September marked the beginning of the next engagement season for the majority of companies.
Did you attend the recent PRI in Person conference in San Francisco? If so, I imagine you’re feeling energised by the people you met, the keynotes you listened to and the workshops you attended. And perhaps disappointed by the latest UN Sustainable Development Goals (SDGs) report which highlighted that we’re already falling behind on meeting the SDG agenda by 2030.
According to PRI signatories, the top engagement topic between investors and investee companies in 2017 and 2018 was executive pay
However, now you’re back behind your desk, it’s time to put this learning and desire to improve the current state of affairs into action.
According to PRI signatories, the top engagement topic between investors and investee companies in 2017 and 2018 was executive pay, closely followed by climate change and human rights.
If we combine business, sustainability and remuneration strategies, we enter the world of ‘responsible reward’: the integration of ESG measures into short and long-term incentive pay. It starts at the top of the organisation, with executives, and filters down to the wider workforce in receipt of variable compensation.
Your investees will shortly be sharing with you updates to their pay proposals and policies. Before you embark on yet another round of meticulous analyses, I would like to suggest you follow the simple 4-step V.O.T.E. methodology, to ensure you get what you want to vote for.
V – VERIFY:
Analyse your prior year’s voting decisions. Did you vote against too many (or too few) pay proposals? Why? Check your top shareholdings. Have they changed since the last engagement season? Have they been subject to any controversies? Are you aware of any performance or ESG issues coming up which might affect your voting position on remuneration resolutions, and ultimately your investment decisions?
O – OPPORTUNITIES:
Spot the opportunities for a closer link between ESG and remuneration proposals. Check how your investees are integrating what they have achieved during the performance year as well as how they conducted their business. Are both aspects considered in the performance assessment of their executives, in the way they are incentivised and rewarded?
Sectorial analysis and benchmarking may be helpful in identifying the material factors. For example, do all your holdings in utilities include a safety factor and clawback provisions in their incentive pay structures? If so, what is the weighting and is it significant enough to be impactful? If not, why not?
T – TELL:
This is the two-way communication process, starting with you clearly stating your expectations for the forthcoming season. Be specific. For ease, you may wish to follow the three 2012 PRI executive pay recommendations:
1. Identify the appropriate ESG metrics:
Investee companies should adopt a clear process for identifying appropriate ESG metrics that relate to sustainable shareholder returns and company strategy.
2. Link these metrics to executive pay:
Investee companies should link appropriate ESG metrics to reward systems in a way that they form a meaningful component of the overall remuneration framework.
3. Disclose company practices:
Companies should endeavour to disclose the rationale, method and challenges presented by the incorporation of ESG metrics into executive pay clearly and concisely.Here are a couple of quick wins.
The 30% Club:
The 30% Club was founded in the UK in 2010. Twenty-three investors have committed to pressuring investee companies to achieve 30% of women on the FTSE 350 boards and at senior roles in FTSE 100 by 2020. In its toolkit for investors, the 30% Club provides guidance on engagement between investors and investee companies which contains two recommendations linked to pay:
• Commitment to diversity: Questions should be focused around the accountability of the CEO and inclusion of progress as part of the KPIs to determine the CEO’s performance pay;
• Pay equity: Investors expect companies to undertake an annual pay equity audit.
The Women in Finance Charter:
In March 2016, the UK HM Treasury launched the Women in Finance Charter, a pledge for gender balance mainly addressing firms with over 250 employees in financial services. As at August 2018, there were 272 signatories. Like the 30% Club, the Charter links diversity targets and executive pay. Signatories make a number of pledges, including the intention to ensure the pay of the senior executive team is linked to delivery against internal targets on gender diversity.
If you are a member of the 30% club or your investees have signed up to the Charter, then remember to ask them how their CEO’s variable pay is linked to diversity targets. Of course, remember to check your own reward practices first. It is more credible to ask your investees to do something if you follow the same example.
I sometimes hear of firms who are still novices in the concept of responsible reward that they can’t measure ESG. Our French counterparts may wish to share their success stories, as over 70% of the CAC 40 firms are already embedding ESG factors into their variable pay structures!
E – ENGAGE
Once you’ve communicated your expectations of the remuneration information you require and its linkage to ESG, then the process of engagement starts with investees. To be successful, it must be a real dialogue. I hear both investors and investees complain about lack of engagement. Investors may ask questions; investees provide further clarification. From my experience, understanding each other’s requirements is time well spent. When engagement is conducted thoroughly, it can influence voting outcomes – either way.
As the engagement process is cyclical, timing is of the essence. If you miss the beginning of the season, you are unlikely to make as much progress as you could have done towards fulfilling your desired business strategy.
Take time this month to set out your responsible reward objectives for a prolific and successful 2019 AGM season. They will go a long way towards catching up on the UN SDG agenda.
Corinne Carr is the Founder of the PeopleNet Ltd, remuneration consultancy. She advises asset owners and investors on responsible reward strategies.