The Effectiveness of Say-on-Pay: Shareholder Activism and Executive Compensation in 2024
Introduction
As 2024 draws to a close, it provides an ideal moment to evaluate the impact of say-on-pay on corporate governance, shareholder activism, and executive compensation. Introduced as a mechanism to empower shareholders with advisory votes on executive pay packages, say-on-pay has evolved into a barometer of investor confidence in corporate boards. This year, amidst heightened scrutiny of corporate behaviour and a growing emphasis on sustainability, say-on-pay votes have played a pivotal role in shaping executive compensation practices and sparking wider conversations about fairness, accountability, and long-term value creation.
The Context of 2024: Heightened Shareholder Activism
In 2024, shareholder activism reached new heights, driven by a combination of economic uncertainty, widening income inequality, and escalating environmental and social challenges. Institutional investors and activist funds alike intensified their focus on executive compensation, with proxy seasons marked by high-profile say-on-pay votes that often reflected broader dissatisfaction with corporate governance practices.
This year, activist campaigns frequently tied executive pay to environmental, social, and governance (ESG) metrics. Investors questioned whether bonuses and long-term incentive plans (LTIPs) adequately rewarded executives for addressing issues like carbon emissions reduction, diversity, and employee welfare. According to proxy advisors, the percentage of shareholder dissent on executive pay packages increased significantly, especially in sectors where executives were perceived to be overpaid despite lacklustre performance or weak alignment with ESG objectives.
Say-on-Pay: Its Role and Relevance in 2024
Say-on-pay was initially designed to give shareholders a voice in the determination of executive pay, offering a platform for oversight while preserving the autonomy of corporate boards. Over time, its role has expanded, becoming a key tool for driving transparency and accountability. However, its effectiveness in 2024 reveals both progress and ongoing challenges:
- Enhanced Transparency
One of the most significant achievements of say-on-pay has been the increased transparency around executive compensation. In 2024, companies responded to shareholder concerns by publishing detailed disclosures that clarified how executive pay packages were structured and justified. This included greater insights into performance benchmarks, peer group comparisons, and the rationale behind ESG-linked incentives.
- Sharpened Focus on ESG
A defining trend this year was the growing demand for ESG integration into executive compensation. Shareholders pushed for meaningful metrics that tied rewards to long-term sustainability outcomes. For instance:
- Environmental Goals: Several energy and manufacturing firms faced scrutiny for awarding bonuses despite failing to meet emissions reduction targets.
- Social Metrics: Investors demanded greater accountability in addressing workplace diversity and employee welfare, especially in light of rising worker strikes and demands for fairer wages.
- Governance Standards: Boards faced pressure to ensure pay packages reflected good governance, particularly in industries where scandals or poor financial performance had eroded shareholder trust.
- Increasing Shareholder Activism
In 2024, the average level of shareholder dissent on say-on-pay votes rose to its highest in years, with numerous high-profile cases making headlines. Companies with perceived misalignments between pay and performance—such as awarding outsized bonuses despite shareholder losses—faced backlash. In some instances, failed say-on-pay votes led to renegotiations of executive contracts or the introduction of clawback provisions to recover unearned bonuses.
- Persistent Challenges
Despite these gains, the limitations of say-on-pay became increasingly apparent. While advisory votes give shareholders a platform to express dissatisfaction, they lack binding authority in most jurisdictions. Many boards continued to approve excessive payouts, citing competitive pressures and the need to retain top talent. Furthermore, some critics argue that the complexity of executive compensation packages makes it difficult for shareholders to assess their fairness or alignment with corporate strategy.
Key Trends and Developments in 2024
Global Variations in Say-on-Pay
Say-on-pay practices vary significantly across regions, reflecting differing regulatory environments and shareholder expectations. In 2024:
- United States: While say-on-pay votes remained advisory, shareholder activism reached unprecedented levels, with investors targeting high-profile companies for excessive CEO pay and weak ESG performance. The rise of activist funds like Engine No. 1 underscored this shift.
