Meloni believes that investors could use their influence by voting to help build sustainable businesses. “In the long run it is going to be an important instrument for the shareholders and management will have to deal with it,” Meloni adds.
A lack of disclosure appears to be part of the problem. Investors need to know the details of what needs to be achieved for the boss to collect their award.
“Is it a share-based incentive? A long-term incentive? What is the performance criteria? How it is calculated? Are the targets challenging? Very often they are not [challenging], so they can be easily achieved,” Meloni says.
She adds that disclosure in this area is improving, but more work is needed. “They want to disclose more. We have seen throughout the years that there is a will to disclose more [details] because they are facing a lot of opposition. There is an improvement, but there is a lot more to do on this.”
Candriam practices what it preaches. In 2015 it voted against 49% of resolutions relating to executive pay. A lack of transparency, challenging performance conditions or a lack of correlation between pay and performance were behind its decisions.
For Candriam, executive compensation must promote performance without excessive risk-taking, but it is not just about financial targets. It believes that pay in the boardroom should not be disconnected from employee lay-offs or incidents that have a negative impact on the environment.
HEAVYWEIGHT SUPPORT
The drive to disclose more information has the support of government and industry. In August business secretary Greg Clark outlined the government’s plans to reform corporate governance. The headline here was that all listed companies must publish a pay ratio of its CEO’s pay to that of the wage of its average UK worker.
For Meloni this is an important move. She says that if there is a huge difference in the pay between the CEO and that of the company’s average worker then “maybe we have to think about what is wrong”.
The government also wants companies to clearly spell out what their remuneration policy is and what executives have to achieve to earn their bonuses, to help justify why the boss is worth so much.
The industry’s attempt to rebuild trust in executive pay structures came from the Investment Association’s (IA) Executive Remuneration Working Group. It floated 10 proposals in this area in July 2016. The group spoke to more than 360 investors, asset owners and workers before drawing up its recommendations.
It sought to simplify pay structures and improve the alignment of the board’s interests with those of the shareholders. It rejected a one-size-fits-all approach and instead opted for a pay structure that works for shareholders at each company. It mirrors the government’s proposals in that it wants companies to justify why they have set a CEOs pay structure and what targets have been set.
The group wants to make remuneration committees more accountable and it believes that there are concerns that companies are not responding adequately enough to “significant” shareholder opposition to what they pay their executives.
The debate over executive pay packages and what they have to achieve to collect them in full will continue to rage even if Toys R Us misses its Christmas sales targets. With research from one source finding no long-term link between pay and performance and political will backing higher pay disclosure, we could be on the brink of an era of more justifiable rewards for executives.
