By Alan Porter, Fund Manager, Sanlam Investments
No, this isn’t an article about yoga. It’s about appropriate targets for executive pay. Every year when proxy season is upon us this topic is front of mind for investors. Proxy season typically runs from February to June and it’s when most large public companies host their annual general meetings. This is when shareholders get to flex their muscles and vote on proposals set out in proxy statements. One of the most common proposals is a vote to approve executive compensation.
In these proxy statements the board of a company will lay out their compensation philosophy and describe the various components and objectives that make up executive pay. Deciding what is appropriate is no easy task. Having said that, there’s no reason why common sense shouldn’t prevail. We want to see clear targets and objectives set so that executives get paid for the specific skillset they bring and the successful outcomes they achieve for all stakeholders. Note all stakeholders, not just shareholders. As managers of the Sanlam Sustainable Global Dividend Fund we regularly vote against managements if we think executive compensation is inappropriate.
A bit of history here. Last year the Economic Policy Institute reported that, in 2020, US chief executive officers were paid 351 times as much as the typical worker. In 1989 that ratio was 61-to-1 and in 1965 it was 21-to-1. A key part of this has been the increasing use of stock awards in executive pay. This matters because exorbitant pay is a major contributor to rising inequality. It is also something that we could change without any damage to the economy or to how companies are run. One way to help effect change is to vote against management on compensation plans that appear excessive.
Back to the common-sense approach. What should we look for? Most executive compensation is made up of three parts. Base compensation, or salary to you or me, an annual bonus, and an equity award. The annual bonus and equity award have, over time, become major parts of total compensation, often 80% or more. These are the two parts to focus on.
Annual bonuses should be linked to outcomes related to all stakeholders. These might include financial outcomes for shareholders, safety outcomes for employees, and sustainability outcomes for the planet. There is no reason why equity awards shouldn’t have the same targets, many have none. Stretch targets should mean that executives don’t receive large annual bonuses or equity awards unless they exceed clearly pre-defined targets. Any other outcome calls into question the efficacy of bonuses and awards.
If proxy statements aren’t clear enough about what the targets and stretch targets are, then shareholders should be comfortable and confident in voting against approving executive compensation. We have a responsibility to stop the relentless upward spiral in executive pay seen in recent decades.
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The Fund has holdings which are denominated in currencies other than sterling and may be affected by movements in exchange rates. Consequently the value of an investment may rise or fall in line with the exchange rates.