Shareholders can influence a company's executive compensation program through a non-binding advisory vote known as "Say on Pay." While this vote doesn't directly allow shareholders to influence overall compensation policies, companies often maintain outreach programs to address shareholder concerns about specific aspects of the compensation plan. Another way for shareholders to have a say in executive compensation is by gaining a seat on the Board of Directors. However, the purpose of obtaining a seat is not solely for executive compensation reasons but to advocate for broader changes within the company. Achieving this is challenging and less common; investors typically pursue this through a proxy contest, where an investor advocates for change in company strategy and may raise executive compensation as an issue.

Investors who seek change through a proxy contest are often referred to as “activist investors.” This term describes individuals (such as hedge fund managers) or groups (like alternative investment firms) who acquire a stake in a company’s equity with the goal of increasing shareholder value, typically by gaining one or more seats on the Board of Directors. Once on the Board, these activists push for changes they believe will improve the company’s performance, strategy, or governance. These changes can take various forms, depending on the investor’s objectives. Common goals of activists include:

• Enhance financial performance by advocating for cost reductions, optimizing capital allocation, or promoting share buybacks and higher dividends
• Strategic changes such as encouraging the company to refocus on its core business or recommending mergers, acquisitions, or spin-offs of non-core assets
• Seek changes in senior management or the Board of Directors

Activist investors aim for these changes to boost the company’s value, thereby increasing the worth of their own stake. However, they are sometimes criticized for prioritizing short-term gains over long-term stability.

This article updates Compensation Advisory Partners’ (“CAP”) research on 2015 – Activist Investors and Executive Pay. It aims to provide a refreshed perspective, incorporating recent developments related to activist investor campaigns.

What We Found

Between 2020 and 2024, activist investors have increasingly asserted their influence in boardrooms, achieving success in various proxy contests. To gain insight into their strategies, among companies in the Russell 3000 Index, CAP reviewed 48 proxy contests initiated by activist investors, finding that concerns about executive compensation programs were raised in 23 cases. Data indicates that executive compensation was often tied to broader concerns about the companies’ strategic direction, operational execution, and financial performance. Essentially, executive compensation disagreements were not the main and sole rationale for engaging in the contest. Instead, activist investors use these disagreements to highlight deeper underlying concerns with a company’s direction or performance to induce change. For instance, if total shareholder return (TSR) is not used as a performance metric while the company has faced a prolonged period of shareholder value decline alongside rising CEO compensation, activist investors will highlight these issues as signs of a flawed business strategy and misaligned incentive structures. In many cases, concerns about executive compensation support their broader calls for leadership changes, strategic adjustments, and stronger governance practices.

Over the past five years, activist investors have raised concerns about executive compensation in approximately 50 percent of proxy contests annually. Key compensation practices highlighted during 2020–2024 include:

The chart shows that among the 23 companies where activists raised concerns about executive compensation, the most common issue was pay-for-performance misalignment (91 percent). Activists frequently argued that CEO compensation packages were insufficiently tied to company performance, advocating for changes to link pay more directly to long-term shareholder value rather than short-term performance metrics. They also often pointed out that CEO pay was disproportionately high compared to peers. Other prominent issues included excessive CEO compensation (57 percent) and weak corporate governance structures (26 percent). Less frequent concerns included outsized peer comparisons, performance metric adjustments (both 17 percent), high dilution, excessive perquisites, and long-term incentive plan design (all 13 percent). A smaller number of cases raised issues with high director compensation, lack of disclosure, or excessive change-in-control provisions (each 9 percent).

Ultimately, we found that activist investors often leverage executive compensation issues to strengthen their case for securing seats on the target company’s Board of Directors.

Target Companies

Successful Activist Campaigns

Of the twenty-three proxy contests that specifically targeted aspects of executive compensation, eleven ultimately resulted in the activist investor gaining board seats at the target company. The companies1 through 2020-2024, include: Masimo Corporation, Norfolk Southern Corporation, Southwest Gas Holdings Inc2, WisdomTree Inc, Illumina Inc, Pitney Bowes Inc, Apartment Investment and Management Company, Griffon Corporation, Exxon Mobil Corporation, and GameStop Corp.

The most common issue in these contests centers on the apparent misalignment between executive pay and company performance. For instance, activist investors argued that management at Norfolk Southern Corporation received substantial compensation packages despite the company losing millions in shareholder value during the same period. In this case, activists also pointed out that the Board awarded the CEO over $10 million in equity grants, even though the company missed all annual performance targets related to financial performance, customer service, and safety. This issue with executive compensation gave activists an opportunity to criticize the Board for weak corporate governance. Ultimately, their campaign was successful, and they were able to elect three of their nominees to the Board.

