The Advisors' Blog

I blogged a couple of years ago about research showing that high pay ratios might result in low say-on-pay votes. At that time, there weren’t many investor policies that were expressly naming pay ratio as a factor in the say-on-pay analysis, but the data showed that investors might be signaling indirect dissatisfaction and that employees were less productive. Trillium’s say-on-pay voting policy has been an exception. Lynn highlighted earlier this year that the asset manager goes above & beyond the ISS SRI voting recommendations that it typically follows – including by saying that funds will vote “against” pay if the CEO pay ratio exceeds 50:1, which is a policy that’s been in place since 2019.

Now, this blog from As You Sow points out that Trillium is not alone: the pandemic and wage inequality have led more investors to incorporate “fairness” concepts into the say-on-pay analysis. That means that pay ratio caps & other fairness concepts might start to affect say-on-pay votes, especially if your shareholder base includes SRI funds, pension funds, and UK, EU and/or Canadian funds. Here are a few examples from the blog:

– Aviva, a UK asset manager with $414 billion assets under management, says in its global voting policy that “… Fairness and equality need to be more prominent principles in shaping the culture of executive pay. … Boards should also show more restraint in approving significant pay-outs or increases to pay opportunity during periods of low wage inflation, cost cutting initiatives and when there has been a loss in shareholder value.” Among other problematic pay practices, Aviva expressly says that it will not support an “unjustifiable increase in the executive pay ratio relative to the median for the workforce.”

– NEI Investments, a Canadian asset manager focused on responsible investing, says in its proxy voting guidelines, “A disconnect between executive compensation and salaries at lower levels of the company may de- motivate employees, and thus undermine the strategic objective of attracting and retaining talented people. Concerns have also been raised that compensation design and high pay levels for top executives do not take into account how people are actually motivated and lead to needlessly complex pay disclosure in proxy circulars.” NEI votes against pay if the CEO pay ratio exceeds 3:1 or if the CEO or other NEO pay is more than 280x US median household income.

– Northstar Asset Management says in its proxy voting guidelines that it will “only approve executive compensation packages in which equity, stock options, bonuses, and benefits packages for all non-executive employees is equivalent to that of executive officers.”

– Castlefield Investment Partners, another UK asset manager, says in its corporate governance & guidelines that, “Where executive base salary is in excess of between 30-35 times the UK median salary and 60-65 times that of the lowest paid employee, executive pay should be deemed excessive and remuneration should be voted AGAINST. The lower multiple should be enforced where the company in question is not a living wage employer.”

– In connection with the pandemic, T. Rowe Price says in its proxy voting guidelines that, “For our 2021 proxy voting decisions, alongside our traditional assessment of pay-for-performance alignment, pay practices and absolute level of pay, we will also assess pay outcomes through the lens of fairness.”

While these pay ratio caps are not yet widespread, it’s something to watch. Long-term pay arrangements that are approved today could affect the pay ratio several years down the road – and that could be a problem for companies & directors if this trend takes off. Continued scrutiny of wage inequality as a factor in say-on-pay would mean that boards & compensation committees (and those who advise them) may need to give more weight to pay ratio as part of approving executive pay packages. You should also keep the impact of these policies in mind in connection with overseeing workforce compensation & benefits, engaging with investors, and preparing proxy disclosures.

– Liz Dunshee