Prompted by Advisers, Shareholders Voting Nay on Say on Pay

Historically, voting on executive compensation packages has been a pro forma exercise at the annual meetings of technology manufacturer 3M Co., as pay proposals breeze through with shareholder approval. Not so this year, however. With prominent proxy advisory firms Institutional Shareholder Services and Glass Lewis balking at what ISS termed “significantly problematic” compensation for two key 3M executives, 54% of shareholders’ votes came down against the “Say on Pay” measure at this month’s annual company meeting.

According to consulting firm Semler Brossy, average support for Say on Pay proposals is better than 90% at publicly traded companies. But the incident at 3M adds to a growing number of shareholder votes pushing back against lavish compensation for members of C-suites – with proxy advisers sitting squarely in the middle of the discontent.

Other examples of companies that have seen Say on Pay votes fail this year include Newell Brands Inc. and Norfolk Southern Corp. Meanwhile, proxy advisers’ recommendation of a down vote caused a stir at investment manager BlackRock this month, where the pay package for chief executive Larry Fink and other BlackRock executives garnered support from 58% of votes cast.

And in the case of Tesla, the opinions of proxy advisers could play a large role in determining the fate of a lucrative compensation package for the automaker’s founder. Shareholders of Tesla have to decide next month if Elon Musk will get stock options valued at more than $45 billion. A January court decision necessitated a new vote on Musk’s compensation, which has left Tesla insiders lobbying major investors and proxy advisers to give the plan a thumbs up. ISS previously recommended against it.

Of course, shareholder disapproval in Say on Pay votes doesn’t automatically kill a compensation proposal. Companies typically respond by discussing with shareholders how best to adjust pay packages the following year. Ongoing disputes over executive pay at Netflix are instructive in that regard. Shareholders didn’t approve the streaming service’s pay proposals in 2022 and 2023, prompting the company to engage with them about fixes each time.

We’ll find out next month if all that “engaging” does anything to produce a more favorable Say on Pay result this time around for Netflix. Likewise, Tesla might need to do some more engaging if shareholders come down against Musk’s compensation. And with proxy votes at ExxonMobil set for May 29, the mammoth oil company might need to do some engaging of its own in the aftermath.

Corporate boards may want to pay particular attention to ongoing events at Axon Enterprise Inc., where shareholder pushback scuttled a $400 million equity grant for its CEO last year. An updated proposal submitted this year scaled the award valuation down to $175 million, and even that barely passed a Say on Pay vote. We may learn soon enough when engaging on executive compensation no longer satisfies vexed shareholders.