Activist investors often tie compensation-related concerns to broader business strategy issues, rallying support from other investors in the process. When shareholders are dissatisfied with their returns, they are more inclined to align with activist investors to drive change. This dynamic was evident in Carl Icahn’s high-profile contest with Illumina, where he not only succeeded in electing a board member but also saw the CEO resign shortly afterward.

Conclusion

There has been a rise in activist investors accumulating stakes in companies with the goal of pushing for change to enhance the company’s value. While our analysis focused on proxy contests specifically addressing executive pay issues (e.g., pay-for-performance misalignment), there are also cases where companies reach settlements with activist investors, avoiding a public confrontation and granting them one or more seats on the Board.

To be well-prepared, Boards and Compensation Committees should take a proactive approach:

• Monitor 13D Filings (Schedule D) to see if an individual or group acquires more than 5 percent of a company’s voting shares
• Ensure the Board has a strategy for effectively engaging with shareholders such as setting up regular communication channels
• Align executive compensation with performance
• Conduct annual reviews of executive compensation programs
• Ensure transparent and clear communication on pay programs / levels and compensation philosophy
• Proactively seek feedback from shareholders throughout the year

The Compensation Committee should collaborate with management to create an executive compensation program that can be defended based on the company’s performance. By taking these steps, companies can better defend their executive compensation programs during a proxy vote and minimize the chances of conflicts with activist investors or shareholders. Being transparent, responsive, and proactive is key to managing shareholder expectations and ensuring a smoother voting process.

Appendix

Summary of Activist Campaigns

1. 1 Masimo Corporation experienced one proxy contest in 2023 and another in 2024.

2. 2 Southwest Gas Holdings Inc. settled with the activist for at least three and up to four Board seats prior to the vote.

Each year CAP analyzes non-employee director compensation programs among the 100 largest US public companies. These companies are trendsetters and can provide early insights into evolving pay practices across the broader public company marketplace. This report reflects a summary of pay levels and pay practice trends based on the most recent 2024 proxy disclosures.

Key Takeaways

• Median total board compensation was flat year-over-year ($325K)
• Similarly, compensation provided for service in board and committee leadership roles was also flat versus prior year at median
• Meeting fees and use of stock options continue to be uncommon, with only 6% of companies paying board meeting fees and only 2% granting stock options to their directors

Looking Ahead

• During the next year, we expect a modest increase to median pay levels for standard board service
• We also expect to see continued focus on the additional retainers provided to Lead Directors and Committee Chairs

CAP Findings

Board Compensation

• Total Fees. Median board compensation was $325K, which was flat year-over-year. At both the 25th and 75th percentiles, board compensation increased +2%, to $305K and $348K, respectively
• Pay Structure. Companies rely mainly on annual retainers (cash and equity) to compensate directors. Pay programs for large companies are simple and tend to not use meeting fees. Only 6% of the companies in our sample continue to have meeting fees. Almost half of these companies only pay meeting fees when the number of meetings exceed a certain threshold. We support this approach as it simplifies administration and the need to define what counts as a meeting, though it may not be appropriate in all situations. All three companies that do provide board meeting fees have non-standard ownership
• Equity. Consistent with prior years, providing full-value equity awards (shares/units) is the standard, with only two companies providing stock options (one of these companies grants both stock options and RSUs). Almost all companies denominated equity awards using a fixed value, not a fixed number of shares. Using fixed value is generally considered best practice as it manages the “target” value awarded each year. This is consistent with practices observed in other recent years
• Pay Mix. On average, total pay was comprised of 63% equity and 37% cash
• Form of Increase: 18% of companies disclosed increases to their annual cash or equity retainers:
  • 1% disclosed increases to only board cash retainer
  • 8% disclosed increases to only annual equity grant
  • 9% disclosed increases to both cash and equity retainers

Committee Member Compensation¹

• Overall Prevalence. 35% of companies paid committee-specific member fees for Audit Committee service, while only about a quarter of companies paid fees for service as a member on other committees. Companies rely more on board-level compensation to recognize committee member (non-Chair) service, with the general expectation that all independent directors actively contribute to committees
• Total Fees. Of the companies that paid committee member compensation, the median for additional compensation remained flat for the Audit ($15K), Compensation ($15K) and Nominating/Governance ($12.5K) Committees

Committee Chair Compensation²

• Overall Prevalence. 95% of companies in the study provided additional compensation to committee Chairs to recognize additional time requirements, responsibilities and shareholder scrutiny of governance
• Fees. Similar to committee member compensation, median additional compensation for Chair service was flat year-over-year for each of the Audit ($30K), Compensation ($25K) and Nominating/Governance ($20K) Chair roles

