Learning their lesson: companies with low opposition in 2021 who took action & gained support in 2022

There were 11 S&P 500 companies that received very low votes in 2021 and were able to increase support by 30 percent or more by the 2022 season. In many cases these companies took actions that answered shareholders concerns. In some cases action was taken to specifically reduce compensation or an element of compensation.

For example, at AmerisourceBergen the committee applied negative discretion to the CEO annual bonus (a reduction of 45 percent) as a response to investors' feedback. In 2021, AmerisouceBergen was the focus of a vote against pay from several state treasurers. The company faced a $6.6 billion global settlement related to its distribution of opioids cost, that was excluded from performance calculations. The negative discretion as well as improved disclosure led to opposition to pay falling from 48.4 percent to 4.4 percent.

Chipotle was the company with the most improved advisory pay vote. Only 3.3 percent of shareholders opposed pay in 2022, well below even a typical opposition level. Total compensation for the CEO fell by 53 percent, from $38.3 million to $17.8 million. Shareholders lauded Chipotle’s clear disclosure of engagement, shareholder feedback and actions taken. Reforms adopted included:

·         Added cap: payouts will be capped at 100 percent of target if 3-year relative Total Shareholder Return (TSR) is below the 25th percentile of the S&P 500 constituent companies.

·         The Compensation Committee eliminated certain perquisites in 2022, including housing and commuting costs to our company headquarters, car allowances, and tax gross ups on financial and tax planning services.  

·         Added quantitative goals to the ESG component of the 2022 Annual Incentive Program (AIP).

PTC saw more than a 50 percent decrease in CEO pay and in shareholder opposition to pay: 48.62 percent of shareholders voted against in 2021, and only 3.3 voted against in 2022. Pay for the CEO fell from $38M to $17.8M. The company acknowledged in its proxy statement the reason for the high opposition the prior year “We understand that stockholders disfavor special or off-cycle awards. Our executive officers’ FY21 compensation did not include any such awards, and no such future awards are currently contemplated.”

The PTC proxy statement notes, “some shareholders indicated a preference for 3-year cliff vesting for performance-based equity, rather than our existing structure of three-year performance-based awards with interim annual performance measurement and vesting opportunities.” The company initiated such a change for a portion of its 2022 rewards. The company also noted, however, “Stockholders expressed a wide variety of different perspectives on our executive compensation program design and/or disclosure, with no significant overlap or consensus among the stockholders’ perspectives about other elements of our executive compensation program.”

At Skyworks, the total disclosed compensation fell by 26 percent, from $21.8 million to $16.1 million. A significant number of shareholders were not satisfied with the company’s language on future large awards and still voted against the pay package. However, the company adopted a clawback policy in 2021, and (retroactively) increased the target goal for the FY21 relative TSR Long-term Incentive (LTI) awards to the 55th percentile of the peer group.  With respect to 2022 awards the company made a number of changes including:

·         Changing metrics, eliminating one for which details could not be disclosed and replacing it with  a more transparent one

·         Extending performance period

·         Extending vesting period

·         Removed some large companies from comparator group

The highest pay figures often reflect mega grants, and the subsequent year the absolute number falls. Sometimes companies mumble “we don’t plan to do it again” and hope that will be enough for shareholders. As noted in this blog, that is not the case. Shareholders do not consider that to be sufficient.

However, AT&T went a step further, noting in its proxy statement that, “In the extraordinary circumstance where a one-time grant may be necessary to support the Company’s critical strategic priorities, the Committee commits that the grant will include a performance component based on market conditions.” The commitment to performance conditions may have made the difference. In addition, the Committee replaced 100 percent Return on Invested Capital (ROIC) with 50 percent EPS growth and 50 percent ROIC for the 2022 long-term incentive plan metrics.

The company with perhaps the best disclosure of the change it made, and the extent of its outreach, was Marathon Petroleum. A chart in the proxy statement lists significant changes made in several governance, annual bonus and long term bonus. The company, which had been a bit of a governance laggard, is moving toward adopting several best practices including annual votes on directors and separating the chair and CEO. Compensation changes included:

·         Updated compensation reference group (or peer group) to reflect the fact that the company is smaller after the sale of its Speedway business

·         Eliminated discretionary component of annual bonus, increasing the weighting of financial performance and adding an ESG metric with quantitative goals tied to greenhouse gas emissions intensity and diversity, equity & inclusion

·         Reduced the types of equity awards granted from five to three and discontinued the use of stock options

·         Increased alignment with shareholders by denominating performance share units in shares of MPC common stock (previously denominated in dollars)

At Phillips 66 the company removed a relatively large potential upward modifier based on individual performance in FY21 based on shareholder feedback. For the LTI program the company adding a cap on relative TSR payout if absolute TSR is negative and increased the relative TSR target for FY22.

A key factor in every upward trend was engagement and shareholders are not willing to be satisfied with simple check-the-box phone calls. Most companies are disclosing the percentage of shareholders they reached out to and timetables of engagement. More shareholders are asking to meet with members of the compensation committee and that evolving best practice is seeing greater adoption each year. Here are a few examples from proxy statements:

·         Chipotle: Executive officers and other senior members of our People Experience, Legal/Corporate Secretary, Sustainability and Investor Relations teams participated in these meetings, with members of the Compensation Committee available upon request.

·         Phillips: Many of these conversations were led by two of our independent directors. In November 2021, we had a second round of conversations with many of the same shareholders, including investors representing 40% of shares outstanding

·         PTC – Under the heading “Who Engages”: A member of our board of directors (either our Chairman of the Board, Robert Schechter, who is also a member of the Compensation Committee, Mark Benjamin, Chair of the Compensation Committee, or Janice Chaffin, Chair of the Nominating and Corporate Governance Committees and former Chair and current member of the Compensation Committee) participated in the majority of these discussions

·         Starbucks: Mary N. Dillon, our independent chair of the Compensation Committee, participated in meetings with investors representing 17% of our total shares outstanding

Of course, as can be seen in the votes and in the information above, the component of engagement that matters the most isn’t the percentage of investors called, but the actions that flow from engagement. The examples of company changes above, however are proof that votes against compensation packages are slowly influencing compensation practices.