This article represents the view of its author and not necessarily those of ShareSoc
The issue of skin in the game and executive pay and how this impacts future share price (and dividends) performance is a crucial one. My favourite quote is from Charlie Munger “you show me the incentives and I will show you the behaviours”.
So when leading proxy advisor firm ISS announce their plans for next year, it is well worth looking at them. Please note these are their US plans and they may customise their approach for UK listed companies.
- Non-Financial ESG Performance Metrics in Executive Compensation: When asked whether the use of non-financial ESG metrics is an appropriate way to incentivize executives, over half of investor respondents replied yes, but that they should be specific and measurable, and targets communicated transparently. Only a small number of investors replied no, and that companies should only use traditional financial metrics in compensation plans. About a third of investors replied yes, and that even metrics that are not financially measurable can be an effective way to incentivize important outcomes if chosen well. That answer choice was the most popular among non-investor respondents. Most respondents thought that non-financial ESG metrics could be appropriate as part of either short- or long-term incentives. Among investors that chose one or the other, almost all chose long-term incentives as the more appropriate place for non-financial ESG metrics.
- Long(er) Term Perspective on CEO Pay Quantum: 85% of investors and 67% of non-investors agreed that the inclusion of a longer-term perspective of CEO pay quantum is relevant and would be helpful. For example, ISS might add a three-year assessment of CEO pay quantum to its pay-for-performance screen.
- Mid-Cycle LTIP Changes: Investors were fairly evenly split on the question about whether mid-cycle changes to long-term incentive programs should still be seen as a problematic response to the pandemic. Over half of investor respondents replied that they should continue to be viewed as problematic. Forty percent said that they may be reasonable for companies that have experienced long-term negative impacts from the pandemic.
Cliff Weight, ShareSoc Director