ESG feature – Executive pay
says. “The vote acts as an underlying driver to avoid an embarrassing situation at the AGM.” Newton voted against 89% of its North American holdings’ pay structures last year, as so few companies in the US link pay to performance. “You can gain a lot of insight on a com- pany’s figures, forecasts and vision by looking at its executive pay policy,” Herskovich says. BNP Paribas AM has opposed around a third of all manage- ment proposals from its portfolio companies this year with executive pay the most popular issue it votes against. “Our opposition rate is 60%, so there is a lot of room to improve,” Herskovich says.
What to look for How much the leaders of a company are paid is a considera- tion when BlackRock assesses companies’ overall ESG prac- tices. Compensation that promotes long termism is one of the asset manager’s five engagement priorities. “Executive compensation needs to be linked to the company’s long-term strategy and how the company performs,” Law says.
“In the past, conversations around executive compensation, certainly in the UK, have been about pay in isolation rather than looking at the full picture.” When assessing pay, BlackRock looks at a company’s perfor- mance, strategy and targets, alongside how it is positioning itself to address its key risks. “Undertaking analysis in this broader context with a focus on strategy is forward looking,
while looking at pay in isolation is backward looking,” Law says.
“Executives need to be cognisant of the broader environment in which they are operating and what they are receiving rela- tive to their employees,” Law says.
Another firm that is not looking at this important topic in iso- lation is Manulife. There are three things it wants to see when compensation committees set an executive’s pay. First, has it been set in a way that promotes capital appreciation. Second, that it will not force a director to take too much risk to hit their targets and, finally, that the level of pay is appropriate to its industry peers. For McAllister, executive pay is an important part of company analysis. “It sets the incentive structure of the organisation and we want to make sure that pay structure is aligned to the strategy we have bought into. “We want to see the executives’ pay tied into those long-term performance metrics, so we can be sure that executives are being paid for performance,” he adds.
After the storm has gone
Executive pay has become a bigger issue in the past five years for investors and stakeholders and will continue to grow, especially as we are heading into a difficult period for the global economy. “If we go into a deep downturn, the magnify- ing light will become stronger,” Isleib says. He hopes that during any downturn ahead, compensation committees and the executives themselves will recognise the hardships that employees are going through. “It would be bad reputational PR to see executive pay escalate while the work- force is being laid off,” Isleib adds.
Executive pay is the bread and butter of ESG.
Meredith Jones, Aon
This is a common theme among those managing mandates for institutional investors. “Events over the past few years have kept executive pay in the headlines,” Law says. “How boards manage the impact of the Covid-19 crisis will keep it in focus.” Jones would like to see the pain felt across an organisation, not just on the factory floor. “Covid-19 has highlighted that in terms of pay cuts and furlough.
“When companies are doing well there is more proportional- ity when it comes to reward so when they experience pain that should be shared proportionally as well,” she adds. The good news is that half of FTSE100 companies have cut the pay of their executives, perhaps temporarily, due to the pandemic, Deloitte has discovered, so more work might be needed here.
“The executive compensation issue is going to be more sensi- tive in 2021,” Herskovich says. “If financial results are not good and you are reducing your workforce then, potentially, some cases might come up.”
40 | portfolio institutional September 2020 | issue 96
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52
