US Council of Institutional Investors Policy on Executive Pay
In September 2019, the Council of Institutional Investors, an influential association of US pension funds, foundations, and endowments, overhauled its policy on executive pay. The recommendations are broadly in line with Chapter 5 of the book. The CII advocates making pay much simpler, moving away from the complex bonuses that not only reduce transparency but also may lead to short-termism, and replacing them with long-term shares. While “long-term” means different things in different companies, the CII suggests that shares “might begin to vest after five years and fully vest over 10”. Importantly, it stresses that the executives should continue to hold shares after their retirement, to ensure that their horizon extends beyond their tenure.
Note that executive pay is not one-size-fits-all, and the new CII policy stresses this. It is neither the case that restricted shares will be optimal in every firm, nor that bonuses or performance shares have a place in no firm. Pay should be tailored to a company’s unique circumstances. Despite this, the CII policy is a major step forward as it changes the “default” from being complex bonuses. It encourages remuneration committees and compensation consultants to think about what pay structure will best incentivise long-term value creation at a particular firm, rather than mimicking what other companies are paying.
UK Investment Association Principles of Remuneration
In November 2019, the Investment Association, the trade body for UK asset managers, published its revised Principles of Remuneration for 2020 and an accompanying open letter to remuneration committee chairs summarising the changes. The new principles echo the CII’s / those in Chapter 5. In particular:
- They support the use of simple shares over complex bonuses (known as Long-Term Incentive Plans): “IA members are increasingly of the view that the traditional Long-Term Incentive Schemes are not working as effectively as they could for all companies”
- They advocate that executives continue to hold shares after retirement: “During the forthcoming AGM season shareholders expect post-employment shareholding requirements to be introduced for all new policy approvals.”
Supporting these new principles, the IA letter states that “Research from the Purposeful Company has recently shown, there is a growing body of investors who are willing to consider alternative remuneration structures” (i.e. long-term shares). The Purposeful Company is a UK consortium proposing evidence-based policies to embed purpose into the heart of business, whose Steering Group I serve on. The research the IA refers to not only (i) finds that investors are willing to support a move towards shares, but also (ii) reviews the academic evidence in favour of this change, (iii) discusses typical hurdles to implementation and (iv) provides a practical guide to remuneration committees on how to overcome these hurdles.