What’s the Story?

The FT reported recently that Netflix lost its 2022 Say on Pay AGM vote for the second year in a row. Only 29% of shareholders voted in favour of the compensation report, one of the lowest figures in the S&P 500. And this followed only 51% support in 2020.

Vanguard, a leading institutional investor, says its funds will normally vote against compensation committee members if the Say on Pay vote is lost for two consecutive years. In other words, if the lost vote Say on Pay message does not impel change significant enough to win shareholder support the following year.

The lost Netflix vote in 2021 did trigger some 2022 compensation changes. Netflix added a “cap” on base pay of $3 million, for its co-CEOs Reed Hastings and Ted Sandros, performance conditions to determine bonus, and a policy that 50% of total compensation will be delivered in stock options, now with an attaching vesting schedule.

But all this was done on packages of some $50 million each. And furthermore, against a backdrop of the six months strike by the Writers Guild of America, which urged Netflix shareholders to vote against the “egregious” pay of Netflix top management.

Though generally, to date, investor vote support for compensation committee members aligns well with the votes for re-election of other directors. ISS Corporate Solutions reports compensation committee members in S&P 500 companies received c. 95% re-election support. By comparison, Vanguard reported votes in favour of directors of some 92.5% in the year ended 30 June 2023; with Blackrock reporting 89% slightly lower than Vanguard but slightly more than State Street reporting 85% support for the same period.

Why Does it Matter?

Say on Pay votes were introduced in the USA as part of the Dodd Frank Act of 2010, framed as part of the regulatory response to the global monetary crisis of 2008.

But some investors and governance experts believe that Say on Pay does not work well, as it seems neither slow the rise in compensation quantum nor to strengthen the desired link between pay outcomes and delivered performance; which is a more critical issue for investors than the quantum itself.

Executive compensation has been in the public spotlight for decades with almost none of the attention favourable.

Companies and compensation committees need to ensure that quantum, the pay structure and the incentive designs are robust, logical, and well communicated.

Newspoint view

The ongoing concern with executive compensation does not automatically mean Say on Pay does not work. First, most companies are sensitive to shareholder views and are conscious of the fine balance between being strongly competitive in an unforgiving market for top talent; and the need to justify pay quantum and design to shareholders, employees and the wider public in the context of the wider scene.

Indeed, in a world without a Say on Pay requirement, it would be an interesting thought experiment to conjecture where the market might now stand instead. But that said, extra requirements may form part of the developing landscape.

For example, in the UK the Investment Association operates a “Bad List” public register, where any AGM vote receiving less than 80% support is publicly recorded and invokes downstream disclosure and action expectations.

Australian rules are harsher still. A “Two Strikes” rule applies by law. If the compensation report receives less than 75% support for two years running, this triggers a simple majority vote requiring all directors to face re-election; a so called “Spill the Board” requirement.

In Switzerland, listed companies have two annual binding votes on compensation, one for directors another for top management.

Potentially too, Vanguard and other investors will increasingly look through the corporate veil and vote against re-election of individuals responsible for compensation decisions which are out of line with investor expectations.

For Netflix, their 2022 compensation changes moved their stance from appalling to poor. Yes better, but still not good. A $3 million base salary is still significant, linking bonus to performance has long been common practice not an innovation, and delivering high-end CEO compensation skewed strongly to long term equity is also a global norm.

Say on Pay leading to a Say on Seat vote might be a logical next step for many institutional shareholders, if the message of a lost advisory vote goes sufficiently unheard.

Executive Compensation and Incentive Design

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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