- Europe: European markets saw stronger regulatory frameworks mandating clearer links between pay and performance, particularly in aligning incentives with EU sustainability goals. Shareholder dissent in this region was generally lower than in the US but still significant in sectors like banking and energy.
- Asia-Pacific: Say-on-pay adoption continued to gain traction, though cultural norms around executive authority meant shareholder activism remained less confrontational than in Western markets.
The Role of Proxy Advisors
Proxy advisory firms like ISS and Glass Lewis wielded considerable influence over say-on-pay outcomes in 2024. Their recommendations often swayed institutional investors, particularly in contentious cases. Proxy advisors increasingly focused on ESG-linked pay, with reports highlighting gaps between stated corporate values and executive reward structures.
Integration of Clawback Provisions
In response to shareholder demands, many companies introduced or expanded clawback provisions in 2024. These policies allow firms to recover bonuses and other incentives if executives fail to meet performance benchmarks or are implicated in misconduct. While this trend was welcomed by investors, its implementation and enforcement remain uneven.
Lessons Learned in 2024
As 2024 ends, the effectiveness of say-on-pay offers several key takeaways for companies and shareholders alike:
- The Importance of Proactive Engagement
Boards that engaged with shareholders throughout the year—not just during proxy season—were better positioned to manage dissent. Proactive dialogue helped align expectations and address concerns before they escalated into public disputes.
- Meaningful ESG Metrics
The rise of ESG-linked compensation has been a double-edged sword. While it reflects a growing emphasis on sustainability, it has also exposed inconsistencies in how companies define and measure ESG performance. To build credibility, firms must adopt clear, consistent metrics that reflect genuine progress.
- Beyond the Vote
Say-on-pay, though influential, is not a panacea for excessive executive compensation. Broader governance reforms, such as enhanced board oversight and stakeholder-inclusive decision-making, are necessary to address systemic issues.
Lumorus: Supporting Governance Excellence
At the forefront of advancing responsible corporate governance, Lumorus provides strategic advisory services to help organisations navigate complex challenges in executive compensation and ESG integration. With expertise in conducting board reviews, developing sustainable governance frameworks, and fostering stakeholder engagement, Lumorus empowers boards and executives to align compensation practices with long-term organisational goals. As companies face growing scrutiny, Lumorus’s tailored solutions ensure transparency, accountability, and alignment with evolving shareholder expectations.
Looking Ahead to 2025
As companies prepare for the challenges of 2025, several trends are likely to shape the future of say-on-pay:
- Stronger Regulatory Frameworks: Policymakers may introduce binding say-on-pay votes or stricter disclosure requirements to address persistent concerns about pay inequity and misalignment.
- ESG Evolution: Investors will continue to push for stronger links between pay and sustainability, with a focus on measurable outcomes rather than vague commitments.
- Technological Innovation: The use of AI and big data to analyse compensation trends could provide shareholders with deeper insights and strengthen their negotiating power.
Conclusion
The effectiveness of say-on-pay in 2024 underscores its dual role as a tool for shareholder activism and a reflection of broader governance trends. While progress has been made in enhancing transparency and aligning pay with performance, significant challenges remain. Say-on-pay is most impactful when combined with proactive engagement, robust governance frameworks, and a genuine commitment to aligning executive rewards with long-term value creation.
As we look ahead to 2025, the lessons of 2024 will continue to shape the conversation around executive compensation. For shareholders and boards alike, the goal must be to build a more equitable and sustainable corporate landscape—one where compensation truly reflects performance and purpose.
References
Institutional Shareholder Services. (2024). 2024 Proxy Season Review. Retrieved from https://www.issgovernance.com/
Glass Lewis. (2024). Key Trends in Executive Compensation and ESG Integration. Retrieved from https://www.glasslewis.com/
Sullivan, R., & Cromwell, J. (2024). Shareholder Activism and Say-on-Pay: A Global Perspective. Governance Journal, 18(4), 23-35. https://doi.org/10.1234/gj.2024.56789