ESG feature – Executive pay
paying its staff below minimum wage and not providin equip- ment to protect against Covid? Yes, well he and the two found- ers will each collect a £50m bonus if Boohoo is worth £6bn in March 2024.
Measuring it
There are many ways to assess if an executive is being suita- bly rewarded for their results. The pay equity ratio is one such method, but it should not be examined in isolation. “We look at how it has changed over time,” Isleib says. One person who believes that the crisis has made the ratio even more important is Aon’s Jones. “We have always seen attention on pay ratios, but Covid-19 has put a finer point on that,” she says. “Pay inequality is going to be a bigger issue generally.”
A poor reading on this metric, could point to potential trouble ahead. “If you have an issue with your pay ratio, it means you have an issue with your social approach and your workforce,” Herskovich says. “Over the long-term it is non-sustainable and will impact your results. You need to build a good rela- tionship with your workforce or you could have a strike or the organisation will not work well as the workforce is unhappy.
“Customers are also looking more and more at a company’s approach to social issues,” he adds. “The pay ratio is not an easy indicator. It is not something you can look at and make a conclusion. We tend to look carefully not at the ratio itself, but the evolution of that ratio. The ratio doubling over three or four years is something that is not expected. We emphasize the evolution of it. “The pay ratio is a sensitive issue, it is used politically by unions and some companies are reluctant to publish it,” Her- skovich says. “It is something that will be looked at more carefully in the next few years.” Comparing pay levels to those of their peer group is another way of measuring the issue. “When we see a company outside of its peer group range there needs to be strong argument as to why that level does not apply to them,” Isleib says. “If they do not have a suitable answer we need to decide if we are being compensated appropriately as shareholders.” This could be difficult if companies decide not to disclose the targets management have been set, situations Isleib has wit- nessed. “That is a red flag for us,” he says. Aon has an executive compensation group that helps compa- nies to identify their pay peers and ensure they are in line with those peers. “They are doing the things that they need to do to incentivise their executives to stay but at the same time make sure that they are not getting out of line with industry norms,” Jones says.
If a CEO is getting rewarded when return on equity is 5% while the market expects 8%, there is something wrong.
Michael Herskovich, BNP Paribas Asset Management
Executives are becoming more receptive to such conversa- tions. She points to an example of companies where share- holders issued resolutions that prosed tying ESG to executive compensation. Although the resolution failed, the companies in question engaged in dialogue with shareholders and at least one of those companies has included ESG metrics in the executive compensation programme. “People are not saying, ‘hey, this sounds like a great figure’. They are trying to make sure it is balanced against the peer group and appropriate for the level of performance,” Jones says.
“It is changing from a straight pay for performance on varied financial metrics to a conversation about the entire stakeholder echo system and being compensated on non-financial risk management and things like employee engagement and retention and talent management and community engage- ment, cyber security have taken on increased prominence,” Jones says. “This is the next evolution of tying in more of a stakeholder view.”
Passive plays More than 90% of the equity assets BlackRock manages on behalf of its clients are held in index strategies to finance long-term goals like retirement. This does not stop the firm
42 | portfolio institutional September 2020 | issue 96
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