Executive Compensation

The Issue

We believe the stakeholder theory of the firm best articulates the purpose of modern public corporations: to create value for shareholders, but also for other key stakeholders — bondholders, employees, customers, communities and society in general. Bloated payouts to top executives at publicly-traded companies have become a hot-button issue. Excessive quantum of executive compensation contributes to income inequality, identified by leading authorities as a key risk to the global economy. You get what you pay for, and compensation structures tend to reward performance on short-term financial indicators, rather than creating incentives to focus on building the long-term value and sustainability performance of the company for all its stakeholders, including shareholders.

ESG Perspective

Recent academic research has challenged assumptions about the extent of movement between companies at CEO level, and the relationship between very high pay and strong corporate performance: shareholders may be paying too much and getting too little in return. Increasing pay disparity between levels within a company may affect employee retention, motivation and performance overall. In consumer-facing sectors, excessive executive compensation may damage the reputation of the company with its customers. Compensation quantum is just one element in a complex of issues contributing to income inequality — but it is one that shareholders have influence over. If income inequality generates systemic risk that could impact all companies in the economy, then institutional investors with holdings across the economy have a duty to respond.

Our Response

We engage companies in dialogue on:

  • Linking executive compensation to performance on both financial and strategic environmental, social and governance metrics of long-term value

  • Curbing excessive executive compensation and ensuring compensation is equitable at all levels of the company

  • Good pay governance practices that encourage high performance and discourage unnecessary risk-taking

We apply stakeholder-based compensation principles in "say on pay" proxy voting and provide feedback to companies on how we voted, and why.

We engage with policy-makers, regulators and standards-setters to advance stakeholder theory and enhance compensation practices and disclosure.