Investors Challenge High Executive Pay as SEC Requires More Data

Companies face increasing pressure over excessive executive pay amid increasing levels of scrutiny from shareholders and a more robust disclosure rule from the Securities and Exchange Commission.

A record number of companies failed to receive majority support from shareholders for CEO pay during the most recent proxy season, according to a recent PwC report. And in the courts, a string of recent lawsuits demonstrate how disgruntled shareholders are airing their gripes over executive pay at companies including online real estate brokerage eXp and electric vehicle manufacturer Mullen Automotive.

Investor scrutiny is expected to ramp up next proxy season, lawyers say, as shareholders will have more accessible information at their fingertips under the SEC’s recently finalized rules requiring companies to report more detailed pay-versus-performance data in their proxy statements.

Recent financial turmoil as well as tougher environmental, social and governance standards from investors are propelling increased scrutiny of how much pay executives are raking in, lawyers say.

“The pressure will increase, not abate,” said Jonathan Ocker, a partner at Pillsbury, noting that the scrutiny could come from a range of stakeholders including customers, employees and more.

New SEC Rule

The long-awaited pay versus performance rule has been in the works for a decade. The 2010 Dodd-Frank Act required the SEC to issue standards for companies to provide information in proxy statements about how executive compensation links to firms’ financial performance.

The rule, completed in August, “makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies,” Chairman Gary Gensler said at the time. “I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies.”

Companies will have to start detailing the link between executive compensation and returns that investors make from holding stock, using a common metric called total shareholder return. In the past, companies have been able to use their own metrics in describing executive pay. The rules take effect Oct. 11.

Companies will be required to provide a table of executive compensation and financial performance measures for the past five fiscal years. They’ll also have to explain what specific performance measures they’ve linked to compensation.

The new rule makes executive pay information “really accessible” to shareholders and “will make it super visible to investors” if it looks like pay and performance don’t align, said Simone Hicks, a partner at Debevoise & Plimpton. Engaging with shareholders on executive pay will be especially important for companies in the future, according to Hicks.

Providing a clear narrative on pay versus performance will also be necessary, she said. Detailing why a CEO received a sign-on bonus, retention bonus or equity award, for example, will help shareholders better understand a company’s reasoning if the numbers appear especially high.

Many companies are still wrapping their heads around the rule, lawyers said, and some businesses feel unprepared to comply by the next proxy season. “All of a sudden it’s really due in under six months,” said Deb Lifshey, managing director at executive compensation consulting firm Pearl Meyer.

Shareholder Discontent

Shareholder pushback against companies has ballooned in recent proxy seasons. The number of Say-on-Pay proposals in which companies failed to secure majority support from shareholders swelled to 21 for S&P 500 companies, up from 15 in 2021, nine in 2020 and seven in 2019, according to PwC.

The Say-on-Pay vote asks investors to vote on the compensation of the top executives of the company—the chief executive officer, the chief financial officer, and at least three other highly-paid executives. The SEC requirescompanies to provide their shareholders with an advisory vote on executive pay at least once every three years.

Shareholder discontent with executive pay generally rises and falls with a company’s financial performance, lawyers say, which could explain why scrutiny appears to be up now amid this year’s significant stock market decline.

But there’s more to it than just economics, Lifshey said, as evolving ESG priorities might also drive scrutiny from a range of stakeholders. Expectations from employees and shareholders “are different now” because of shifting ESG priorities and a changing workforce, said Lifshey. The pandemic also played a part in driving heightened economic and social concerns over outsized CEO pay.

The pushback can be about a lot more than the dollar amount. Sometimes, shareholders reject an executive pay proposal because they’re disgruntled over social or environmental concerns at a company, for example over improper mining practices, Lifshey said.

While executive pay is typically linked to financial metrics such as profit margins, companies including Chipotle Mexican Grill Inc., McDonalds Corp. and Caterpillar Inc. are increasingly tying executive pay to ESG goals. McDonalds, for example, said last year that it would tie 15% of executive bonuses to targets including diversity data.

‘Unfair’ Pay

Shareholders are also taking to the Delaware Chancery court, where many corporate disputes play out, to air their concerns about what they see as staggering executive compensation.

Shareholders sued electric vehicle company Mullen Automotive Inc and its board of directors in June for not disclosing sufficient information about an “outsized and unfair” CEO award. The proposed award is part of a CEO mega-grant where executives are given large stock grants in exchange for securing ambitious performance goals.

Mega grants can be a particular source of discontent for shareholders and spark questions about why such large payouts are necessary for the business, Ocker said. The pandemic exacerbated these concerns, he said, as shareholders became more skeptical of high executive pay, such as a mega grant, amid layoffs and pay cuts lower down at a company.

Online real-estate brokerage eXp World Holdings Inc. faced a shareholder derivative suit in June accusing the board of directors of excessively overcompensating themselves. The total director compensation real estate giants Zillow, Redfin and RE/MAX handed out in fiscal years 2018 to 2020 together was less than the amount eXp paid in one single year, the filing said.

The pay Sculptor Capital Management’s CEO received was also called out in a lawsuit brought by the company’s founder, Daniel Och. The billionaire pointed to “a series of escalating compensation awards” the CEO secured including over $145 million in 2021, a payment that exceeded the amount paid to CEOs at Apple and Goldman Sachs. The lawsuit said Sculptor’s CEO has delivered a “less than mediocre performance” amid stock price drops while raking in massive returns.

In response to Bloomberg Law, Sculptor said the lawsuit “is misleading and full of falsehoods that present a grossly distorted view” of the board.

To gauge reasonable pay, shareholders and companies themselves often look to pay packages at similar businesses. Hicks said corporate boards often engage consultants to help navigate their compensation and will need to pay even more attention to pay amid new levels of scrutiny.

“Boards already spend a lot of time talking about this,” she said.