ESG feature – Executive pay
If we go into a deep downturn, the magnifying light will become stronger.
Fred Isleib, Manulife Investment Management
downturn risk into account. “In theory, some pay structures should correct for it, but this does not always work in prac- tice,” he says. Despite this, Jones believes that growing awareness of the issue among corporates is a sign of an “acceleration” to a more stakeholder than shareholder model. “It used to be that an executive could justify getting their full pay if they hit free- cash flow or earnings targets,” she adds. “Given that Covid and climate change are putting a spotlight on environmental, social and governance issues and the global conversations we are seeing on social justice, we are to a point where that proportionality of pay and sharing of ben- efits becomes more important. “As awful as it has been, Covid-19 has proven which execu- tives are taking a holistic view of all their risks and opportuni- ties, not just the ones that show up on their balance sheet,” Jones says.
Another issue is that most company targets are now irrele- vant thanks to the pandemic. “Being director of the compen- sation committee will be harder next year,” Herskovich says. “It is not easy to find the right balance between rewarding management for their work during such a complex time and having a disconnection with performance.” This is a time that could highlight that the success of a com- pany is not just reliant on the decisions made in the board- room. “Covid has highlighted that the workforce is crucial in value creation and when it is taken away it is devastating for the economy,” McAllister says, believing that employer-em- ployee relationships will grow in importance. “Employee satisfaction is linked to above-average share returns. A poor relationship with employees can lead to pro- ductivity declines, a lack of satisfaction, increased staff turno- ver and higher training costs.
“The interest of employees and shareholders can be aligned if the right incentive structures are put in place,” he adds. “This is definitely going to increase in importance post-Covid.” The ideal policy allows the leaders of a company to earn more money in good times but less when performance is not so great. However, van Esch would be surprised to see a deep fall in pay across the board as some pay structures do not take
Full disclosure An executive’s compensation is typically not just their salary. There are other rewards that can be hidden from the head- lines, such as bonuses and pension contributions. BlackRock has seen a reduction in pension contributions for executives in the UK, down from 25% to 30% of salary. In 2017, BlackRock amended its EMEA voting guidelines to express its expectation for executive pension contributions in line with those of the broader workforce. It outlined these new guidelines to the largest 300 listed companies in the UK. “Within a year-and-a-half, a substantial portion of these com- panies reduced their executive pension contributions,” Law says.
The message is getting through. One of the UK’s largest banks has reduced executive pension contributions to 10% of salary from 30%, and the new chief executive of a large insurer receives a pension payment of 14% of salary versus the 28% its previous chief executive received. Talent costs. You want the best people running your company and you want to keep them motivated. “You are trying to balance attracting the right talent at a sen- ior level while not wanting the pay disparity to demotivate the employees,” McAllister says. “There has to be fair distribu- tion of the rewards to the business’ various stakeholders.” The problem has been that too many leaders have been paid a fortune for a mediocre performance. Marissa Mayer’s five- year stint as chief executive of Yahoo is an example. She received a $239m (£179m) compensation package while over- seeing losses and the number of monthly visits to the home page more than halving. Then there is John Lyttle. Remember, the guy who it is alleged commissioned a factory to make dresses and tops that was
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