What’s the Story?

New data reported last week shows European shareholders increasingly contesting corporate executive pay reports.

The rise in dissatisfaction is ascribed partly to investor unhappiness with how companies link directors’ pay to ESG issues.

Some 42.9% of remuneration reports across seven countries were disputed by investors during the 2023 AGM season. This is the highest for five years, according to the new study by Georgeson. Investor dissent is defined as a 10% or more vote against.

Switzerland saw the highest number of contested resolutions on remuneration at 68.4%; with the UK the least at 20.2% (2021: 16.2%), still more than 1 in 5.

Why Does it Matter?

Directors’ remuneration is a highly sensitive corporate matter.

First is the delicate issue of setting the directors’ total earnings opportunity. This must be fully competitive, but also seen as fair by shareholders and others.

Second, the selection of performance metrics, the performance targets and linked pay-out amounts, signal strongly the intended future direction, and performance expectation defined by the company itself.

In recent years, investors have increasingly asked for ESG factors to be within directors’ incentives. Across most advanced economies this is now commonly seen in listed companies alongside financial metrics to judge and reward success.

Indeed, on 4 November 2021, ISS announced they would judge ESG metrics in top pay in the same way that financial metrics are judged.

Unfortunately, now some investors, and others, question how in practice companies have baked ESG into the incentive set.

A common approach is to “bolt on” a few ESG metrics with low weight. For example, DE&I and Carbon reduction with a total 10% to 20% weight the S measure in STI, and the E one in LTIP.

Some now believe that in practice ESG incentives are delivering soft bonuses to directors.

That might be due to low targets, or because the metric definition is framed to suit the company profile, or both. Truth told, adding an untried metric to top pay might mean softish initial targets, to help ease executive acceptance.

In addition, some claim that ESG is just good management and should be attended to anyway; irrespective of incentive pay.

A Harvard Law School report in 2022 flagged multiple concerns with ESG in executive compensation.

Investor voting seems to share some of the concerns.

Newspoint View

By its nature, executive compensation tends not to “please all of the people all of the time”. It’s a thorny topic. This means that total executive compensation, the split between fixed and variable pay and the incentive design are under constant and detailed scrutiny.

Companies must therefore frame the executive compensation structure to meet the needs of the business and the external expectations of multiple shareholders. Clear, well argued disclosure is essential.

Adding ESG into executive incentives is now a fact in most major listed companies. The question now should be - “Can we improve the design?”.

This first generation of ESG in incentives marks the start, not the end, of a complex process. Expectations should not be excessive. What you get on this first cut is well worthwhile; as explored by CORPGO.

Soon we shall see the adoption of “More, Better, New” approaches to ESG in incentives. CORPGRO’s view on this can be found here.

To borrow from Winston Churchill in 1942:

“Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Executive Compensation and Incentive Design

Reward and Share Plans 

Remuneration Advisory and Support

ESG and Sustainability

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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