DealLawyers.com Blog

This recent alert from Compensation Advisory Partners updates research from 2015 on how often and when activist investors raise issues with executive pay during proxy contests. In 48 contests at Russell 3000 companies, CAP found that executive pay concerns were identified by the activists in 23 of those contests and that activists have raised concerns about compensation in about half of proxy contests annually for each of the last five years. Typically, pay concerns are included as evidence of issues with the company’s strategic direction:

Data indicates that executive compensation was often tied to broader concerns about the companies’ strategic direction, operational execution, and financial performance. Essentially, executive compensation disagreements were not the main and sole rationale for engaging in the contest. Instead, activist investors use these disagreements to highlight deeper underlying concerns with a company’s direction or performance to induce change.

For instance, if total shareholder return (TSR) is not used as a performance metric while the company has faced a prolonged period of shareholder value decline alongside rising CEO compensation, activist investors will highlight these issues as signs of a flawed business strategy and misaligned incentive structures. In many cases, concerns about executive compensation support their broader calls for leadership changes, strategic adjustments, and stronger governance practices.

Not surprisingly, the most commonly cited issue was pay-for-performance misalignment (91% of the time). But other issues were cited as well, including:

– Excessive CEO pay (57%)
– Weak corporate governance structures (26%)
– Outsized peer comparisons (17%)
– Performance metric adjustments (17%)
– High dilution (13%)
– Excessive perquisites (13%)
– Long-term incentive plan design (13%)
– High director compensation (9%)
– Lack of disclosure (9%)
– Excessive change-in-control provisions (9%)

– Meredith Ervine