FCLTGlobal, a non for profit organisation with a mission to focus capital on the long term to support a sustainable and prosperous economy, has called for a fundamental shift in remuneration structures.
Joel Paula, lead author of the report ‘The CEO shareholder: Straightforward rewards for long-term performance’, said that companies and their corporate boards who set remuneration policy, are facing increasing pressure on executive pay amid rising shareholder scrutiny of pay plan proposals.
Last year’s proxy season in the US saw a record number of say-on-pay failures, he added, yet say-on-pay voting at publicly listed companies has arguably had the opposite of its intended effect, driving up executive compensation and showing little relationship to long-term shareholder interests.
Paula added that total shareholder return is the most common metric that shareholders employ to align interests, but it is often short term-oriented. By tying executive pay to stock prices over short periods of time, he said companies and investors are actually putting their long-term interests at risk.
He added that the most effective remuneration structures are matched to a company’s objectives, strategy, and management.
He said: “The simplest solution is direct stock ownership by executives, with long-term holding periods. This arrangement is similar to private equity-backed companies’ structures, where the focus is on executive wealth creation over time.”
The report offers practical tools to aid corporate boards in designing executive remuneration, calibrating long-term equity awards, and effectively communicating remuneration policies to shareholders.
These actions include:
- replacing approaches that are counterproductive in the long term, and focusing on rapidly building executive share ownership through restricted stock and share retention policies;
- applying alternative indicators to gauge compensation structure and incentives;
- streamlining corporate disclosure of pay practices, emphasising the decision-making narrative.
Paula added that investors require simplified approaches to say-on-pay voting that are aligned with long-term remuneration design.
As result, FLTCGlobal proposes a framework that focuses on five key elements: holding period, quality, targets, instruments and progress. He said that each of the elements is broken down into key elements that investors can use to update their proxy voting policies.
He said this is a critical step to take, and by clearly stating in writing what criteria are likely to lead to a ‘no’ or ‘yes’ vote, investors can lean into a set of principles that drive proxy voting and contribute to positive change in portfolio companies.