Covid-19 Pay Restraint Bolstered by Investor Ownership, Gender Diversity

Asset managers and pension funds can drive fairer executive remuneration through more active engagement, says report. 

New research has indicated a correlation between higher levels of female board representation and institutional share ownership and the likelihood of UK-based companies undertaking executive pay cuts in response to the economic impacts of the Covid-19 pandemic. 

The Open University, University of Nottingham, Canada’s Western University and the think tank High Pay Centre evaluated the extent to which UK corporates’ cut their executive pay during the initial outbreak of the pandemic, assessing the correlation with female board-level representation and degree of ownership by institutional investors – specifically pensions funds and asset managers. They did this by analysing statements made to the stock market from 216 non-financial companies with a market value of over £500 million between March and May 2020.  

Slightly less than half (104) of these firms reduced executive remuneration as a response to Covid-19, the report said.  

On average, firms that cut executive pay were found to have more female directors than firms that did not. Companies cutting pay by between 25-40% had an average of 3.5 women on their board, compared to just over two female directors at firms that made no reductions. 

“Correlation is not the same as causation,” the report nonetheless noted, adding that the relationship between gender diversity and executive pay cuts merits “further exploration”.  

Companies that reduced executive pay were more likely to have higher ownership stakes by asset managers, the report added. Firms in which asset managers held an average 0.5% ownership stake were more likely to reduce executive remuneration by between 25-50% than firms where average stakes were lower, it said. The report noted this is likely due to asset managers with larger stakes engaging with investee companies on this governance theme. 

The same could not be said for pension funds, however, where the average direct ownership stake by funds made little difference to remuneration policies.  

The authors suggested that this could be due to the fact pension funds collectively hold a smaller proportion of total institutional shareholdings in individual firms, so their influence over corporate governance is therefore more limited.  

However, given that “a significant number” of asset managers and pension funds are signatories to the Financial Reporting Council’s Stewardship Code, which commits them to active engagement with companies, the report noted that they are “potentially a more independent, objective and engaged arbiter of whether executive pay levels are appropriate or proportionate than other investors”.  

If shareholders were to increasingly engage with companies to encourage them to enforce fair executive remuneration policies, they could have a bigger impact on investee companies’ executive pay reductions, the report said.  

Pay is a priority 

Executive remuneration has been highlighted as a key theme for investors this year, with many concerned about the widening pay gap between corporate c-suites and the rest of the workforce.  

In 2019, compensation earned by CEOs of US-listed companies outweighed the average worker by a ratio of 320:1, according to the American think tank Economic Policy Institute. 

Increasingly, investors also expect investee companies to tie remuneration to ESG-themed KPIs, to ensure that companies are committing to improving their environmental, social and governance performance at the highest level.  

The Investment Association has previously sent a letter to FTSE 350-listed companies, calling for them to make executive pay and bonuses more dependent on performance against ESG metrics. 

Investors are looking to vote against excessive executive remuneration.  

Earlier this month, US proxy advisory firm Glass Lewis recommended that investors vote against remuneration plans at banks Barclays and Standard Chartered.  

Despite greater institutional ownership and board diversity correlating with higher pay cuts during the Covid-19 pandemic, an average 10-20% reduction in base salaries doesn’t represent a “meaningful reduction”, the High Pay Centre report said. In several cases, firms restored pay to previous levels after just three months. 

In 2020, the average FTSE 100 CEO earned a base salary of £954,000 in 2020 and bonus payments and share award schemes averaging £2 million. 

“Greater worker involvement in ownership and strategic decision-making […] may be necessary to deliver truly responsible businesses fully aligned with the interests of wider society,” the report noted.  

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