ESG feature – Executive pay


ance structures on a consistent basis, even when companies are performing well,” she adds. Newton also sees executive remuneration as a governance issue. “It is different from the E and the S pillars of ESG, which are more industry or region specific,” McAllister says. “It is a universal factor for us, we look at it in every circumstance.” Across the world, asset owners are putting asset managers under increasing pressure to ensure their portfolio compa- nies have adequate executive pay policies. “It is something that you have to look at and look at carefully,” says Michael Herskovich, BNP Paribas Asset Management’s head of corpo- rate governance. “If a CEO is getting rewarded when return on equity is 5% while the market expects 8%, there is some- thing wrong.” Herskovich recalls a case when one of his fund managers sold a stock because he was not convinced the company’s forecasts were achievable after considering the executives’ pay deals. “A few months later, the company announced its interim results and reduced its forecast,” he adds. This is an issue that more and more investors are factoring into their decision making. “Shareholders are becoming more vocal about what they want from a pay structure,” van Esch says. “They are looking more into whether pay struc- tures fit into their voting policy.”


One person not underestimating the importance of how much a company’s executives are paid is Fred Isleib, director USA, ESG research and integration at Manulife Investment Management. “For those factoring ESG into their investment decisions, executive pay is critical,” he adds. “It sits squarely within the governance framework. “At the end of the day, what executive compensation speaks to is how well a company values its shareholders and how will- ing it is to promote and create capital accretion over the long term.” For Isleib this is too important to limit to an ESG checklist. “Every


should look at executive compensation because you want management teams that are being incentiv- ised properly.” To ensure this happens, Manulife continuously reviews this topic in its portfolio companies. “It is something we do as responsible investors,” Isleib says. He makes it clear that Manulife’s approach should not be confused with trying to cap the upside on any compensation plan. “The key for us is to make sure that there is alignment between shareholders and the economic return of the corpo- ration and how the stock has performed.”


investor Fear of the ballot box Boards are taking notice of shareholder concerns. Last year,


Performing well financially, ESG and pay are inter- linked.


Lloyd McAllister, Newton Investment Management


according to Deloitte, the chief executives of the largest 30 companies on the FTSE were paid on average around 7% less last year than they were in 2018. While chief executives pay remained static across the wider FTSE1OO, financial direc- tors fared worse taking a 12% hit to their pay. Lower compensation packages are reported to be the result of new hires or the early impact of the Covid crisis being felt in some parts of the world, but there could be another reason. In June, 67% of investors voted down Tesco’s pay policy over fears that bonuses were being inflated by an incomplete peer analysis. A month later, shareholders vetoed the proposed pay deals for the directors of budget airline Wizz Air after profit targets were missed. Could BA be next? Shareholder group ISS is urging investors to reject outgoing chief executive Willie Walsh’s proposed £800,000 bonus at a time when the national carrier is look- ing to cut 12,000 jobs.


This is not a new phenomenon. In 2018, 70% of Royal Mail’s investors did not support a 17% rise in the new chief execu- tive’s salary or a £900,000 pay-off for the departing one. The fear of shareholders voting against their pay deal is enough to bring executives to the table to discuss the issue. “Losing a vote is embarrassing, a sign that they are not doing their job to the satisfaction of their shareholders,” McAllister


Issue 96 | September 2020 | portfolio institutional | 39


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