Investors Concerned About Executive Compensation: Report From Farient Advisors

Investors are perturbed about the disconnect between executive performance and ever-escalating compensation.

Engaged investors continue to be concerned about climate change, gender adversity, and pay equality, says a report from Farient Advisors and the Global Governance and Executive Compensation Group. Executive pay and its disclosure are also top-of-mind.

Company directors are developing fatigue on ESG, but investors remain tenacious on their concerns on this account.

However, the report’s exposition on executive compensation and its effect on investors’ psyche makes for interesting reading.

Investors’ pain points on executive pay

‘The single-most agitating thing for investors regarding compensation is when a company pays a lot of money for a CEO who hasn’t performed,’ says Mark Hodak. ‘Pay-for-performance disconnect is always a lightning rod.’

Hodak is a partner at Farient.

Apart from discontent on pay versus performance, investors are also concerned about the growing disparity of pay in companies. Executive compensation continues to escalate while the salary of the average worker remains stagnant.

Investors are frustrated, too with the complexity of disclosures regarding executive pay. Here lies a conundrum: Investors demand that management be rewarded for performance through performance shares. However, reporting of this compensation is by its very nature complex, and investors may be forgiven for being unable to understand the incentive plans.

Investors are pushing back on whether or not the complexity is worth the trade-off of making disclosures so hard to understand, Hodak says.

Hodak recommends that the linkage between executive pay and compensation, the company’s activities, and governance structure should be made clear to investors in ‘plain English’ disclosures. Boards should strictly avoid boilerplate language in these disclosures. Boilerplate undermines authenticity, says Hodak.

Overall governance

Overall, the board should follow the best governance practices. Investors are concerned about the composition of the board, skill sets, diversity, and its commitment to oversight of company management.

[Related Story:  How Serious Should We Take ESG Investing in 2020? ]

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