Investor Dissent Grows Against Rising Executive Pay

ISS reports opposition on US ‘say-on-pay’ votes, while UK investors mull action against “egregious” settlements.

Asset owners and managers are becoming increasingly vocal in their opposition to executive pay and renumeration policies at investee companies, according to a recent report from Institutional Shareholder Services (ISS), highlighting that say-on-pay votes at S&P 500 firms have this year received their lowest levels of support from investors.

The findings of an analysis by ISS Corporate Solutions (ICS), the branch of ISS helping companies implement and manage ESG issues, including executive compensation, revealed that median investor support for say-on-pay proposals was at 92.2% through May, down from 92.7% last year.

Median pay for a S&P 500 chief executive had jumped 9% in the 2021 financial year, to a record US$14.4 million, according to ISS, up from US$13.2 million in 2020.

Pay increases were driven by higher bonuses and increases within long-term incentive grants, it said.

ISS noted that even through S&P 500 CEO pay levels were flat last year, investors rejected say-on-pay proposals at what was then a “historic rate” during the last proxy season, with 20 S&P 500 companies failing to secure majority support.

The 2022 figure currently stands at eight companies. More vote results are expected to come over the coming weeks.

“These results potentially suggest a continued growing disconnect between board determinations of CEO compensation opportunities and shareholders’ support for the pay packages,” said ISS ICS executive director, Brian Johnson.

“Against the backdrop of the current inflationary environment, investors appear to be more inclined than ever to vote against large pay packages that aren’t justified by company performance,” he added.

Rising opposition

The findings come in the week JP Morgan Chase shareholders voted against the bank’s executive pay plan, with just 31% voting in favour of the plan in a say-on-pay vote at its AGM.

The plan included a US$201.8 million pay package for six executives. Chief executive Jamie Dimon would have received a one-off US$50 million pay-out.

A growing number of FTSE 100 companies have also faced revolts around executive remuneration recently. GlaxoSmithKline had 38.2% of shareholders vote against a new policy that would raise the annual bonus for executives from two times salary, to three times, at its AGM held on 4 May.

ISS, the acting proxy adviser, said the bonus would also come with a substantial long-term incentive plan.

Online retailer Ocado suffered similar opposition over plans to provide its chief executive, Tim Steiner, a £100m bonus over the next five years. According to reports, 29.3% of voters were against the proposal.

A recent PwC analysis of salaries paid to FTSE 100 CEOs revealed an average increase of 34% from £3.1 million in 2020 to £4.1 million, marking a return to pre-Covid-19 levels.

In 2020, the median FTSE 100 CEO was paid £2.69 million: 86 times the median full-time worker in the UK, according to the High Pay Centre.

Investor action

Say-on-pay votes became mandatory in the US in 2011, while AGMs at UK and European firms routinely vote on remuneration packages. While shareholder opposition to proposals is getting stronger, the overall trajectory of settlements suggests impact is still currently limited. In response, some asset owners are considering new forms of collective action.

Adam Matthews, Chief Responsible Investment Officer for the Church of England Pensions Board, said in LinkedIn post yesterday that the UK executive remuneration system “is not working”, and this, given inflation has risen to 9% and many workers at investee companies will be hit hard by the cost of living crisis, was particularly “egregious.”

The pension fund is calling a meeting of asset owners, including fund managers, to examine the “broken system that is enabling excess. Board chairs and chairs of renumeration committees will be invited.

The UK’s Investment Association (IA) has set out clear guidelines on executive pay and how asset managers should vote on remuneration packages. In November last year the IA sent a letter to chairs of remuneration committees at FTSE 350 companies encouraging them to partially tie executive pay and bonus structures to ESG metrics.

Companies which fail to incorporate ESG metrics into executive pay should explain to shareholders how they will be integrated into future policies on remuneration, it said.

Director of Stewardship and Corporate Governance at the IA Andrew Ninian told ESG Investor: “Since the start of the pandemic the vast majority of FTSE companies have sensitively balanced the need to incentivise senior executives while at the same time fairly reflecting the experiences of their wider workforces, stakeholders, and customers.

“At a time when people across the country are struggling with the cost of living, ensuring this approach is maintained and showing restraint on executive pay increases will be critical for investors.”

Taking control

Executive remuneration was always expected to be a hot topic during the current proxy season, as the Covid-19 pandemic and ensuing cost of living crisis further accentuated disparities in pay between high level executives and employees.

A Morningstar report published in December last year indicated the average S&P 500 chief executive was paid 291 times higher than a median worker, with average annual earnings being as high as US$15.3 million.

Pensions & Investments Research Consultants (PIRC) Head of Stewardship Tom Powdrill told ESG Investor asset owners should engage with both asset managers and investee firms to ensure their views on executive remuneration are fully reflected at AGMs.

“As executive pay is considered to be one of the more straightforward governance issues there is still fairly limited challenge to companies. We are starting to increasingly see investors getting fed up and voting against directors on boards who are responsible for executive pay,” he said.

“Asset owners should be taking control of the voting rights themselves or be voting differently if they do not agree with the way managers are doing it. They could also engage with managers to find out why they are voting the way they are. Both will require the asset owner to have a clear sense of what they think is reasonable and what they expect of companies.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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