Executive pay – ESG Club feature


With concerns over social inequality growing, how much is too much when it comes to rewarding the people sitting in the boardroom? Mark Dunne reports.


Big is not necessarily beautiful. The rewards executives receive for leading a company are facing greater scrutiny as anger over inequality has led to strikes, protests and defunding campaigns. It’s bad for business if directors receive six-figure salaries, bonuses, shares and pension contributions while the guys working on the shop floor are struggling on the minimum wage.


The chief executive of clothing and homewares retailer Next being handed a 50% pay rise at a time when fami- lies are struggling is the latest example that has put the issue under a microscope. Tesco and the Restaurant Group, which owns Wagamama, have also faced ques- tions from shareholders concerning the rewards they have handed their leaders in difficult economic times. Finding a balance between companies needing to attract and retain talent while avoiding accusations of being greedy is not easy. “Talent at the top can make a differ- ence in terms of financial performance, but they need to balance having strong leaders with a prudent allocation of investor capital and robust, objective and transparent incentive metrics,” says Peter Dervan, senior director of stewardship at Manulife Investment Management. Karoline Herms, senior global ESG manager at Legal & General Investment Management (LGIM), has two dec- ades of investment management experience, which has seen her work with companies on their remuneration proposals. “Remuneration has been a bit of a hobby- horse for me,” she says. “It is a window into a company’s governance structures, which, as an external investor, you don’t often see. “You get to see who is really wearing the trousers,” she adds.


When is enough…enough? Herms says that LGIM trusts boards to govern their company, which includes setting management remu- neration. “Essentially, we trust them to do it right, but we take our responsibilities as an active shareholder seriously. We know our voting rights when looking at remuneration proposals and the accountability of direc- tors,” she adds.


The decision on what is appropriate to incentivise man- agement lies with the remuneration committee. “If it is their belief that they must give a significant pay award, they can do so as long as it’s structurally long-term aligned, reflects strong performance and is potentially measured against benchmarks,” Herms says. “We want to see the management outperform the market. “We also expect the committee to look at other issues. So, for example, the stakeholder experience, the size of


Issue 126 | September 2023 | portfolio institutional | 31


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