Say-on-Pay at 54.8%: Diagnosing and Rebuilding an Executive Program Before the Next Proxy
Vertex Industrial (NYSE: VTX) is a $4.2B industrial-parts manufacturer with 9,400 employees. At the May 2025 annual meeting, say-on-pay received 54.8% support, down from 91% a year earlier; both ISS and Glass Lewis recommended against. The proxy disclosed realized CEO pay of $14.6M against an $11.2M target. Advisor rationale cited three things: a 2022–2024 PSU payout at 187% of target measured on relative TSR against a 22-company peer group, six of which have revenue more than double Vertex's; a $3.0M off-cycle equity award granted in November 2024 and described only as "retention"; and personal aircraft use valued at $186K with no disclosed policy. Revenue missed guidance in two of the last four quarters, and three-year TSR sits at the 41st percentile of the peer group. The compensation committee meets in August with the CHRO, outside counsel, and its consultant to plan the response. The 2025–2027 PSU cycle is already granted and in flight, and management has publicly promised no further off-cycle awards.
1. Rank the likely drivers of the 54.8% result by severity and explain what evidence you would gather before recommending anything. What should the committee deliberately not change, and why?
Read the worked answer
Ranking by severity
- The off-cycle award. Discretionary equity granted outside an approved plan is the highest-severity item because it attacks process legitimacy, not just magnitude. $3.0M is roughly 21% of realized pay, and "retention" with no named risk, no vesting description, and no performance condition reads to proxy advisors as pay without rationale.
- Peer group construction. A 22-company set where six are more than 2x Vertex's revenue makes a 187% relative-TSR payout mechanically easier and undermines the credibility of the whole incentive result. Advisors weight this heavily because it is fixable and it compounds across years.
- Perquisite and policy disclosure. $186K of aircraft use is only 1.3% of pay, but an undisclosed policy signals weak governance hygiene and is cheap for a proxy advisor to cite.
Realized-versus-target pay is a symptom, not a driver: the committee should not treat "we paid 130% of target" as the problem, since the payout curve, not the target, produced it.
Evidence to collect before deciding
- The consultant's peer-selection memo and the revenue/percentile screen behind the current set.
- Payout curves and leverage for each plan year, plus rTSR against both the peer group and a broader index.
- Vote results split by holder type and by institutional versus retail, plus the full ISS and Glass Lewis reports.
- The minutes and rationale for the November award.
- Prior engagement commitments and whether they were kept.
What not to change
Do not amend in-flight PSU terms downward, shrink the peer group in a way that looks like outcome-shopping, or cut perquisites punitively. The first invites legal challenge and destroys trust; the second and third look responsive but leave the alignment defect intact.
2. Recommend the specific design and disclosure changes to put in the 2026 proxy, and state how you would handle the already-granted 2025–2027 PSU cycle.
Read the worked answer
Forward design (2026 grants)
- Peer group. Rebuild on a documented screen, roughly 0.5x–2.0x revenue, targeting 15–18 companies, and disclose the screen. Add a secondary reference index (broad market or sector) for rTSR so a single hand-picked comparator set cannot carry the payout.
- PSU architecture. Keep relative TSR but reduce it to 50% of the award and add a returns or margin metric at 50%; cap at 200% of target; lengthen to a three-year cliff; add a one-year post-vest holding requirement or a requirement to hold until the stock ownership guideline is met.
- Off-cycle award policy. Codify in the CD&A that off-cycle awards require committee approval, a disclosed rationale, and count against the share reserve. Commit to a standing rule rather than a one-time promise.
- Perquisites. Adopt a written aircraft policy (business use only, personal use prohibited or pre-approved and disclosed) and publish it.
The in-flight 2025–2027 cycle
Do not amend it. Three reasons: legal exposure under the award agreement and plan terms; retention damage to the exact executives you need; and proxy advisors generally view retroactive tinkering as worse than the original design flaw. Instead check whether the plan permits negative discretion and, if it does, disclose that the committee retains it and will assess outcomes against the new framework at vest. A forward-looking modifier disclosed in the grant letter is cleaner than a mid-cycle rewrite.
Disclosure
Restructure the CD&A to open with a "what we heard and what we changed" table that maps each criticism to a specific action and effective date. Advisors reward visible, dated, verifiable responsiveness more than they reward a better-looking pay number.
3. Design the shareholder outreach plan: who engages, with whom, on what message, and what the committee should and should not commit to.
Read the worked answer
Scope and targeting
Identify holders representing at least 50–60% of shares outstanding, prioritizing the 10–15 largest active managers and the two proxy advisors. Separate the conversations: proxy advisors need design mechanics and the peer screen rationale; large holders need strategic logic and evidence the committee is independent of management.
Timing
Run engagement September through November, before the proxy is drafted, so commitments made in the meetings can actually appear in the filing. Engagement that happens after the CD&A is written is a courtesy, not a consultation.
Who attends
The compensation committee chair should lead, with the CHRO and head of investor relations. The CEO should attend only where the holder asks; a meeting that looks CEO-led signals the program is management's, which is precisely the concern.
Message
Four beats: (1) we heard the vote and we are not attributing it to a small activist segment; (2) here is our diagnosis, named specifically - off-cycle award, peer group, disclosure; (3) here are the dated changes; (4) what are your priorities that we have not addressed?
What to commit to and what not to
Commit to things fully within the committee's control: peer screen, disclosure format, off-cycle award policy, perquisite policy. Do not commit to a specific payout outcome, a specific CEO pay level, or a retroactive change to the in-flight cycle - those commitments either cannot be kept or create legal and retention problems, and broken commitments cost more support than the original issue.
Closing the loop
Report results to the board, publish an engagement summary with the number of holders and shares represented, and note the specific changes the engagement produced. Repeat annually, not only after a bad vote.