Council of Institutional Investors Calls for Simplification of Pay Plans, Citing "Mirage" of Pay for Performance

September 20, 2019

Mirroring trends seen in Europe, the Council of Institutional Investors this week unveiled revised executive compensation best practice policies that call for executive pay plans to be “comprised of salary and restricted shares that vest over five years or more” in addition to barring the CEO and CFO from selling stock during their employment tenure to help promote a long-term focus.

“The policy revision reflects concerns on excessive complexity in U.S. executive pay plans, and questions on the effectiveness of some approaches to pay-for performance,” said CII Executive Director Ken Bertsch, who announced the new policy at CII’s annual fall conference.  Mr. Bertsch also noted that “pay for performance can be a mirage” in calling for “comprehensible” executive compensation that should not be “difficult to explain…in reasonable detail.”

CII's new policy suggests that long-term focus using salary and time-vesting restricted stock should be the foundation for executive compensation plans.  Thus, the group views the use of fixed pay and long-term time-vested restricted stock as more effective compensation that is “more comprehensive and easier to value than performance-based equity, providing clarity not only to award recipients, but also to compensation committee members and shareholders trying to evaluate appropriateness and rigor of pay plans.”

Performance plans are “susceptible to manipulation,” according to CII, due to the ability of executives to “use their influence and information advantage to advocate for the selection of metrics and targets that will deliver substantial rewards even without superior performance.”  Further, CII notes that the use of non-GAAP measures in incentive plans makes it difficult for investors to understand how the plans work.  (CII has petitioned the SEC to require clearer reconciliation of non-GAAP measures in pay plans.)

Calls for simplification mirror trends seen in the EU and UK:  U.S. investor interest in executive pay simplification has been slowly growing after originating in the EU with a 2017 Norges Bank paper, and more recently, the updated compensation guidelines in the United Kingdom.