The number of activist investors making compensation related demands during proxy contests has jumped to its highest level since 2013, according to a recent article from Activist Insight. Through the first half of the year, 12 proxy contests have focused at least partially on the CEO’s compensation structure and if 4 more do so, it will set the highest mark since 15 in 2019. The trend is strong in Europe, as well, where 39 companies were hit with compensation demands and 8 more have been filed this year.
So, what is driving the complaints? Several activists highlight that share prices over time have declined far more sharply than executive compensation. That makes an impactful headline while ignoring several basic elements of the executive talent marketplace. In cases of sharp share price decline, the CEO is losing most, or all, incentive pay. Further, salary cuts have a poor track record for retention, and it is generally far more expensive to have C-Suite turnover than stability.
Kai Liekefett, co-chair of Sidley Austin’s shareholder activism practice, highlighted the increased sophistication of activist complaints in an Agenda article. Activists run full pay-for-performance analyses, focus on how the equity plan functions, and pull in outside opinions, such as proxy advisory firm reports. Overall, Liekefett notes that there is a “damned if you do, damned if you don’t” element to the activist complaints. Too much cash and boards are criticized for insufficiently linking pay to performance; too much stock, and accusations are raised of diluting shareholder equity.
Overall, defense against these complaints is based on preparation and building relationships. Directors, especially compensation committee members, should be ready to defend a compensation structure in some detail, including peer group selection. During periods of calm (or high levels of shareholder support for say-on-pay proposals), companies should focus on consultant scenario testing and planning, engaging with institutional investors, and proxy advisors. Additionally, preparation for potential future criticisms would be worthwhile. As companies disclose more ESG and HCM data (either by choice or from regulatory requirements), be prepared to defend that disclosure and initiatives to improve. Using ESG or D&I metrics in the incentive plan presents additional risks. Ambiguous, qualitative goals and/or relatively small weightings could create reputational risks during an activist campaign, but significantly greater weights could drive criticism that the plan is not sufficiently tied to shareholder returns.
