Small caps most likely to face negative say-on-pay result, study finds

Investors are voting against executive compensation packages at small-cap companies this year, with say-on-pay failures at a three-year high, according to new analysis across the Russell 3000 from Willis Towers Watson.

So far this year, 22 non-S&P 1500 companies have lost a say-on-pay vote, compared with 13 same-size companies in 2017. The number of S&P SmallCap 600 companies that have lost a say-on-pay vote has also risen from seven in 2017 to 11 in 2018 so far.

‘Smaller companies maybe thought they could ride under the radar screen and this shows maybe they can’t,’ says Don Delves, executive compensation practice leader for North America at Willis Towers Watson.

Number of say-on-pay vote failures by market cap

Indices	2018 to date	2017	2016	2015	2014
S&P 500	6	7	6	4	6
MidCap 400	10	7	5	11	18
SmallCap 600	11	7	11	11	11
Non-S&P 1500	22	13	13	35	27

Source: Willis Towers Watson

Delves says small caps have been hit particularly hard by the say-on-pay changes that started in 2014, but the number of small-cap companies that were unsuccessful fell in 2016 and 2017, so this year’s results surprise him.

Despite a recent study finding that small and micro-cap companies have smaller and less diverse boards, Delves doesn’t think the rise in failed say-on-pay votes reflects poor corporate governance practices at small caps. Instead, he says investors may be drilling down into more granular data about the say-on-pay figures and looking for a clearer link between compensation and strategy, having had four years to understand how to interpret the results.

For smaller companies, a lack of resources can throw up challenges around disclosure and shareholder engagement. ‘Some of this is down to greater scrutiny from investors,’ Delves says. ‘[Smaller companies] don’t have the money and resources to spend a lot of time writing a beautiful proxy statement or to make sure they have engaged with all of their shareholders on executive compensation. They won’t have corporate governance departments that can work on these things.’

The data from Willis Towers Watson shows the rigor of incentive plan metrics is the most common reason for a company to lose a say-on-pay vote, which Delves says points to the importance of taking time to invest in clearly linking compensation to strategy.

KBR won the best proxy statement (small cap) category at last year’s Corporate Governance Awards, partly in recognition of its updated CD&A section. The company knew it would be announcing falling earnings per share and rising executive compensation, but ultimately received a 91 percent vote in favor of the CEO’s package, thanks in part to the use of bullet point lists, graphs and charts in the proxy statement.