The Advisors' Blog

– Lynn Jokela

Last week, I blogged on TheCorporateCounsel.net about BlackRock’s 2021 engagement priorities.  Along with BlackRock’s engagement priorities, the asset manager issued a memo about its engagement approach relating to executive compensation. In the memo, BlackRock explains situations where it finds engagement productive and states it doesn’t think it’s useful for companies to engage with shareholders primarily to gauge support in advance of shareholder meetings.

The memo also emphasizes BlackRock’s focus on long-term sustainable growth for companies and says it expects a meaningful portion of executive pay to be tied to the long-term, sustained performance of the company, as opposed to short-term increases in the stock price. BlackRock acknowledges increased use of sustainability-related metrics in incentive plans and this excerpt explains what BlackRock is looking for when companies do so:

As companies increasingly incorporate sustainability measures in their incentive plans, they should also be material and aligned with a company’s long-term strategy. It is important that companies using sustainability performance metrics explain carefully the connection between what is being measured and rewarded alongside business goals and long-term performance. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts.

When it comes to disclosure, BlackRock expects clear disclosure about how incentive plans reflect strategy and incorporate performance metrics, including sustainability-related goals, that are aligned with long-term shareholder value.

Companies should also disclose the timeframe for performance evaluation, i.e. the specific period over which shareholders should assess performance.

Where discretion is utilized, compensation committees should clearly explain how these decisions are either driving or creating long-term sustained performance aligned with shareholder interests. We expect especially rigorous disclosure and justification when mid-cycle adjustments are made. When evaluating potential windfall scenarios derived from market dislocations or company-specific events, compensation committees should disclose how they determined whether executives benefited from a windfall, or may do so in the immediate future. Disclosures should address whether and why the committee used its discretion, as well as factors taken into consideration in determining the appropriate compensation outcome. BIS is keen to understand how the compensation committee balanced the contractual obligations and rewards for their workforce and executives, while preserving the link with pay and performance, and preventing outsized awards relative to originally established goals.