The Advisors' Blog

The notion of capping executive pay, which is at least a decade old and reemerges every few years, seems to be reentering the dialogue once again.

One aspect of this is centered on capping severance payouts: we’ve blogged about recent shareholder proposals which led at least one prominent company to cap the cash component of those arrangements. (And we’ll be discussing what other companies should do about that at our upcoming “19th Annual Executive Compensation Conference.”)

Going even further is this 16-page position paper (available for download) from European impact investor Triodos. The asset manager first outlines these “best practice” elements of executive pay:

1. Disclosure, Transparency & Responsiveness: consisting of disclosure & intelligibility; transparency & power; and responsiveness

2. Risk-Taking: including a cap on variable pay; clawback policy; and performance targets & thresholds

3. Pay-for-Performance: relating to performance-based payouts; performance metrics & TSR; and company value

4. Sustainability & Alignment with Long-Term Success: including carefully-designed ESG metrics, alignment with long-term success, and appropriate severance agreements

But the more “extreme” part of Triodos’ policy, is how it votes against “the extremes.” Here’s what that means:

1. CEO pay cap of EUR 2.5 million, adjusted for company size (e.g., the largest companies could pay up to 8x that)

2. CEO pay ratio cap of 100:1, not size-corrected

3. Qualitative analysis that allows for tolerance of excessive pay levels if the compensation structure & policies are significantly aligned with long-term value creation and ESG impact

Triodos says that if a company hasn’t already adopted some best practices and/or isn’t open for dialogue, it is excluded from their investment universe.

Triodos isn’t the first investor to float this concept, and it won’t be the last. While these calls tend to come out of European-based investors and asset managers, they are a reaction to global pay levels – and Triodos has engaged with companies including Adobe, Cisco, Disney, Nike, Paypal, Prologis and Starbucks, according to this Responsible Investor article.

These discussions come at a time when CEO pay reached new heights (again) in 2021. I’ve blogged that this wealth accumulation is due in large part to the shift to stock awards. And in the past few years, the embrace of “moonshot” awards has only accelerated the trend. Dave Lynn is covering what you need to know about moonshot awards in the forthcoming issue of The Corporate Executive – so I won’t steal his thunder, but I will reiterate that investors generally don’t like mega-grants or special retention awards.

Compensation committees have a lot to think about these days, and calibrating the amount of CEO pay isn’t easy during this time of market volatility and retention sensitivity. But with continued focus on overall human capital management, directors should be aware that investors and other stakeholders are signaling that tempering payout levels and mega-grants must continue to be part of the conversation.

If you don’t already have access to The Corporate Executive, email sales@ccrcorp.com to check it out. The newsletter is published 5 times per year and Dave ensures that it is always full of valuable information.

– Liz Dunshee