Norway’s sovereign wealth fund, which invests almost half of its NOK19.9trn (€1.7trn) of assets in the US, has warned the US Securities and Exchange Commission (SEC) about an increasingly popular type of compensation scheme for the chief executive officers of listed firms that it says is linked to corporate underperformance.
Following its recent participation in a roundtable discussion as part of the US government agency’s ongoing review of executive pay rules, Norges Bank Investment Management (NBIM), which runs the Government Pension Fund Global (GPFG), today published comments on the issue.
In a letter to the SEC, NBIM’s chief governance and compliance officer Carine Smith Ihenacho and two colleagues wrote that performance share units (PSUs) had become increasingly prevalent in US CEO pay structures, having made up almost 90% of the growth in pay from 2017 to 2023.
The NBIM team wrote: “We are not aware of any academic evidence supporting the use of PSUs in pay structures, and the available research seems to indicate the opposite.”
PSUs are a type of equity compensation depending on an employee meeting performance goals over a set period – once met, the employee receives the cash equivalent of shares, or shares which can immediately be sold.
NBIM told the SEC it favoured simple pay structures, with CEOs building and holding shares for the long term.
“We consider straightforward equity grants that are locked in for 5-10 years, regardless of resignation or retirement, to directly align CEO interests with those of the company’s long-term shareholders, while avoiding complexity in compensation design and disclosure,” Smith Ihenacho and her colleagues wrote in the letter.
“We also believe this reduces the risk of unintended consequences of basing a significant portion of pay on achieving various multi-year performance metrics, given the inherent difficulty of choosing metrics that provide appropriate incentives in shifting circumstances,” they wrote.
They cited a finding in 2019 research by Farient Advisors partner Marc Hodak that S&P 500 firms using PSUs paid more and underperformed sector peers who did not use PSUs over rolling three-year periods, and said NBIM’s own analysis yielded similar results.
“Additionally, our analysis indicates that PSUs typically vest above target levels more often than below, suggesting that the actual cost of PSUs is higher than indicated by target grant values,” they said.
In its letter, NBIM gave the SEC two recommendations on the topic to make disclosures more effective – summarised as “simpler disclosure when pay structure is straightforward”, and “improved lifecycle transparency for equity awards”.
Expanding on the latter, NBIM suggested that for equity-based compensation, the SEC consider disclosure formats that provided clearer visibility from grant through to vesting.
Current requirements emphasised detailed information at the time of grant, but gave limited standardised disclosure about vesting outcomes and how performance criteria were actually evaluated, NBIM said.
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