by NEI ESG Services Team.

Many investors agree shareholders should play a role in reining in excessive pay for top executives—but we’re still working through what would be the most effective way of implementing an “absolute cap” on compensation.

Editor’s note: This article first appeared in our Active Ownership Report from Q1, 2022 

Almost 70% of attendees who responded to a poll at a roundtable session we led in March said, “Investors should consider setting an absolute cap on executive compensation, regardless of the financial performance of a company, to address the issue of excessive compensation.” The session was part of the Interfaith Center on Corporate Responsibility’s spring conference, timed so that investors can seek alignment as they head into proxy voting season and the annual crush of say-on-pay decisions.

One stumbling block to setting an absolute cap is the question of sector. Some investors contemplated whether a sector agnostic approach could be limiting if the definition of excessive pay varies from sector to sector. Can a “sector lens” be applied to account for those differences?

We also discussed the role of third-party compensation consultants, which do wield strong influence in determining the appropriateness of pay packages. In fact, companies led by executives we deem to be excessively compensated often refer to the input they receive from third-party consultants in setting their pay structures. Those recommendations tend to be based on horizontal benchmarking (comparing pay levels among peer companies), rather than vertical benchmarking (comparing pay levels among employees within a single organization), which is one element we encourage companies to consider. This is an area session participants agreed needs to be looked at more closely.

For our part we choose to implement a cap knowing there is not yet a commonly agreed-upon definition of excessive pay. Yet, we recognize shareholders’ role in facilitating runaway executive pay rates that have not been matched with workforce pay increases over the past few decades. We think it is important to raise the issue with the information we have available, given the risks of systemic inequality. In 2021 we tightened the criteria for how we determine “excessive” and “extremely excessive” compensation to curb the growing pay gap between executives and everyday staff. If a pay package is higher than 120 or 190 times median household income in Canada it is deemed excessive and extremely excessive respectively, and we would expect to vote against it. Prior to that, thresholds were set at 150 and 200 times. We also made downward adjustments for U.S.-based companies.

Our hope is the number of investors voting against excessive compensation packages rises further this year, as results in 2021 were disappointingly on trend. Based on our analysis of the S&P/TSX Composite Index and S&P 500, Canadian companies received an average of 93% investor support for pay packages we had deemed excessive, while U.S. companies received 82% average support. We will continue to work with like-minded investors throughout the year to explore and implement solutions to the challenge of high compensation.

 

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