Committee Meetings

• Audit Committees are meeting more than two times per quarter
• At median, Audit Committees met the most with 9 meetings, while Compensation Committees met 6 times and Nominating & Governance Committees meeting 5 times

Independent Board Leader Compensation

• Non-Exec Chair. Additional compensation was provided by 90% of companies with this role. Median additional compensation provided for service in this role was $200K, which was consistent with prior year. As a multiple of total Board Compensation, total Board Chair pay was 1.67x that of a standard Board member, at median
• Lead Director. Additional compensation was provided by 88% of companies with this role2. Median additional compensation was flat versus prior year, though we do anticipate increases in the future. At the 25th and 75th percentiles, additional pay provided for this role increased +3% and +5%, respectively. Median additional compensation provided for this role is approximately 67% greater than that provided for the Audit Committee Chair role. As a multiple of total Board Compensation, total Lead Director pay was 1.15x that provided to a standard Board member, at median. The difference in pay versus Board Chairs is in line with typical differences in responsibilities

Pay Limits

• 75 percent of companies have a shareholder approved limit in place for director compensation, consistent with prior year. Prevalence of limits that apply to both cash and equity-based compensation (i.e., total director pay) is slight majority practice
• Director pay limits are in place largely due to advancement of litigation where the issue has been that directors approve their own annual compensation and are therefore deemed to be inherently conflicted
• Similar to last year, limits typically range from $600K to $1M, with a median approximately $800K
• The limits are generally much higher than annual equity grants and/or total annual compensation. For example, roughly one-third of limits are equivalent to more than 5x the annual equity grants, which (as mentioned above) represents 63% of total annual board pay, on average

• Companies do not typically change, or review, director compensation limits on an annual basis. They typically review these limits about every three to five years when they look for shareholder approval for a new or amended equity incentive plan/reserve. Only two companies in our sample made changes to their limits over the past year:
  • Caterpillar increased their equity & cash limit to $1.0M (from $750K)
  • MetLife changed their limit to now cover both equity & cash, from equity only, and reduced the limit to $1.0M (from $2.0M)
• Some companies exclude initial at-election equity awards, committee Chair pay, and/or additional pay for Board leadership roles from the limit, but such a practice is the exception not the norm
• The higher limits above are intended to address situations like having to pay higher amounts to a non-executive Chair. In terms of potential perceived conflict of interest when it comes to setting pay for a non-executive Chair, the incumbent can be recused from discussions and the vote on their own pay

Equity Retention

• 90% of companies in our sample have a minimum stock ownership guideline in place for outside board members, consistent with prior year. Among these companies, 87% use a “multiple of retainer” approach (e.g., 5.0x the annual cash retainer must be achieved within five years)
• Nearly 40% of companies have a holding requirement where (net-after tax) a portion or all of vested equity awards must be held until a director achieves the minimum stock ownership guideline
• It is minority practice to require for equity awards to be settled at or after termination of board service

Some Changes CAP Suggests Companies Consider

• Communication and Education: Not all companies get this aspect of effective compensation programs right. Oftentimes, distributing a simple summary (or “cheat sheet”) of the director pay program to participants can be an effective tool that limits misunderstandings, help prompt questions, and support consistent understanding of the program, philosophy and rationale behind the program
• Recruiting New Directors. As boards look to refresh and diversify their membership, this may be the time to re-visit initial at-election equity awards for new directors. At-election grants can be a way to differentiate your company’s pay program in the recruiting process without a more costly increase to standard director pay levels and more quickly “ramp” the ownership position of new board members
• Board Leadership Roles. Taking on the role of non-executive Chair, Lead Director or Chair of a major Board committee can come with considerable additional time requirements, responsibilities, and reputational risk, yet additional compensation provided for most of these roles only reflects a modest premium on the standard director pay program. Providing greater additional compensation for the role of Lead Director of Chair of a major Board committee should be considered, to better align with the typical time requirements, responsibilities and reputational risk individuals in these roles take on
• Stock Ownership Requirements. Especially among the largest companies, it is common practice to require settlement of equity-based pay be deferred until a director leaves the board. We support alignment of director and shareholder interests through equity compensation, but allowing access to some equity-based compensation while an active director in combination with a standard stock ownership guideline (e.g., multiple of annual cash retainer) may be a competitive advantage when recruiting new directors who may be more focused on current compensation

Historical 3-Year Look

Research Assistance: Zaina Jabri, Kasey Landon, and Abigail Bucklin provided support in preparing this CAPintel.

