Policy Survey 2024: Executive Pay

This post provides an overview of Glass Lewis’ 2024 Policy Survey, conducted to inform their annual “benchmark” policy guideline updates.

Executive Pay

Make-Whole Awards For executive recruitment, companies sometimes agree to provide “make -whole” grants to compensate for awards that the candidate must forfeit upon leaving their current employer. There is a significant gap in investor and non-investor expectations regarding disclosures related to “make-whole” grants. On average, 63.4% of investors expect disclosure of the terms of the award, along with explicit confirmation that awards are time-restricted and the same size as those forfeited, vs 30.1% among non-investors. By contrast, nearly half of non-investors responded that companies should only need to provide minimum disclosure (48.4%, vs 15.5% of investors).

One U.S. investor stated:

“We would prefer a detailed breakdown, but often that is not made available. …[W]e will try to reconcile the terms and value of the award with any previous public disclosures made at the executive’s prior employer. Failing that, we will generally take the company at their word, but would engage if we hold a material position.”

Comments left by U.S. non-investors indicate the opposition was mainly to general rules for disclosure, favoring instead board discretion:

“We use guidelines, but if it is material enough as compared to prior or other similar employee grants, then a fuller explanation is warranted.”

“If a company feels a make whole payment is necessary and that it might raise investor questions, they should disclose what will help explain that decision. Why would we apply a general rule here?”

“In the best case,….investors should simply agree that the company had all the elements to make the best decisions, and no reason to waste money.”

Time-Based vs Performance-Based Incentives

Some market participants advocate for granting non-performance-based awards subject to extended time-based vesting periods, but no performance conditions. The vesting period for these time-based grants is typically at least five years.

Investors were far more likely to disagree that performance conditions are unnecessary for long-term incentives (73.0% vs 39.5% among non-investors), or too complicated (85.1% vs 62.7%). However, there was a consensus that performance-based equity plays an important role in directing executives (90.9% of investors agreed, vs 87.0% of non-investors). Notably, a majority of investors would consider supporting time-based awards in specific circumstances, but generally prefer performance-based awards.

While investors were generally aligned in their views across different regions, North American investors were more willing to consider supporting time-based awards if the award size is reduced (61.5%, vs 41.9% for other investors).

“There should be an appropriate discount to the more leveraged nature of performance-based pay, given the increased certainty of reward.” (U.S. investor)

Several investor comments underscored concerns regarding PSU structure while still supporting their use:

“We believe incentive compensation should be primarily long-term and performance-based…That said, we have been giving extra scrutiny to PSUs, the issues are surrounding complexity of the design, appropriateness of targets, dilution and gearing impacts.” (U.S. investor)

“We agree that many equity plans have become too complicated to assess and/or monitor. Generally, plans should include and disclose clear performance-based criteria, longer horizon vesting periods and post-employment holding periods.” (U.S. investor)

“There is no one size fits all answer. Companies should not obfuscate and enrich management with murky performance metrics and formulae.” (Canadian investor)

Non-investors highlighted practical difficulties with performance-based awards:

“[G]oal setting is a lot less precise and more difficult than is recognized by academics and advisory services…. However, extending the vesting period for time-based grants ignores the reality of executive tenure and duration. Longer vesting periods create larger issue upon separation and they actually exceed the time horizon that is incentivizing (if we believe these are really incentives at all). The structure of overlapping grants over say a 3-year period provides a continual and practical incentive to manage beyond the current quarter. This is a solution in search of a problem.” (U.S. non-investor)

In contrast to that last comment, many non-investors highlighted the importance of long-term alignment:

“Companies should have the flexibility to award equity vehicles that align with the business strategy and culture. Companies can better meet their goals, motivate employees, and maintain a culture that supports their mission and values. With that said, having a strong stock ownership guideline would help with long-term alignment between shareholders and executives.” (U.S. non-investor)

“Suggest consideration of equity awards with not only long vesting period but long overall holding periods (vesting + post vesting holding).” (U.S. non-investor)

One European investor who expressed a strong preference for time-based awards over performance-based awards clarified that:

[Our responses] apply to CEOs and not necessarily other executives. The CEO has a unique and comprehensive role in the company which is different from the other executives who tend to have more sectoral or process-focussed roles. The terms and incentives of other executives will normally be strongly influenced by the CEO, and are sometimes seen as largely the remit of the CEO. In our perspective, shareholder views on compensation are therefore mostly relevant for the CEO.

Workplace Safety & Pay Outcomes

Workplace safety is a common component of executives’ annual bonus opportunity, particularly among companies in sectors with significant operational exposure, such as energy, manufacturing, mining and utilities. Typically, payouts are decreased by a certain range (5-15% in some markets) for poor safety performance.

