Shareholder scrutiny around executive pay is placing increasing pressure on companies and their boards. An emphasis on total shareholder return and say-on-pay voting at publicly listed companies has driven up executive compensation while doing little to align with long-term shareholder interests. Companies need to reward leaders who create long-term value, but focusing on short-term returns as the primary metric in remuneration keeps companies stuck in short-term behaviors.
To be successful, companies need to attract and reward leaders who create value over the long term, but executive remuneration often focuses on short-term targets. Shareholders and their advisors similarly focus on short-term returns as a primary metric in the design and evaluation of pay plans. It’s no surprise that executive remuneration stands out as one of the most visible and closely examined aspects of a publicly listed company’s corporate governance program.
Companies are facing increasing pressure on executive pay amid rising shareholder scrutiny of pay plan proposals. Last year’s proxy season in the United States saw a record number of say-on-pay failures. 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.
Total shareholder return is the most common metric that tries to align interests, but it is inherently short–term–oriented. By tying executive pay to stock prices over short periods of time, companies and investors are actually putting their long-term interests at risk. The most effective remuneration structures are matched to a company’s objectives, strategy, and management. The simplest solution is direct stock ownership by executives, with long-term holding periods.
This 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 the following:
Likewise, investors require a simplified approach to say-on-pay voting that is aligned with long-term remuneration design. We propose a framework that focuses on five key elements: holding period, quality, targets, instruments, and progress.
The prevailing approach to executive pay has proven ineffective and counterproductive. To address these challenges, a fundamental shift is needed. These strategies offer a clear path forward for boards of directors, executives, and investors to foster responsible compensation practices that genuinely align with and advance long-term value creation.
The CEO Shareholder: Straightforward Rewards for Long-term Performance
Incentive Alignment | Report
8 March 2021 - The Risk of Rewards presents practical approaches that companies and their investors can use to frame their decisions about corporate executive remuneration to support long-term value creation
Governance, Incentive Alignment | Toolkit
8 March 2021 - These tools empower companies to tailor long-term remuneration by replacing some elements now, reflecting on their long-term needs, and finally by using key decisions to redesign pay packages
In the News
14 December 2022 - Soaring executive pay is prompting resistance from those who believe business should play a role in shaping a fairer, more equitable society.