Starbucks CEO Kevin Johnson won a $ 1.86 million bonus in fiscal 2020, in addition to a larger retention premium, designed to keep Johnson in office until fiscal 2022, according to the Starbucks proxy statement.
“The board unanimously supported the performance-based retention rewards granted to our executives in late 2019,” said Starbucks board member and Ulta Beauty CEO Mary Dillon in a statement responding to the vote.
Companies seek non-binding approval for executive compensation shareholders, through the so-called “say-on-pay” proposals outlined in the proxy statements each year. As the proposal is not binding, companies do not need to make changes based on the result of the vote. But companies are legally obliged to allow investors to vote on compensation.
Generally, “it is very rare that proposals to ‘tell about payment’ are not approved,” said Kai Liekefett, a partner at Sidley Austin law firm specializing in executive compensation and corporate governance.
When investors make it sound like they think executives are overpaid, it can signal underlying shareholders’ unrest, he said. Shareholders typically “don’t care about executives making a lot of money, as long as performance is excellent,” said Liekefett.
This time, shareholders were probably influenced by the guidance of Institutional Shareholder Services and Glass Lewis, two influential proxy advisory firms that provide guidance on how investors should vote on proposals to ensure the best possible returns and often effectively dictate how investors vote.
ISS recommended that shareholders vote against the proposal, arguing that the justification that justifies the value of Johnson’s compensation package is “insufficient, considering the overly large goal and the maximum opportunities under the award”, and given that Johnson won a special performance award the year before. Glass Lewis, also recommended that shareholders vote againstt the proposal, saying that Starbucks “paid [its CEO] moderately more than their peers, but performed worse. ”
ISS recommended that shareholders vote against compensation packages for approximately 12% of companies each year for the past decade, according to an analysis published in March by Compensation Advisory Partners, a consulting firm specializing in executive and director compensation. The report found that in about 96% of cases, when the majority of shareholders voted against a proposal for executive compensation, ISS advised them to vote that way.
The shareholders finally decided to follow the recommendation issued by the consultants and voted against the compensation package proposed by Johnson.
While Starbucks is not required to make any changes, it must take stockholder sentiment into account when considering how to structure executive compensation going forward, Liekefett said. Investors can feel “alienated if a board does not seem to respond … to criticism,” he said. This could lead to consultants voting against the nominations of directors or inviting an activist shareholder to take a stake in the company.
Starbucks intends to better understand what happened, Dillon noted.
“Our board and management team will continue to engage with investors in the coming months to understand their perspectives as part of our ongoing assessment of our executive compensation programs,” she said.