A question we get as board advisors is: do non-executive Board Chairs and Lead Directors typically serve on board committees, and if they do serve on a board committee, or committees, is it typically as a member or as the Chair of the Committee? We analyzed practices among the 100 largest U.S. public companies, by revenue, to address this and related questions, with a focus on the three standard board committees: Audit, Compensation and Nominating/Governance.

Do non-executive Board Chairs and/or Lead Directors serve on board committees?

Among our sample, a majority of both non-executive Board Chairs and Lead Directors serve on board committees. 69% of non-executive Board Chairs serve on at least one board committee, compared to 83% of Lead Directors. Most commonly, both roles serve on one or two of the standard board committees, and on average non-executive Board Chairs serve on 1.1 board committees compared to 1.4 committees for Lead Directors. In our experience, directors serving in either of these leadership roles at times will attend committee meetings even if they are not a formal/voting member of a given board committee.

Which board committees do non-executive Board Chairs and Lead Directors serve on?

Among the non-executive Board Chairs that serve on at least one committee, they most often serve on the Nominating/Governance Committee (59%), followed by the Compensation Committee (33%), with more limited prevalence of serving on the Audit Committee (13%).

At a high level, prevalence is directionally consistent for Lead Directors, Nominating/Governance Committee has the highest prevalence (57%), Compensation Committee has the second highest prevalence (48%), and Audit Committee has the lowest prevalence (32%) among Lead Directors that serve on at least one board committee. While directionally similar in terms of prevalence, Lead Directors are more than twice as likely (32%) to serve on an Audit Committee as a non-executive Board Chair (13%). This is likely driven by the independence standards that exist for Audit Committee members on public company boards.

When non-executive Board Chairs or Lead Directors serve on a board committee, how often do they Chair that board committee?

Among non-executive Board Chairs that serve on at least one committee, when they are on an Audit Committee they serve in the Chair role 20% of the time, when they are on a Compensation Committee they serve in the Chair role 31% of the time, and when they are on a Nominating/Governance Committee they serve in the Chair role 35% of the time.

In contrast, among Lead Directors that serve on at least one committee, none in our sample served as the Chair of the Audit Committee. Serving as the Chair of the Compensation Committee is also less common for Lead Directors compared to non-executive Chairs, with the Lead Directors in our sample serving in the Chair role only 17% of the time. The Nominating/Governance Committee has the inverse relationship, where Lead Directors serve as the Chair in the majority of instances (56%) which is significantly higher than their non-executive Chair counterparts.

Conclusion

This information has compensation-related implications. For example, a question that periodically comes up during director compensation reviews, is for instances where the Lead Director also serves as the Chair of the Nominating/Governance Committee, is if the Lead Director should receive additional compensation for both roles, or just for the Lead Director role? Answering such questions in a data-based manner, in terms of both pay data and other relevant market/prevalence data, is best practice. Detailed information on pay levels and trends can be found in CAP’s annual CAPintel on non-employee director compensation here:

https://www.capartners.com/cap-thinking/director-compensation-increases-are-back-among-the-largest-us-companies/

Blackrock, Vanguard, and State Street (the “Big Three”) are among the largest and most influential institutional investors in the world with current assets under management (AUM) of $10.0, $8.2, and $4.1 trillion respectively. Given their size, they have ownership stakes in many U.S. publicly traded companies. As a result of their holdings, the Big Three have the power to influence proxy voting outcomes, and any policy update, should be closely monitored by companies.

For the 2022 proxy season, the Big Three released their proxy voting guidelines and engagement priorities. These updates are a way for the public, and companies to understand the Big Three’s positions and priorities for 2022.

In the following chart we summarize a variety of policy updates from the Big Three that focuses on executive compensation, Compensation Committee voting, human capital management, board composition and board of director overboarding.

As summarized above, there has been a focus over the last few years on ESG, particularly on diversity among the board of directors and workforce, human capital management and climate change (not summarized above). The Big Three believes companies that focus on these issues will enhance a company's ability to maximize long-term shareholder value.

This article highlights select changes and updates to the Big Three's voting policies. For full detail related to all the proxy voting guidelines, please visit:

Blackrock:

• BlackRock Investment Stewardship – Proxy Voting Guidelines for U.S. securities
• BlackRock Investment Stewardship – Engagement Priorities

Vanguard:

• Proxy voting policy for U.S. portfolio companies

State Street:

• Proxy Voting and Engagement Guidelines – North America (United States & Canada)
• CEO's Letter on Our 2022 Proxy Voting Agenda
• Guidance on Diversity Disclosures and Practices
• Guidance on Managing Director Time Commitments
• Guidance on Human Capital Management Disclosures & Practices