandemic.

More than 100 S&P 500 companies have rewritten bonus plans for executives in the wake of the pandemic, according to Esgauge, a data analytics company, and the Conference Board.

At Walgreens Boots Alliance, a drugstore chain, the board has rewritten the executives’ long-term bonus plan to insulate their wages from the business upheaval caused by Covid-19. Asset manager Vanguard, who voted against compensation packages at Walgreens, said the company should have presented “a compelling rationale” for the bonus changes. About 53 percent of Walgreens shareholders voted against the bonus.

GE’s board has also been working hard to rewrite bonuses during the pandemic. CEO Larry Culp’s new contract reduced the share price at which he would earn free shares and nearly doubled the amount of shares he would receive. The payout could reach a maximum of $ 230 million earned in 2024 at the earliest if it stays with the company. GE shareholders revolt on his compensation at the company’s May 4 meeting.

“When you give someone a $ 230 million retention reward, you can’t be very surprised that you’re going to get the ire of investors,” said Marc Hodak, partner at Farient Advisors, an investment consulting firm. executive compensation.

Union Pacific, which will hold a compensation vote at its annual meeting on May 13, stripped the worst months of the pandemic for its businesses of performance targets for its executives. By eliminating the second quarter of 2020 from executive bonus plans, Union Pacific’s chief executive is up about 10% from 2019, Morgan Stanley said.

“It’s interesting that there is no symmetry in the way discretion and adjustments are made,” said Simiso Nzima, chief investment officer and head of corporate governance at CALPERS. Bonuses are never limited when companies benefit from positive economic forces beyond the control of executives, he added. “You can’t have it both ways.”

While they may complain about executive compensation, investors tend to support management because of the belief that high bonuses are needed to retain executives and because leadership transitions can hurt stock prices. ‘a company.

But the pandemic has highlighted pay inequalities that are becoming hard to ignore, said Allison Binns, an equity strategist at Morgan Stanley, who said the string of pay-over-vote failures could herald a permanent change in behavior. investors.

“It may be a catalyst for reducing wages,” Binns added.

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