Executive Pay Amidst Rising ESG Concerns: Communicating with Investors
Dear Friend,
Increasingly, and especially during the COVID-19 pandemic, investors are scrutinizing executive pay. A recent Harvard Law School article outlines that, as in the 2008 financial crisis, there are many reasons for investor activity to pick up in the wake of economic disruption. Chief among them are that many companies are sitting ducks and activist investors aren’t paid to sit on the sidelines.
To prepare for the coming increase in scrutiny, directors would be well-suited to dot their I’s and cross their T’s. As is the case in regular times – but amplified now – companies that have sound governance and pay principles are less attractive to activist investors.
To better address this, Farient’s suite of Interactive Trackers can play a role in helping boards gauge where their company’s pay stands relative to competitors, helping to address investor concern.
The CEO Wealth Tracker™ measures total CEO wealth based on stock ownership and the daily price of CEOs’ company stock holdings; the COVID Tracker™ captures changes to executive and board of director compensation over the course of the current pandemic; the Pay Ratio Tracker™ aggregates the CEO Pay Ratio data; and our Say on Pay Tracker™ is a one-stop resource for Say on Pay results.
Collectively, they provide directors the requisite tools to make pay decisions and communicate effectively with investors before the activists are emboldened.
I encourage you to visit our suite of Trackers and reach out to me with any questions. Wishing you a restful and safe Thanksgiving holiday.
Sincerely,
Marc Hodak
Hot Off the Press From Farient
Are Performance Shares Shareholder Friendly?
Today, an executive is more likely to be granted over half their awards in performance share units (PSUs) that vest at the end of three years. Though favored by institutional investors and proxy advisors, PSUs may not be uniformly in shareholders’ interests, as I discuss in this article for the Journal of Applied Corporate Finance.
The Evolving Role of the Compensation Committee: It’s More Than Pay
When it comes to executive pay, investors are no longer concerned only with maximizing shareholder value. As ESG issues have risen in importance, the role of the compensation committee has changed, according to Farient’s CEO Robin Ferracone and Partner Dayna Harris, to encompass a far wider agenda including diversity and inclusion, talent management, employee engagement and well-being, succession planning and overall corporate reputation.
In this Agenda article, Robin Ferracone predicted that a future Biden administration would lead to changes in the tax code meant to curb executive pay. “The government has tried to use the tax code to quell increases in executive compensation, but it’s never really worked,” she says. “But I think we may see a re-emergence of that.” Additionally, she sees the likelihood of more ESG reporting requirements, which will require boards to continue thinking about risks and communicate with investors who are ESG-conscious.
San Francisco Voters Pass “Overpaid Executive Tax”
With San Francisco voters recently approving a 0.1 percent tax on companies whose executives earn 100 times more than the average worker, the issue of sizable pay ratios is trending. With investors conscious of portfolio companies’ pay ratios and the impact on corporate reputations, boards will need to be able to access relevant data on how they fare in relation to other players in their industries if questioned by shareholders, using tools such as Farient’s Pay Ratio Tracker™.
New York Conversation on Board Diversity – December 4, 2020
If you missed any of the Women on Boards 2020 city programs, join Farient CEO Robin Ferracone and Women on Boards 2020 for the December 4 New York City session from 2-3:30 pm EST for a conversation on “Women Directors During Times of Crisis.” With more than 6,000 directors and executives attending city programs around the world, this virtual event will include extensive networking, panel discussions and interactive coaching sessions.
Finding the Good of 2020 and Taking It Forward: Governance Lessons from a Year We Will Never Forget – December 8, 2020
The upheavals of 2020 have impacted companies across every industry, teaching important lessons about corporate governance that boards will have to hold onto going into 2021. In this virtual event hosted by the Institute for Excellence in Corporate Governance, at the University of Texas at Dallas, I will be joining UT Dallas’ Executive Director, Greg Ballew, for a discussion on the lessons of this tumultuous year and what’s in store for the year ahead. The event will be held on December 8 from 8-9:30 am CST.
Marc Hodak is a Partner at Farient Advisors with more than 20 years of experience as a compensation and corporate governance consultant. He has developed executive and board compensation programs for global companies, both private and public, including extensive work around goal setting, performance and perverse incentives.
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