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.