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Illustration: Aïda Amer/Axios

Companies that fail their "say-on-pay" votes — in which shareholders give thumbs-up or thumbs-down on the compensation of the C-suite — tend to perform worse than the market and their peers, research from Morgan Stanley finds.

Why it matters: "Say-on-pay failures should be taken as a meaningful red flag for investors," the firm says, noting that there's increased scrutiny of CEO pay this year as COVID-19 forces mass layoffs and furloughs.

Where it stands: Public companies are required to hold say-on-pay votes at least once every three years, per rules ushered in by the Dodd-Frank Act and approved by the SEC in 2011.

  • The vast majority of companies get approval from their shareholders in these referendums, which are non-binding.
  • But among the approximately 2.5% that get less than 50% of shareholder buy-in, there are often bigger problems at work.
  • "Companies in our US coverage that failed their say-on-pay votes in 2019 have underperformed the market by 20%, on average," according to Morgan Stanley (where I once worked).

The details: Among companies that failed their say-on-pay votes in 2019 — like Netflix and Williams Sonoma — many haven't yet had their 2020 annual meetings, where such votes are taken.

  • Two companies that failed say-on-pay votes both in 2019 and 2020 are Qualcomm (which saw only 17% of shareholders support its say-on-pay vote in April) and Iqvia Holdings (which saw 46% support).

"I think of say-on-pay as a very unique window into how shareholders are perceiving not just executive compensation, but governance practices as a whole," Mark Savino, equity strategist at Morgan Stanley, tells Axios.

The intrigue: Since the advent of COVID-19, many companies have announced that their CEOs were taking salary cuts, some as much as 100%.

  • "Through May 2, 432 Russell 3000 companies announced or publicly disclosed compensation actions in response to COVID-19," according to Semler Brossy, an executive pay consultancy.
  • But salary is typically a small part of a C-suite executive's compensation.
    • Take Netflix's CEO, Reed Hastings: Per Deadline, his compensation package totaled $38.58 million for 2019, but his base was only $700,000.

What they're saying: In a year when employees are losing their jobs en masse, it creates good optics for top executives to forgo some pay.

  • "Given the intensity of the spotlight on executive compensation in normal market conditions, a temporary reduction in executive salaries may very well produce an outsized impact on market perception in today’s climate," per Longnecker Associates, a compensation consultancy.

Coronavirus has also changed investors' ESG priorities — environmental, social and governance — however temporarily.

  • Before COVID-19, "climate change as a whole was the overwhelming majority of focus and inbounding queries that we that we were receiving from investors" regarding ESG," Savino says.
  • These days, the "attention and focus has shifted much more towards the social and governance elements," such as the treatment of employees and executive compensation decisions.

The bottom line: "We believe a failed say-on-pay vote (especially when occurring in multiple years) can suggest a lack of engagement or misalignment between company management and its shareholders, and can also highlight underlying shareholder concerns about a company's performance and strategy," according to Morgan Stanley.

Go deeper

Jul 31, 2020 - Economy & Business

Australia orders tech to pay media firms for access to content

Illustration: Sarah Grillo / Axios

A new draft code of conduct released on Thursday by officials in Australia would require tech giants like Google and Facebook to start paying news companies to distribute their content.

Why it matters: If Australia adopts the plan and it becomes a model for others around the world, such measures could offer a significant boost to the news industry, especially local news, as it faces financial decline.

2 hours ago - World

Maximum pressure campaign escalates with Fakhrizadeh killing

Photo: Fars News Agency via AP

The assassination of Mohsen Fakhrizadeh, the architect of Iran’s military nuclear program, is a new height in the maximum pressure campaign led by the Trump administration and the Netanyahu government against Iran.

Why it matters: It exceeds the capture of the Iranian nuclear archives by the Mossad, and the sabotage in the advanced centrifuge facility in Natanz.

Scoop: Biden weighs retired General Lloyd Austin for Pentagon chief

Lloyd Austin testifying before Congress in 2015. Photo: Chip Somodevilla/Getty Images

Joe Biden is considering retired four-star General Lloyd Austin as his nominee for defense secretary, adding him to a shortlist that includes Jeh Johnson, Tammy Duckworth and Michele Flournoy, two sources with direct knowledge of the decision-making tell Axios.

Why it matters: A nominee for Pentagon chief was noticeably absent when the president-elect rolled out his national security team Tuesday. Flournoy had been widely seen as the likely pick, but Axios is told other factors — race, experience, Biden's comfort level — have come into play.