Pay Under Pressure: A Compensation Playbook for Engaging with Activist Investors

As seen in Chief Executive Officer Magazine 2025 – Solving the Remuneration Riddle Feature

When activist investors show an interest in your company and start buying a stake, their goal is influence. They want to exert control, push for seats on the board, make changes to how the business is run, enhance profitability and drive growth. Their tactics may vary, but if they fail in attempts to influence change, they may engage in a proxy fight for more presence on the board, and the resulting battle can be messy.

Whether it is a hedge fund that specializes in activist investing, or an institutional investor that occasionally adopts such tactics to achieve its ends, the ramifications can be far-reaching, affecting every aspect of the business, and compensation is no exception. Indeed, the work of the compensation committee can have a key role in determining the relationship between the board and the investor, and compensation programs can become weapons in any conflict. Compensation is often used as wedges through which an activist investor exerts control and opens rifts. Conversely, it can also be a tool for opening up discussion, addressing gaps in perception about how the business is performing and how it is defining its strategic goals. It can, therefore, present an opportunity to improve alignment, governance and preparedness.

So, what are a company’s options when an activist investor comes calling, and what are the potential outcomes? For Dan Kaufman of Meridian Compensation Partners, there are at least three possible eventualities. Firstly, a company can put up a fight and successfully push out the activist, thereby retaining all of the seats on the board with little to no change to existing compensation programs. Secondly, it could fail in that fight, with the activist getting at least one board seat, but typically more. Alternatively, management can reach an agreement that typically involves changes to strategy, leadership and, perhaps, the activist taking an agreed upon number of seats on the board, and relevant committees.

“There is a range of outcomes, including those, but there are unlimited possibilities in between,” he remarks. “If an activist shows up and starts buying shares, there is potentially a negotiated outcome. That can potentially lead to a change at the executive level and possibly seats on the board for the investor, but it is rare that everything is resolved behind closed doors.”

“It is more likely that the company will not agree to all of the activist requests,” he adds. “It will dispute some or all of what the activist has come out with in its commentaries, which often amount to a large deck of criticism. The company may win the fight through a proxy vote to keep its own directors, or activists may get some or all of its directors on the board. In most cases, there is a downstream effect on the ‘Say on Pay’ vote.”

Compensation as a Battleground

Say on Pay – the vehicle through which a company’s shareholders have the right to vote on executive remuneration – can become a weapon in the activist investor’s arsenal, though it is just one area in which leverage can be applied within a broader discussion about corporate control.

Many factors determine the outcome of a fight with an activist – financial performance and its drivers, disagreement over M&A strategy, a lack of confidence in management, and much more. Executive compensation is rarely the main driver of an activist’s desire to exert more control, but it will most likely play a role in determining the outcome of any discussion.

“It is natural to feel defensive when an activist becomes involved in your company, but if you get in the room and have a discussion then that defensiveness can break down,” states principal Mike Meyer of Meridian. “Compensation is an important factor among many that will be discussed, but it is not usually why activists become involved, as they are more focused on strategy.”

“Once they are involved, however, they will put together a packet of information in which executive compensation is always a part,” he adds. “They use it as a wedge, or even so far as an embarrassment of the board when discussing decisions it has made. It can be used to question the company’s oversight, to suggest that it is being mismanaged, and to paint the company in a negative light.”

The company itself many not even be underperforming, but the activist investor may feel that it is not taking full advantage of a market opportunity, or not transforming to keep pace with how the market is evolving, or may simply see the potential for more upside performance opportunities with changes to strategy or a different team leading the business. Whatever its goals, it will use any factor it can to exert pressure on the board, not least the structure of compensation programs.

“Activists tend to run many different compensation analyses and selectively choose the one or two that best supports their argument against the existing compensation programs,” says Kaufman. “They want to find the most embarrassing angle for the board, and paying executives too much relative to performance is a good example. They will question whether the company should set more aggressive targets, whether it is paying bonuses for shrinking the company, or anything else that might serve their purposes.”

Looking at executive compensation as a percentage of revenue or examining the percentage of profits spent on equity awards, or any other analysis that negatively represents compensation spend compared to profitability, may come up in negotiations. This might be a comparison with peers, or an analysis of the CEO’s remuneration compared to the next highest level of compensation to prove concentration and autonomy of leadership.

