When Pay Attracts Activists

After decades advising boards through shareholder scrutiny, compensation redesigns, and activist pressure, Farient Advisors COO R.J. Bannister has learned that credibility is built long before a proxy fight begins. In a market where investors demand tighter alignment between pay, performance, and strategy—and where activists are increasingly sophisticated—Bannister argues that compensation committees must think less tactically and far more structurally about how incentives tell the company’s story. That story, he says, begins with disclosure.

Bannister emphasized during a recent webinar on shareholder engagement hosted by BDO that, as boards enter proxy season, the Compensation Discussion & Analysis (CD&A) is their most powerful—and most underutilized—tool for engaging investors. It is not simply a compliance document, but the board’s primary mechanism for explaining how compensation programs reinforce strategy and promote shareholder value.

Bannister: “Boards that actively engage investors and then reflect that feedback in year-over-year CD&A changes signal credibility and responsiveness.”

Effective CD&As clearly articulate the company’s compensation philosophy, explain why specific performance metrics were selected, and demonstrate how those metrics support growth, returns, or a deliberate balance of both. Bannister stressed that investors respond best when disclosures feel explanatory and intentional—using visuals and narrative to help shareholders understand how decisions were made—rather than a rote, “check-the-box” recitation of plan mechanics. He also noted boards that actively engage investors and then reflect that feedback in year-over-year CD&A changes signal credibility and responsiveness.

Defensible Strategic Metrics

As companies increasingly incorporate strategic metrics—such as AI initiatives or human capital objectives—into incentive plans, Bannister cautioned these metrics must remain investor-defensible.

In the near term, Bannister outlined a clear test that any strategic metric should demonstrably influence at least one of five enduring shareholder drivers:

• Revenue growth relative to peers
• Cost efficiency
• Asset utilization
• Risk management
• Workforce productivity

If a metric cannot show how it advances one or more of these outcomes, it becomes difficult for compensation committees to validate guardrails, justify adjustments, or defend the metric to investors and proxy advisors.

Over the longer term, Bannister highlighted a growing challenge for boards: comparing investments in people and investments in technology on an equivalent basis. As companies weigh decisions such as hiring talent versus deploying AI, compensation committees need consistent measurement frameworks and shared vocabulary to assess incremental returns. Traditional accounting conventions complicate this analysis, but boards are increasingly being forced to confront these trade-offs in real time—and incentive structures must evolve accordingly.

Where Pay Invites Activist Attention

Bannister identified two scenarios where compensation programs most often attract activist scrutiny. The first is sustained pay-for-performance misalignment, particularly when executive compensation remains high despite prolonged underperformance in total shareholder return relative to peers. Proxy advisor flags in this area frequently act as a catalyst for activist involvement.

The second scenario arises when investors believe a company is failing to execute or adapt—often in the face of technological change or missed growth opportunities. In these cases, compensation metrics themselves can become a point of attack, especially if they emphasize capital efficiency or return metrics in ways that appear to inhibit necessary investment, innovation, or strategic evolution.

An Expanding Role

Bannister underscored that M&A activity significantly raises the stakes for compensation and human capital committees, particularly around leadership transitions. He noted that poorly managed CEO and C‑suite transitions—especially those tied to mergers—have destroyed substantial shareholder value across public markets.

As more companies expand the compensation committee’s remit to include human capital management and succession planning, boards are better positioned to address these risks proactively. He advised committees to develop transition scenarios in advance, identify critical leadership roles likely to be affected by deals, and work with their advisors to analyze relevant data before decisions are forced by transaction timing or market pressure.

Prepared Boards Preserve Shareholder Value

Across all topics, Bannister returned to a consistent theme as boards head into annual meetings and proxy season: preparation equals credibility. Boards that understand the risks embedded in their pay programs, can clearly explain how incentives link to strategy, and anticipate investor concerns are far more likely to maintain trust—and avoid reactive decision-making under activist or proxy pressure. In his view, the boards that succeed are not those scrambling to defend decisions during proxy season, but those that have already aligned compensation, disclosure, and strategy well in advance.

Questions Boards Should Ask Now

As boards prepare for annual meetings and the proxy season now underway, Bannister’s comments point to a short list of questions directors—and particularly compensation and human capital committees—should be asking immediately:

• Does our CD&A clearly explain why our incentive metrics were chosen and how they link to strategy, not just what the metrics are?
• Would an investor reading our CD&A understand how year-over-year changes reflect shareholder feedback and evolving priorities?
• Are we using narrative and visuals to explain decision-making, or relying on technical disclosure that obscures intent?
• Can each strategic metric in our incentive plans be tied to at least one enduring shareholder driver—growth, cost efficiency, asset utilization, risk management, or workforce productivity?
• Have we established clear guardrails and validation standards so discretionary adjustments remain defensible to investors?
• Do we have a consistent framework for evaluating incremental investments in people versus AI or technology on an apples-to-apples basis?
• Are our pay outcomes aligned with total shareholder return over time, particularly relative to peers, in a way that would withstand proxy advisor scrutiny?
• Do our incentive metrics support long-term execution and strategic adaptability—or could they be viewed as constraining necessary investment or innovation?
• Has the compensation and human capital committee proactively mapped leadership transition scenarios tied to potential M&A activity?
• Are incentive structures designed to support continuity, succession, and value preservation during executive transitions, rather than reacting under deal pressure?
• If investors or activists challenged our compensation decisions tomorrow, could we clearly explain how pay, performance, and strategy are aligned—and why that alignment serves long-term shareholder value?