With shareholders having more say on executive compensation than ever before, companies have been forced to reevaluate and in some cases overhaul existing executive pay schemes in response to external pressure. Based on interviews with 25 corporate counsel, corporate secretaries, and heads of investor relations at North American firms, Toppan Merrill’s Market Pulse: Executive Compensation examines the ways in which companies are seeking to navigate this changing landscape.
To find out how the executive compensation landscape is evolving, Toppan Merrill commissioned Mergermarket to survey corporate respondents in North American firms for their insights.
Respondents report mixed results from increased executive compensation disclosure requirements on proxy vote results. Overall, 62% say increased disclosure has had a significantly (20%) or moderately (44%) positive impact on vote results, leaving a substantial 36% reporting a negative result.
While respondents on the whole are familiar with Say on Pay at this point, more recent SEC rules requiring companies to disclose the ratio of CEO pay to employee pay have been presenting new challenges. One respondent describes the effects of these new disclosure requirements at his firm. “Since the CEO pay ratio rule came into force, we've had to address additional criticism from shareholders on existing compensation policies,” he says. “The tendency of investors has been to make comparisons to companies of similar merit and value. The pressure is growing, and it’s more than we had anticipated.”
Pay ratio disclosure rules have indeed already lead to heightened public scrutiny of executive pay structures in the broader market, with companies like Yum Brands and Mattel raising eyebrows in 2018 for having CEO-employee pay ratios of 1000x and 4000x, respectively.
Gaps of this size may be easily explainable—for example, manufacturing operations in countries with lower wage standards can magnify the CEO-employee pay discrepancy—but companies are nevertheless on the hook for justifying such disproportions to a skeptical public in more detail than previously required.