Executive compensation continues to be a focal point for shareholders, proxy advisors, and boards. As public scrutiny intensifies, companies face growing pressure to demonstrate that their pay practices align with performance and reflect shareholder interests. Based on our experience in these situations, provided below are effective strategies to help companies foster transparency, build trust, and secure shareholder support on executive pay programs.
1. Start with a Clear, Compelling Narrative
Shareholders expect to understand not just what you are paying executives, but why the compensation program is structured the way it is and how it aligns with performance and shareholder value. A wellstructured proxy statement can help communicate the nuances of the program to shareholders.
To develop a clear narrative for the compensation program in the proxy statement, companies should:
- Explain the Strategic Rationale and Provide Context: Clearly articulate how the executive compensation program supports the company’s business objectives and how performance metrics were selected, goals were set, and results were evaluated
- Demonstrate Pay-for-Performance Alignment: Show how compensation outcomes are tied to financial results, shareholder returns, and strategic priorities
- Highlight Key Decisions: Focus on significant changes, performance achievements, and alignment with shareholder value
- Address Shareholder Concerns: Proactively acknowledge prior shareholder feedback and explain any changes made to address those concerns
- Simplify the Message: Use clear language and visuals to explain complex compensation structures
2. Engage the Compensation Committee Chair
In cases where direct shareholder discussions are helpful, shareholders often look to board leadership for direct insights into pay decisions and governance.
In advance of the shareholder meeting, companies and compensation committee chairs should:
- Ensure Preparedness: Equip the compensation committee chair with talking points, shareholder feedback, and a review of pay program nuances
- Facilitate Direct Engagement: Allow shareholders to hear directly from the compensation committee chair / board, reinforcing the committee’s and board’s oversight and accountability, recognizing that the recent SEC amendments to Sections 13D and 13G may influence how shareholders engage on executive compensation
- Show Alignment: Communicate how compensation program decisions that were approved by the compensation committee align with the company’s strategy and shareholder interests
Strategies for Engaging Shareholders on Executive Pay Matters
3. Prioritize Proactive Communication
The most effective shareholder engagement begins well before proxy season. Proactive communication allows companies to establish relationships, solicit feedback, and address concerns before they escalate.
- Engage Key Stakeholders Early: Initiate discussions with institutional investors and other key stakeholders well ahead of the annual meeting; the recent SEC amendments to Sections 13D and 13G may prompt investors to reassess engagement - proactive outreach can help reduce uncertainty
- Identify Shareholder Priorities: Tailor your messaging to different investors' priorities, such as pay-for-performance alignment, pay transparency or equity usage / dilution
- Offer Accessibility: Ensure board members, particularly the compensation committee chair, are available to engage with shareholders directly when necessary
Regular, proactive outreach builds trust and positions the company as transparent and responsive to shareholder priorities while mitigating surprises in shareholder vote outcomes.
4. Demonstrate Reponsiveness to Feedback
Shareholders want to know that their input matters. Demonstrating responsiveness to feedback strengthens trust and builds credibility.
- Assess Prior Votes: If your prior say-on-pay vote received significant opposition, assess the factors that drove opposition and if any potential modifications are appropriate
- Explain Changes to Pay Programs and Rationale: Clearly communicate any potential modifications to the compensation structure and the rationale behind those changes
- Close the Feedback Loop: Follow up with shareholders after engagements to reinforce and demonstrate responsiveness to their concerns, and clarify any remaining questions
Effective shareholder engagement on executive pay issues is built on transparency, responsiveness, and clear communication. By developing a compelling narrative, engaging proactively, and demonstrating responsiveness to feedback, companies can foster trust, and strengthen shareholder relationships.
