Investor support for “say on pay” plans at companies in the S&P 500 has increased to its highest level since 2020, with many issuers seen as taking a more conservative approach to compensation due to weaker market conditions.

The 457 remuneration plans that have faced a vote in the first eight months of this year have won an average of 88.9% support from investors, compared to 87.7% in all of 2022 and 88.5% in 2021, according to the Diligent Market Intelligence (DMI) Voting module.

In the same period, only 11 (2.3%) S&P 500 director remuneration plans have failed to receive majority support, compared to 19 (3.9%) throughout 2022.

“Disclosure around one-time actions such as grants for single special awards to a named executive officer has continued to become more comprehensive over the last few years, with companies largely responding to investor asks on pay philosophy and pay design disclosure,” Semler Brossy Principal Austin Vanbastelaer told Diligent Market Intelligence (DMI).

“One of the biggest ‘say on pay’ challenges companies face is explaining the rationale behind these one-time actions, and we did see a bit of a pullback in the number of these actions related to COVID, which were more common in both 2020 and 2021 pay outcomes,” he said.

Sector breakdown

In the first eight months of the year, companies in the energy sector secured the highest level of support from investors for their “say on pay” plans at 94%, followed by the utilities sector at 93.5%.

U.S. utility company Pacific Gas and Electric Company’s (PG&E) pay plan won the highest level of backing from shareholders out of all such proposals during the period, receiving 99.9% support at its May 18 annual meeting. Glass Lewis had urged shareholders to back the proposal, while Institutional Shareholder Services (ISS) recommended against.

Energy giant EQT Corporation’s plan secured 98.8% support at its April 19 annual meeting, with both proxy advisors recommending a vote in favor.

In both instances, the companies were commended for their robust disclosure and alignment of pay with company performance.

“Our view is the stability of both pay and performance in those industries contributes to higher support,” Semler Brossy Consultant Justin Beck told DMI. “There is less volatility in performance that would typically lead investors to be concerned about and vote critically on executive pay practices; and lead companies to make reactive decisions on pay design such as special awards and outsized pay.”

The adoption of climate metrics in these sectors has also contributed in part toward support levels. “It is still a second-order topic after pay magnitude and overall mix of performance-based pay, but certainly is a positive factor when investors evaluate executive pay for a company where there may have otherwise been some concern about performance or pay relative to market.”

On the other end of the scale, the communication services sector received the lowest level of backing from investors with seven pay proposals receiving an average of 81% support in the period.

This is followed by real estate with an average support rate of 84.8% support, a trend evidenced at Simon Property Group’s May 4 annual meeting, which saw a record 89% of shareholders reject its remuneration package with concerns over poor alignment between pay and performance. Tech companies also encountered lower levels of support, with pay plans attracting an average of 85.8% backing.

“The communications, real estate and tech industries are the more volatile industries where we’ve seen some challenging performance over the 2022 period that this round of ‘say on pay’ votes covers,” Beck said. “In the tech sector, a lot of the ‘one time’ actions around large awards, and in some cases top-ups to restake the loss in equity value have caught up to a handful of companies.”

Proxy voting advisors

Support for pay plans from proxy voting advisor ISS has grown since 2022, hitting an average of 89.1% in the first eight months of 2023, compared to 88% in 2022.

Support from Glass Lewis, however, continued on its downward trajectory, with an average backing of 82.7% recorded so far this year, compared to 86% in 2022, and 87.3% in 2021.

Glass Lewis has increased its focus on compensation, highlighting in a policy update ahead of the 2023 proxy season that it had revised its threshold for the minimum percentage of the long-term incentive grant that should be performance-based from 33% to 50%, raising the bar for remuneration committees seeking to win its support.

“Beginning in 2023, Glass Lewis will raise concerns in our analysis with executive pay programs that provide less than half of an executive’s long-term incentive awards that are subject to performance-based vesting conditions,” the proxy advisor warned.

As compensation remains in the spotlight, the investor community will also likely observe the level of consideration proxy advisors will give to the U.S. Securities and Exchange Commission’s (SEC) Pay for Performance rule, which requires issuers to disclose information reflecting the relationship between executive compensation and the company’s financial performance.

“I don’t think it has had an impact this year, nor do I think it will be particularly influential going forward unless the proxy advisors build it into the recommendation models,” Brian Bueno, ESG practice leader with Farient Advisors, told DMI.

However, with market conditions remaining volatile and company performance closely watched, investors are expected to maintain stringent expectations on executive compensation and pay for performance alignment.

“Although we haven’t found a specific correlation between ‘say on pay’ votes and stock price performance, empirically, investors tend to be more forgiving of executive compensation if they are ‘getting paid’ as well through stock price appreciation,” Bueno concluded.