ESG feature – Executive pay
Contrary to popular belief, there is such a thing as bad public- ity. Just ask John Lyttle.
The first six months of 2020 were a happy time for the chief executive of online clothing retailer Boohoo. Second quarter sales jumped 45%, the share price climbed 38% and he saw off a revolt by almost a third of the company’s shareholders to secure a 30% pay rise and pocket a £1m bonus. It must have seemed like the Covid pandemic was something that affected other people. But then, early in the second half of the year, his luck changed. A Covid outbreak in a Leicestershire factory that makes clothes for Boohoo gave the business the type of attention few would welcome. Undercover reporters found poor working conditions in the factory and made claims that staff were being paid as low as £3.50 an hour, less than half the £8.72 minimum wage for those aged over 25.
Boohoo became the poster boy for modern slavery and its value soon shrank by 23%, or £1bn. With the company hit by such a scandal, the validity of Lyttle’s reported £1.5m salary and future bonuses, which could top £50m, is being questioned. Such scrutiny is not limited to executives engulfed in a PR storm. The compensation packages that corporate leaders receive and what targets they must achieve to collect their bonuses help investors form an environmental, social and governance (ESG) profile. Is it good for the business if execu- tives are receiving a seven-figure salary while the company is continuously losing money?
The equality issue is also a risk. If the chief executive is get- ting paid thousands of times more than the guy on the shop floor then there could be resentment, which could lead to operational inefficiency and ultimately reputational damage. Executive pay is not just about financial performance any- more. More and more institutional shareholders are seeing success as sustainable profit growth and acting in the best interests of the staff, suppliers, local community and the environment.
“Executive pay is the bread and butter of ESG,” says Meredith Jones, a partner and global ESG practice lead at Aon. “ESG is an attempt to take more of a stakeholder than a shareholder point of view.”
This feeds into building a sustainable business. “Performing well financially, ESG and pay are interlinked,” says Lloyd McAllister, a responsible investment analyst at Newton Investment Management.
Just desserts “We expect executive pay to be linked to a company’s long- term strategy and its goals,” says Jennifer Law, vice president, BlackRock Investment Stewardship. “We expect executives to
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be rewarded for delivering strong and sustainable returns over the long term.” Law believes that a lack of correlation between executive pay and company performance is a sign of a weak oversight of management by the board. “Poor pay outcomes are sympto- matic of deeper governance concerns, rather than the cause of them.” Michiel van Esch, governance and active ownership specialist at Robeco, says that understanding what the board needs to do to secure their full salary tells you what the company’s pri- orities are. “Remuneration allows you to understand the credibility of a company’s ambitions,” he adds. “If you have climate targets as a key performance indicator in management’s renumera- tion package, then the issue is a priority at the highest level, not just something the sustainability reporting team are look- ing into.”
Law adds that in the past there was less focus on governance structures in companies that performed well. Complacency can set in during good times, resulting in governance weak- nesses. It is too late to wait until the tougher times arrive to address these weaknesses. “It is important to look at govern-
Poor pay outcomes are symptomatic of deeper governance concerns, rather than the cause of them.
Jennifer Law, BlackRock
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