Investors appear to take a stricter line regarding the treatment of fatalities in the workplace safety component of short-term incentives. The most popular response among investors was that significant penalties should be applied that go beyond the typical adjustment range (30.7%, vs 15.5% among non-investors), whereas the most common response among non-investors was to limit penalties to the typical adjustment range (34.2%, vs 25.3% among investors). Notably, North American investors were more likely to call for significant penalties (38.6%, vs 19.4% for investors from other markets). However, among investor comments, context is important:

“i.e., to what extent could better training/procedures etc have prevented the fatalities…We are not opposed to other H&S metrics being included in the incentive structure, but we need to see strong evidence that they actually result in improved practices.” (U.S. investor)

“It depends on the nature of the incident, the culpability of the company and the level of disclosure from the company about the incident.” (U.S. investor)

Equity Plans and Shareholder Dissent

In most markets, binding shareholder approval is required for equity incentive plans and some individual equity incentive awards. Where companies implement equity incentive plans or awards despite significant shareholder dissent, investors were far more likely to view escalation to other agenda items as appropriate regardless of other circumstances (63.7% overall, vs 33.9% among non-investors).

Notably, investors from outside North America were much more likely to consider voting against the executive pay proposal in the year that plan awards vest (60.0%, vs 34.2% among North American investors), while North American investors were more likely to limit escalation to cases where ultimate payouts are concerning (39.5%, vs 20% among other investors).

Executive Perquisites

In recent years, the annual value of CEO perquisites (such as personal use of the company aircraft or country club fees) has dramatically increased among U.S. companies. Compared to pre-pandemic levels (2019), 2023 CEO perquisites was an average 28% higher among S&P 500 companies, topping $1 million in many cases.

Investors were more likely to view perquisites as indicative of broader executive pay issues (55.8%, vs 28.7% among non-investors), whereas the most common response among non-investors was that concerns with perquisites should be handled via engagement rather than proxy voting (35.3%, vs 11.7% among investors).

Notably, non-North American investors were more likely to vote against a pay proposal based solely on perquisite concerns (63.6%, vs 50.0% among North American investors), whereas North American investors were more likely to include perquisites as a consideration, but not the primary reason for voting (34.1%, vs 15.2% among other investors).

Median Pay Disclosure

Investors were more than twice as likely to view median pay level disclosure as “necessary” (43.8%, vs 19.2% among non-investors). The most popular response among non-investors was that companies should not disclose this information if it is not required by local regulations (33.5%, vs 6.3% among investors). To understand why, one European non-investor explained:

“the median employee pay is meaningless in companies having an international footprint. Its mixing apples and carrots.”

A U.S. non-investor concurred:

“…pay ratio depends on which countries the majority of your employees live in, or which type of jobs they have. This ratio has very little value in our opinion.”

More broadly, we observed a geographical split; among both investors and non-investors, respondents from outside North America were more likely to view median pay level disclosure as important. Half of investors from other regions viewed this disclosure as “necessary”, compared to 39.1% of North American investors; as did 29.6% of non-investors from other regions, compared to 10.0% among North American non-investors.

Transatlantic Pay Gap

Perhaps surprisingly, investors were more likely to view the so-called Transatlantic pay gap as ‘problematic’ (60%, vs 42% among non-investors). While different respondents interpreted the nature, severity and causes of the ‘problem’ differently, by and large there was a consensus that, as a U.S. investor put it:

“Such a gap is evidence of the excessive executive pay common in North America.”

A counterpart at another U.S. investor states:

“The problem is overblown. We will provide some leeway if the company genuinely needs to compete for talent in the U.S. (e.g. senior executives are based there, significant operations/revenue derived there). However, we do not agree with the notion that a mid-cap European or U.K.-based company needs to pay in line with U.S. benchmarks. We are highly skeptical of the idea that increasing executive compensation would significantly improve the competitiveness of the U.K./Europe capital markets vis-à-vis the U.S.”

European investors concur:

“…high remuneration for US peers shouldn’t be reason for European companies to significantly increase remuneration. US remuneration should rather decrease as pay inequality is also already high within European companies.”

Perhaps unsurprisingly, North American non-investors were much less likely to view the pay gap as a problem (31.0%, vs 53.9% among non-investors in other markets). As one U.S.-based non-investor noted:

“Compensation Committees are independent and have their own independent advisors. There are different reasons different people at different positions are paid as they are. Not every difference in pay means it is problematic. People have different roles and impact at a company and they are compensated accordingly after reviewing the relevant data.”

Among investors, there was not a significant geographical split.

In terms of what is causing the pay gap, investors were particularly more likely to view the influence of both investor bodies/engagement, and of regulators and governments, in establishing local market norms and promoting shareholder interests as a “Strong” or “Moderate Factor”. Culture was also seen as a strong factor, and cited in several comments:

“Perhaps the most important factor is social and cultural – the mistaken impression that top management “deserves” and is entitled to excessive compensation because their peers in other companies are rewarded excessively.” (U.S. non-investor)

Structural Issues in Advisory ‘Pay Implementation’ Votes

Among investors, the most common response was that structural issues should only be considered for context when implementation decisions have already raised concerns (41.3%, vs 33.7% among non-investors). Investor and non-investor totals for “Always” (22.2% vs 5.4%) and “Never” (4.8% vs 20.7%) were roughly inverse. Notably, there was a significant split between UK and European investors, with no UK respondents answering “Always” (vs 21.1% of European respondents) and a majority only taking structural issues into account when they were egregious (57.1%, vs 21.1% among European investors).