Shareholders almost always approve ‘Say on Pay’ votes – but that doesn’t make them meaningless

That decline was likely, in large part, due to a recommendation by proxy advisers Institutional Shareholder Services and Glass Lewis who urged people to vote no on the plan.

Catherine McCall, the chief executive officer of Toronto-based Canadian Coalition for Good Governance, said it’s “very rare” for shareholders to outright reject compensation plans for executives.

“It’s usually above 90 per cent in favour of the board’s approach to comp,” she said. “They support the management and it’s very unusual to have a Say-on-Pay proposal pass, meaning they disapprove of management.”

Recent numbers bear out that fact. According to the Harvard Law School Forum on Corporate Governance, 98.8 per cent of votes have passed in year-to-date in 2024 for firms on the S&P 500. Just 1.2 per cent failed, and 4.1 per cent passed with less than 70 per cent support.

But that success rate doesn’t mean it’s a pointless exercise, and a vote that dips below 90 per cent approval can provide fodder for conversation for a board, said McCall.

“If you get even a significant number of votes against by shareholders — like an 80 per cent vote in favour of the management Say on Pay proposal, that would be considered a low vote,” she said.

That level of rejection, while still a minority, is a signal that there needs to be some engagement with shareholders to find out what they don’t like, she said.

“It’s a binary vote — yay or nay — so you don’t get a lot of information about what shareholders don’t like,” she said.

Why bother with Say on Pay?

If the vote is essentially a rubber stamp, then why bother conducting it in the first place? McCall said there have been a lot of good things, that may not be obvious, that have come out of Say on Pay since it started in 2007.

Disclosure has improved “incredibly” around how senior leaders are paid, she said.

“In the proxy circulars, you get a lot more detail, a lot more background, and a lot more explaining,” said McCall. “It has increase dialogue between shareholders and management or the board.”

It’s also a way of holding boards and management to account.

“If you look at it from the other side, from the management perspective, it’s ‘who are these annoying shareholders?’ Well, the shareholders own shares, and they have certain rights associated with that ownership,” said McCall.

Shareholders are not compensation experts: Pittman

Paul Pittman, president of Toronto-based The Human Well, a boutique HR consulting practice based in Oakville, Ont., said shareholders are not experts on executive pay — and aren’t experts on a lot of things about the business.

“That’s why you have experts, and that’s why you have board committees who spend a lot of time sweating over pay,” he said.

But that transparency is a good thing, as is raising awareness among the shareholders about why and how compensation is designed the way it is, he said.

“Pay is an art form masquerading as a science,” said Pittman, noting there are nuanced and tailored circumstances that must be taken into account when designing plans.

Lessons for private companies?

Both McCall and Pittman said there is some value for private companies in looking at the way executive compensation is structured at public companies, as it can provide blueprints and insights into trends.

“The primary reason you measure yourself against the outside world is to prevent other companies stealing your best people,” said Pittman. If your leaders are the people who founded the company, or part owners, there’s not a lot of concern on that front.

The dilemma comes when looking at some of the other senior executives at private companies, who are at risk of being poached by publicly traded ones, he said.

“Do you compare yourself with public companies? Public companies typically pay more because executives go to jail if they don’t do things right,” said Pittman. “So, really, it’s part of your philosophy in deciding what you’re going to pay your execs.”

Give employees a say?

Pittman said he’s always been fascinated with the idea of asking the employees, rather than shareholders, about compensation plans.

“If you ask a group of people in an organization whether Fred is worth this sort of pay increase, they’ll have a view and generally it will be the right view,” he said.

But he has yet to see an organization head down that road when it comes to paying the C-suite.

“No,” he laughed. “It’s a bridge too far. But if you believe in engagement, then it’s the natural closure I think.”

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