Investors Highlight Need for Simplification of Executive Pay at CII Roundtable

Shareholder Viewpoints

Pay magnitude, design, complexity and disclosure were discussed at a recent Council of Institutional Investors (CII) roundtable.  Participants included BlackRock, Vanguard, T. Rowe Price, Norges Bank and Capital Group, along with a number of large state pension funds.  According to a CII report, highlights from the informal gathering included:

• Simplification of Pay.  Participants reflected growing interest in reducing complexity in pay plans, with one investor asking, "How do you know when an incentive system is too complex?  If your compensation committee members can’t explain to investors how it works, there's a problem."  Suggestions for simplification included focusing on base pay and time-vested restricted stock: "Companies perceive that investors won’t support a simple package of cash and restricted stock, but that approach has advantages that investors and proxy advisors may be forgetting."
  
  
• Magnitude of Pay.  Shareholders differed widely on their approaches to pay magnitude, likely reflecting basic differences in how institutional investors and pension funds view "quantum."  Several investors noted that they use pay magnitude to identify outliers rather than a basis for voting decisions: "We don’t have a bright line voting policy on magnitude, but we do use it as a triage for where to look."
  
  
• Disclosure.  Investors were in general agreement on the importance of specific and transparent disclosure, with some indicating a desire for increased disclosure of performance metrics and targets: "Advisory services tend to hone on the idea of 'Is the performance roughly analogous to peers, and is compensation roughly analogous to peers?'  What’s missing is an analysis of how 'stretch' the goals really are."