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Article | Executive Pay Memo North America

2020 proxy season review: Say-on-pay post-season update

Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Laura Elmore , Henry Mbom and Brian Myers | September 14, 2020

The calm before the storm: Decisions made during the COVID-19 environment will largely be scrutinized in 2021

Despite a slow start to the 2020 proxy voting season due to the coronavirus (COVID-19) delaying annual shareholder meetings for many companies (we saw approximately 16% fewer vote results as of mid-May and 7% fewer results as of early June), the year-to-date voting results are largely consistent with outcomes in recent years. The overall rate of say-on-pay (SoP) proposals failing to receive majority support held steady at 3% for companies in the Russell 3000, and the average support for SoP proposals remained at 90% for the fifth year in a row. So, while there is an abundance of uncertainty in the ongoing COVID-19 environment, it has not yet translated into widespread action in the SoP realm.

ISS ‘against’ recommendations and ‘high’ concern levels on the decline

The number of “against” recommendations has steadily declined since spiking in 2018 with 14% of SoP proposals receiving an “against” recommendation from Institutional Shareholder Services (ISS). While 2020 is currently at the lowest level of “against” recommendations in 10 years, we do note that the most recent SoP reviews have generally been under the auspices of a pre-COVID-19 world. The first half of the year largely reflects pay and performance ending with the 2019 calendar year, and though it seems like a distant memory at this point, 2019 saw strong total shareholder return performance (the S&P 1500 was up approximately 31% for the year). The overall strength of the market likely played a role in the diminishing level of “high” pay-for-performance concerns from ISS (67% of negative recommendations, down from 83%), leading to a lower level of negative recommendations. As we move forward toward 2021 and begin to see 2020 COVID-19-related decisions around compensation program design performance and adjustments, we expect an eventful year full of proxy advisor and investor scrutiny.

Even with fewer negative ISS recommendations, we are still seeing failure levels in line with recent years. The weight of an ISS vote recommendation remains strong (with an approximate 30-percentage-point difference between “for” and “against”), though we like to caution not to let the spotlight become too narrow. Institutional investor votes and their perspectives are very important, and their use of proxy advisor services varies. The largest investors use internal policies to determine their votes, and though they use ISS and Glass Lewis reports as resources, they do not necessarily vote in lockstep with recommendations from the largest proxy advisors. We believe this reinforces the importance of not only continuing to monitor and understand proxy advisor policies and pay-for-performance alignment but also the need for proactive and ongoing shareholder engagement.

Severance concerns demonstrate increased impact on ISS ‘against’ vote recommendations

While perceived pay-for-performance disconnect and compensation committee responsiveness (or lack thereof) are still the primary drivers behind ISS “against” vote recommendations, we are increasingly seeing problematic severance arrangements cited in reports. In 2020, 20% of companies receiving an “against” vote recommendation from ISS were flagged as having a “high” level of concern related to severance. The main triggers for the “high” concern were insufficient rationale (41%), providing severance upon voluntary departure (36%) and the magnitude of cash severance provided (23%).

As with other areas, such as incentive plan design and shareholder engagement, ISS will flag companies that provide limited disclosure and/or rationale for severance actions taken. Companies are encouraged to provide sufficient background and contextual details, with rationale for decisions made in order for shareholders to adequately assess whether the company is acting responsibly and appropriately. If sufficient details are not disclosed, e.g., differentiation between involuntary not-for-cause termination versus poor performance, ISS and shareholders are left to make assumptions with the worst-case scenario often taking hold.

Outside of a change-in-control (CIC) scenario, severance payouts are typically only provided in the event of involuntary termination without cause and sometimes upon voluntary resignation for “good reason” where “good reason” is defined in a formal severance policy or employment agreement. Further, we generally see the market differentiate involuntary cases deemed as “poor performance” with ineligibility or reduced severance. ISS does not consider “poor performance” severance or severance upon a voluntary termination to be best market practice, especially when the payment does not appear to be contemplated under an existing agreement.

While there is general angst around providing severance, it usually does not rise to the level of inducing opposition to SoP until the mechanics of the payout fall outside market norms, which is why it is important to drill down into the details of what is driving the magnitude of the severance payout. The usual culprits are payout formulas that exceed market standards by including long-term incentives (LTIs), bonuses based on maximums or highest historical payouts (rather than target or actuals), or plan provisions that provide cash-outs or acceleration of incentive awards that might not otherwise be earned based on performance. In 2020, we’ve seen the following examples of magnitude concerns regarding severance:

  • Named executive officer receiving large consulting fees for an advisory role with the company in addition to regular severance payment
  • Sizable noncompete cash payment in addition to a supplemental retirement plan
  • Large inducement award in excess of $20 million
  • Agreements providing for non-CIC severance payment equal to 2.99 times the executives' "base amount"
    • This basis exceeds the upper parameter of acceptable non-CIC severance amounts under current market norms.

First-time failed votes at highest level in five years (again) — but recovery is possible

So far in 2020, 36 companies failed to receive majority SoP support for the first time (72% of all SoP failed votes), which is the highest percentage of first-time failures in the past five years. Midyear results in 2019 were also at higher-than-norm levels, before ultimately leveling off by year-end. The top three reasons companies fail for the first time have consistently been (1) a lack of rigor in incentive plan metrics, (2) the majority of LTIs not being performance-based, and (3) a substantial increase in compensation year over year without sufficient justification or commentary.

Companies are learning how to respond to a failed SoP vote, though: 75% of organizations that failed in 2019 recovered to an above-majority result in 2020. In the wake of low shareholder support, there are proven steps that companies can take to reverse course in the eyes of shareholders and proxy advisors:

  • Actively reach out and engage with shareholders, specifically targeting your largest and most vocal institution investors.
  • Streamline the compensation discussion and analysis (CD&A) to increase clarity around plan design, metrics and rationale and to demonstrate your responsiveness to shareholders by describing engagement efforts and resulting plan changes.
  • Incorporate additional performance-based compensation elements by, for example, adding performance metrics to an existing plan or introducing a new performance-based LTI vehicle.
  • Differentiate performance metrics, weightings and measurement periods in annual and LTI plans.

Overall, while pay-for-performance continues to be the largest concern, we increasingly see responsiveness and severance features as aspects that demand attention from companies. In addition to monitoring market actions, focusing on CD&A disclosure to provide background and rationale can proactively mitigate concerns the proxy advisors and investors might otherwise have.

For a more detailed report summarizing the 2020 proxy season, please download the pdf below. The summary covers this year’s voting trends on SoP, say on golden parachutes and equity plan proposals. Slides include several topic breakdowns, all using data as of July 17, 2020.


Associate Director, Executive Compensation (Arlington)

Senior Associate, Executive Compensation (New York)

Governance Team Lead, North America & Director, Executive Compensation (Arlington)

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