The Advisors' Blog

BlackRock recently released this investment stewardship announcement, which complements its global incentives commentary by outlining factors that US companies may (should?!) consider when designing executive compensation programs. Directors and others who set compensation will appreciate the high level approach BlackRock has taken here. The announcement specifically avoids providing prescriptive guidance on executive compensation construction, which BlackRock believes boards are in the best position to design. Instead, BlackRock encourages compensation committees of US companies to consider the following factors:

– How the balance between retentive and motivational components in compensation program design promotes long-term performance
– How the compensation program rewards long-term financial value creation, sustained across the duration of the program’s performance period
– How pay underpins strategy, with clear disclosure of the rationale for the selected performance metrics
– How resilient the pay program may be across dynamic market environments and the business cycle
– How the committee might responsibly use discretion to reinforce alignment of pay program outcomes with long-term shareholders’ interests
– How to provide sufficient disclosure in unusual situations such as executive transitions and newly public companies

In this uncertain environment, BlackRock expresses concerns about the resilience of executive compensation programs and suggests that companies may have overly relied on performance awards since 2020. Here is an excerpt:

We believe over-indexing executive pay to performance-levered awards increases the potential for a perceived need for special awards and award modifications, especially in tumultuous business environments. Since 2020, the business environment has been challenging for many companies and as a result, many performance awards have not paid out under the formulas within the plan design. Similarly, many options grants are underwater. We have noted that some boards have used discretion, special awards, and/or award modifications to increase the compensation likely to be realized by executives. In essence, these committees seem to be, at least in part, rewarding executives for expended effort rather than for realized results aligned with returns to long-term shareholders.

We ask that companies consider and explain how their executive compensation program is resilient and, thus, will deliver reasonable pay outcomes across a broad range of business outcomes and market environments. In this context, resilient means that programs will provide sufficient retentive impact without intervention when market conditions are difficult, motivate appropriate risk behaviors by executives, reward performance when conditions are more favorable, and adequately reflect the financial performance that shareholders are experiencing.

– Meredith Ervine