Shareholder and management pay resolutions in the 2021 proxy season

Remuneration and pay equity is a key battleground for investors reflecting on equality, race and the recovery from Covid

As shareholders and civil society continue to table resolutions on remuneration this proxy season, there is a clear focus on pay equity – between management and workers, as well as gender and racial pay equity.

Resolutions have been filed asking companies to report on, or address, gender and racial pay gaps. Biotechnology company Biogen and healthcare organisation Cigna are both being asked for more data on their gender pay gaps, for example, by US consultancy Proxy Impact. Canada’s Shareholder Association for Research and Education, better known as SHARE, has submitted a resolution at Walmart asking it to disclose its plans to address the gender and race pay gap, while the Franciscan Sisters of Perpetual Adoration are requesting that the supermarket giant explains how it reconciles its racial justice commitments with a starting wage of $11 an hour.

As well as the usual proposals asking for CEO pay to be tied to worker pay, a couple of resolutions pull several issues into one. Domini Impact Investment, for example, has filed two resolutions – one at Walt Disney, the other at Chipotle Mexican Grill – titled Strengthen Board Oversight of Workplace Equity Issues, which address CEO/worker pay, paid sick leave and pay equity in general. At retailers Burlington and TJX, Trillium Asset Management and Newground Social Investment are asking the board to take into account the pay grades and salary ranges of employees when setting target pay for the CEO. Both companies’ workforces are made up mostly of women and people of colour. A similar resolution was put to 3M by the United Steelworkers.

Sick leave

While most pay resolutions this proxy season centre on pay equity and tying executive pay to ESG, the single request that is being tabled the most is for companies to report on the feasibility of paid sick leave – a situation that will give pause to European readers. Many US companies adopted paid sick leave only in response to the pandemic, and do not have plans to continue the benefit. Resolutions were filed at discount retailer Dollar General, pharmacy CVS, fast food chain McDonalds, and retailer Walmart, among others, and are being challenged at the US Securities and Exchange Commission as companies seek to have them kicked off the ballot. 

Tying executive pay to ESG metrics

The range of resolutions tying pay to ESG metrics is as broad a house as ESG itself. A couple have been withdrawn already, including one from NorthStar Asset Management seeking to tie diversity at senior management level to executive pay at green investment house Hannon Armstrong, when the company agreed to hire a consultant to prepare a report. 

“The company was actually quite willing to engage in dialogue with us,” notes Mari Swartzer, NorthStar’s Director of Shareholder Activism and Engagement. “The decision to withdraw was also due to hearing from the CEO himself that he is committed to improving diversity within the company ranks and specifically in the senior management team. We believe that improving diversity at a company needs to include a commitment from the top level of management.” Alphabet (Google) is facing a resolution calling for it to tie long-term material sustainability targets and senior management gender, race and ethnic diversity to executive incentives. That resolution has been submitted by Zevin Asset Management, American Baptist Home Mission Society and Mercy Investment Services. Zevin has withdrawn a similar proposal at Apple, because the company agreed to introduce an ESG ‘modifier’ to its annual bonus plan, meaning that bonuses can be adjusted up or down according to sustainability performance results.

Say on Pay resolutions

Many companies made changes to their executive compensation policy in response to the pandemic, some reducing salaries or independent director retainers, others adjusting targets, canceling bonuses or making one-off awards. In what looks to be a stormy proxy season, several companies have already lost Say on Pay votes. 

Proxy advisor Glass Lewis said in its statement of policy, which indicates how it views changes to executive compensation in the context of Covid, that it would be looking carefully at potential windfalls, major structural changes to short- or long-term incentive plans, one-off awards and increases to quantum (ie large pay rises). The statement was very clear about the additional vigilance that would be in play, using words like “great scrutiny”, “wary” and “viewed with caution”. Even companies that did well during the pandemic, it added, would find it difficult to justify high payouts to executives.

Fellow proxy advisor ISS was only a little less firm in its statement of policy, warning companies to expect increased scrutiny on excessive use of shares for bonuses, performance measure adjustments, and changes to performance periods. One-off awards would be of particular concern, it said. Companies, warned ISS, “will be forced to choose between lying in the bed they’ve made or changing arrangements and all but guaranteeing shareholder ire”.

Jamie Bonham, Director of Corporate Engagement at Canada’s NEI Investments – which votes against absolute levels of executive pay, rather than just relative levels – questions the assumption that pay is the only way to incentivise performance. While employee wages have stagnated in recent years, CEO pay has continued to rise, he notes. 

“Companies seem to be finding other ways to incentivise performance for employees. Otherwise we would have seen a similarly dramatic rise in employee wages. Why do we use a different set of assumptions when thinking of how to incentivise executives?” 

“I would love to see us have a collective conversation on what drives people to excel, because I don’t think the answer is going to be money. And, frankly, if the only reason a corporate leader is showing up to work is for the paycheque, then surely we need to question if they are the right person for the job.”

Even with backing from BlackRock, Amerisource very narrowly won the Say on Pay vote on March 11. Walgreens Boots Alliance (which recently lost its own pay vote) owns 27.7% of Amerisource’s stock and has an executive on its board, making it very difficult for a majority vote against.

Ryan Colucci, a Senior Associate at US pay consultancy Compensation Advisory Partners (CAP), says that, rather than a complete collapse in support for companies’ proposed pay packages, voting is likely to hit around 2.4%. In his recent report looking at a decade of Say on Pay, he highlights that ‘no votes’ have ranged between 1.4% to 2.4% over the period, so this estimate sits at the top end of the trend. 

CAP’s Principal, Shaun Bisman, says companies changing incentive plans to ensure that executives get paid out regardless of performance know they might prompt a ‘vote no’ recommendation from proxy advisors, but that many would accept a dip in shareholder support on pay if it allowed them to motivate and retain key talent.

Both Colucci and Bisman note the value of the ‘stock price can save you’ mantra. In other words, companies making changes to incentives would more likely be forgiven by shareholders if their long-term total shareholder returns did not suffer.