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.
More than half of respondents say proxy advisory firms have put the most pressure on companies with regards to executive compensation. This reflects the widespread impact firms such as Institutional Shareholder Services (ISS), Glass Lewis, and Egan-Jones have had on high- stakes shareholder votes this year.
Proxy advisory firms have become so influential that new regulations may soon try to rein in their powers: as this report goes to print, the SEC announced it would consider updating rules on the use of proxy advisory firms in an effort to increase transparency surrounding how their recommendations are formed, as well as to expose any potential conflicts of interest.
Outside of proxy advisory firms, just under a quarter identify activist investors as the group applying the most pressure, followed by outside observers (16%) and large institutional investors (8%). Yet although the pressure appears to be concentrated, a respondent from the healthcare industry argues that these various sources are in fact interrelated: “Independent observers provide more pressure than one would anticipate with their regular commentary about how compensation policies should be altered and what should be done to improve the performance of executives. Proxy advisory firms relate these concerns for those who seek guidance, such as larger institutions, and from there the pressure builds for companies to make alterations.”
A respondent from a leading US-based construction and mortgage company similarly links executive pay pressures to a network of interested parties. “Activist investors are changing their approach to management, getting more vocal and presenting their stands for change,” he says. “Often, this can lead to increased pressure on deals and other business activities. The increased involvement of rank and file shareholders has made clear that they want their opinions of top management compensation to be heard.”