The Issue at Hand
For over a decade, institutional investors have cast Say-on-Pay votes at numerous companies, guided by vague voting guidelines that offer little actionable insight. BlackRock's 2026 proxy voting guidelines suggest that compensation policies should "encourage an appropriate risk appetite, and align the interests of shareholders and executives," yet they provide no concrete measures for risk appetite or pay alignment. Similarly, Vanguard advises that plans should "align company executives' pay outcomes with the company's performance relative to its industry peers over multiple years," but lacks a methodology for measuring this alignment.
The consequence is that companies cannot predict how changes in pay design will affect an investor's vote. Your remuneration committee is left without clear direction, your compensation consultant can't model scenarios effectively, and your board is unable to act decisively. The vote becomes mere theater.
This situation highlights a fundamental failure in the governance feedback loop between institutional shareholders and portfolio companies.
Timeline of the Control Gap
2011: The Dodd-Frank Act mandates Say-on-Pay votes at U.S. public companies. Institutional investors develop broad qualitative guidelines.
2011-2022: Companies receive Say-on-Pay votes with no actionable feedback. Remuneration committees design pay structures without clear guidance. Proxy advisors fill the gap with quantitative models that measure cost, not alignment.
2023: The SEC mandates Pay versus Performance disclosures, requiring companies to report mark-to-market CEO pay alongside Total Shareholder Return for five years.
2024-2026: Institutional investors continue using general guidelines despite having access to data that enables specific quantitative thresholds. The control gap remains.
Breakdown of Governance Controls
1. Feedback Mechanism Failure
The Say-on-Say-on-Pay was intended as a feedback control. Under the COSO ERM Framework, feedback controls require clear performance criteria and actionable information flows. General guidelines like "clear link between Incentive Compensation and operational performance" provide neither.
A remuneration committee cannot adjust pay leverage, alignment, or risk appetite when the voting threshold is ambiguous. This isn't a control; it's a suggestion box.
2. Measurement System Inadequacy
For decades, companies reported the grant-date fair value of equity awards. This measure captures the value at grant but ignores subsequent changes in unvested equity value. If your CEO receives restricted shares worth £2 million at grant, and they fall to £500,000 before vesting, grant-date reporting still shows £2 million. The incentive effect is £500,000.
Institutional investors built voting guidelines on a measurement system that couldn't fully capture the pay-performance relationship. You cannot manage what you cannot measure.
3. Proxy Advisory Model Deficiency
Institutional Shareholder Services, a dominant proxy advisor, uses three primary metrics. Two of them measure cost, not alignment. The Relative Degree of Alignment compares the company's TSR percentile to the CEO's grant-date pay percentile. Despite its name, it doesn't measure correlation between pay and performance at the individual company level. The Multiple of Median is purely a cost comparison with no adjustment for performance or leverage.
Investors outsourced analysis to models that don't measure the stated objective.
Standards and Their Requirements
UK Corporate Governance Code, Provision 40
"Remuneration schemes should promote long-term shareholdings by executive directors that support alignment with long-term shareholder interests."
This provision requires alignment, not just cost restraint. General voting guidelines that don't measure alignment fail to enforce this principle.
Investor Stewardship Code, Principle 12
"Signatories actively exercise their rights and responsibilities. Institutional investors should monitor their investee companies and be willing to intervene where necessary."
Monitoring requires measurable criteria. Intervention requires specific thresholds. A guideline that says "we look for a clear link" provides neither.
COSO ERM Framework, Control Activities Component
"Control activities are the actions established through policies and procedures that help ensure that management's directives to mitigate risks are carried out."
The directive here is "align executive pay with performance." The control activity is the Say-on-Say-on-Pay. For the control to function, the voting policy must be specific enough that management can predict the outcome and adjust behavior accordingly.
Actionable Steps for Your Organization
For Institutional Investors and Stewardship Teams:
Adopt specific quantitative thresholds using Pay versus Performance data. Five dimensions are now measurable at the individual company level:
- Pay alignment (r-squared): Percent of variation in relative pay explained by relative TSR. Set a minimum threshold (50% is suggested).
- Pay leverage: Percent change in relative pay per 1% change in relative shareholder wealth. Require statistical significance (t-stat above 2.13 for five-year data).
- Relative pay risk: Variability of pay relative to TSR variability. Cap it at 2.0.
- Pay premium: Performance-adjusted cost at peer median performance.
- Pay leverage t-statistic: Confidence that observed leverage isn't due to chance.
Publish these thresholds in your proxy voting guidelines. Companies will model their pay structures against your criteria. Your vote will start to matter.
For Remuneration Committees:
Calculate your own five pay dimensions before your institutional shareholders do. Use your five-year Pay versus Performance table. Plot the natural log of relative pay against the natural log of (1 + relative TSR). Run the regression. Know your alignment, leverage, risk, and premium.
If your pay alignment is below 50%, your largest shareholders may vote against your remuneration report once they adopt specific guidelines. Adjust now.
For Compliance and Governance Officers:
Map your current executive pay structure against emerging quantitative voting thresholds. Don't wait for a failed Say-on-Say-on-Pay to discover your pay-performance correlation is negative or statistically insignificant.
Add pay dimension analysis to your annual governance review cycle. This isn't just Remuneration Committee work; it's enterprise risk management. A failed Say-on-Say-on-Pay triggers reputational risk, regulatory scrutiny, and board accountability questions.
For All GRC Leaders:
Recognize that vague controls don't constrain behavior. They create uncertainty and invite failure. When your stewardship responsibilities or governance codes require "alignment," measure it. When they require "appropriate risk appetite," quantify it.
The data exists. The measurement methods are established. The only thing missing is your willingness to set specific thresholds and enforce them.