Activists will cherry-pick whatever statistics paint the picture they want. And they have history on their side. After all, when companies are preparing compensation packages they do so on a forward-looking basis, making certain assumptions about possible future performance. Activists, by contrast, can look back at what actually happened over a given period to suggest that the compensation committee made mistakes. They may question the rigor of goal-setting and the alignment of pay outcomes with performance. They may link compensation to the shareholder experience, looking at total shareholder return (TSR). They may, if it serves their purposes, look at any historical use of discretion and question any deviation from market practice in the area of compensation.

“Activists are focused on board oversight, and they may use pay disparity as a way of suggesting that succession planning has failed if the disparity between executives is too large,” says Kaufman. “And in many cases, things can get very personal on attacking qualifications of existing board members. Also, if board members have any history together – like attending the same university – then activists may try to argue that some conflicts of interest exist which impact the director’s independence.”

“They will also look at the tenure of specific individuals,” he adds. “They will question how long they have been on the board or in key decision-making roles and perhaps suggest that they are exerting undue influence. It is common for activists to try to unseat long-serving directors.”

Calculating the Counterpunch

There are clearly grounds for conflict when activists come calling, but companies are not entirely impotent in the face of their executive compensation tactics. Their tactics will, however, differ depending on whether they respond publicly or try to settle matters behind the scenes. If they respond publicly, the key is to get management, compensation consultants and proxy solicitors to work together to create a cohesive response in which compensation is just one component. It is vital to rebut the negative conclusions of the activist with your own analyses that support the decisions that were made.

“Ultimately, if you are going to fight then you are responding publicly through additional filings,” Kaufman explains. “You need your own analyses that dispute the activist’s items, and we generally recommend hiring proxy solicitors. They work hand-in-hand with us to provide more insight into institutional shareholders, and to identify the right contacts at institutional shareholders to best influence the vote outcome.”

“It could go to a vote, so you want to make your argument publicly,” he adds. “Most institutional investors own thousands of companies and can’t do this level of individual analysis, which is why there are proxy advisers out there. So, reach out to shareholders and have discussions well in advance of when you need them. It is all about developing strong relationships.”

A compromise might be giving the activist one seat on the board instead of three, which is yielding some control but limiting the damage. If the activist does get one or more seats, they may well have some suggestions about compensation, and it pays to be prepared for these ideas.

They may want to shift the emphasis on TSR, often in absolute terms, in incentive plans. They may suggest a more rigorous approach to financial goal-setting with a focus on the return on invested capital (ROIC) compared to the weighted average cost of capital (WACC). Another suggestion could be closer monitoring of equity spend, or a change in the way compensation is benchmarked against peers. There may also be a change in the focus on realized or realizable compensation.

“It is not surprising that many activist suggestions are in line with their initial arguments, and they will want to know how many compensation plan metrics are linked to shareholders,” says Meyer. “They will be looking at TSR metrics, and in the US it is most common to measure TSR relative to a peer group. But they also expect absolute returns. They could be looking to grow the stock price by a specific percentage over a certain period.”

It is entirely possible, however, that compensation may recede as an issue once an activist has exerted its control and got some seats on the board. If it was just a wedge issue, then it may fall down the list of priorities, but that does not mean it can be overlooked. It is still essential to prepare for and minimize any potential concerns around compensation. To do this, companies can analyze programs from an activist’s perspective to anticipate their moves. Active engagement with shareholders will help to set up a quick response to activists, and transparent proxy disclosures will help to tell your side of the story.

“Preparation can be about having good shareholder relationships,” says Kaufman. “Shareholder outreach is important. Build that muscle by exercising it. Look at compensation from different perspectives. How could you criticize your compensation program from the outside? Can you defend it? If there is an issue to address, can you adjust the program?”

“Changes to compensation won’t prevent an activist from getting involved, but they can help in the initial discussion over board seats,” he adds.

Just as compensation programs can be a tool for activists to exert leverage in their search for control, so can they also be a shield companies can use to push back and limit the damage. Whether they are a powerful wedge to sow division or a counterpunch to maintain control will depend on how well the board prepares.