Tool presents “different way of looking at executive pay”, meeting needs of asset owners and the “wider investment community”.
Leading UK asset owners are due to release a new executive fair pay tool to help investors more effectively scrutinise the pay awards of CEOs and other senior company officials.
Adam Matthews, Chief Responsible Investment Officer at the Church of England Pensions Board, told ESG Investor the new tool is aimed at “reframing the way we can look at executive pay from something that very much needs to be rethought”.
The tool is being developed by a group of UK pension schemes in response to recent trends in executive remuneration, which have seen pay awards spiralling despite calls for restraint.
Matthews said that there is a “broad consensus that executive pay structure is broken”, and this tool looks to respond by presenting a “different way to look at executive pay”. The public, free to use tool will assess senior executive pay against a series of fairness indicators and will be based upon corporate disclosures.
A consultation on the tool is expected by mid-May, but Matthews urged investors to maintain vigilance on pay during the current AGM season.
“It is essential investors exercise their rights over director appointments during this proxy season”, he said. “As a fund, if a pay award is excessive then we will also be voting against the chair and members of the remuneration committee”, Matthews said.
“At the moment you get these very excessive awards, which are generated from hugely complicated pay policies and calculations that that quite frankly send you down a rabbit hole,” he explained. “It’s very much framed on the terms of the remuneration committee rather than actually what’s in the real interests of the shareholders and the beneficiaries.”
Mending a “broken” system
The idea for the executive fair pay tool was born out of a summit hosted by the Church of England Pensions Board in December last year. The summit reached the conclusion that the executive pay system across the world was “broken”, and that it “undermined trust in large-scale business operations and the prospects for economic growth”.
The summit gave rise to efforts to distil a new way of evaluating executive via “a framework of indicators”. A core group of ten asset owners has been working on the tool, including Railpen, Brunel Pension Partnership and Universities Superannuation Scheme. A full list of names will be released alongside the consultation.
The tool’s indicators will help to assess fairness by looking at the quantum of renumeration in terms of relationships between the lowest and median levels, factoring in consultations on workforce pay levels, and considering other criteria.
“We will consult on those indicators and the methodology, and we aim to public on that in the next few weeks,” said Matthews.
“The aim is to consult to see if this really meets different asset owner and wider investor community needs,” he added.
Matthews said the group aims to learn from the establishment of the Transition Pathway Initiative, regarding the relationship with corporate disclosures, the ability to create a very clear methodology, and use of a clear set of indicators.
“The consultation signals that these issues are important to investors,” Matthews said. “We want feedback, and we will be asking the chairs remuneration committees to consider what we’re proposing and to provide feedback to us and other stakeholders.”
The feedback will then be consolidated and used to inform the development of the tool. The first assessments of executive pay awards will then be published.
Excessive executive remuneration
December’s executive pay summit found that one of “most egregious” features of current executive pay decisions was the lack of proven link with performance and “so-called bonuses [being] unconnected with any achievement”.
With say-on-pay votes coming up at 2023 AGMs, Matthews said the Church of England Pensions Board will “continue to challenge excessive executive pay where we see it”.
“We’re going to be flagging votes that we’re taking in upcoming AGMs,” Matthews said. “Already you’ve got very significant pay awards in the oil and gas sector, as a result of the Russia-Ukraine war, which we would venture to call excessive. Pay awards to CEOs as a result of no fundamental change in operation is an area where you would have expected remuneration committees to have exercised greater judgment.”
Earlier this month, the CEO of Exxon Mobil’s pay was found to have risen 52% amid the Russia-Ukraine war, while a report from WTW said that 2022 saw the highest salary budgets increase for executives in almost two decades. During last year’s AGM season, a report from Institutional Shareholder Services highlighted that say-on-pay votes at S&P 500 firms received their lowest ever levels of support from investors.
“We recognise that there are people within the company that need to be paid higher salaries. We’re not opposed to people being paid well,” Matthews added. “But we are opposed to that excess, and we’re opposed to executive committees failing to exercise judgement.
“In that context, we wanted to reframe the way that you could look executive pay.”