Kevin Thomas is CEO of the Shareholder Association for Research and Education (SHARE), a Canadian leader in shareholder advocacy, research and education for institutional investors.
As we head into proxy season – the time of year when most companies hold their annual general meetings – shareholders at publicly listed corporations will be asked to vote on how the board has decided to compensate its C-suite.
This year, those votes will be overshadowed by the COVID-19 public health and economic crisis, and they will be different in two fundamental ways.
First, the meetings will largely be held online to avoid spreading the virus, a new experience for most of us.
Second, the oversized pay packages for executives and directors that shareholders often accept will be more clearly out of place, when the rest of the community is facing layoffs, cutbacks and serious financial uncertainty.
Some corporate leaders have been reducing pay, foregoing bonuses or donating pay to COVID-19 relief, which is commendable. Many executives will also take a hit, at least temporarily, on the current value of any stock-based compensation. Many stock options granted years ago and vesting now will not be “in the money” at current share prices and executives may have to wait to exercise them.
But with so many boards basing executive performance targets on their company’s relative shareholder returns, rather than absolute ones, some executives will continue to be eligible for high awards, as we have seen at recent annual meetings of large Canadian banks. The value of any share-based compensation may be low at present, but those grants may set up executives for a much, much happier recovery than the rest of us – something we saw in spades after the 2008-09 financial crisis.
Perhaps this is the right time to rethink our whole approach.
Shareholders have long taken aim at the, “Heads I win, tails you lose,” approach to executive compensation at some companies. Corporate boards justify massive payouts to executives when times are good on the basis that shareholder returns are also high, yet somehow find other reasons to continue high levels of pay when shareholder returns are low.
Those approaches are easy targets for scorn and clearly justify a shareholder vote against the board’s approach. But that’s not all that’s wrong with the current system of executive pay.
The structure itself, where so much of an executive’s pay package is based on incentive rewards rather than base salaries, inevitably serves up exactly the kind of high pay packages we will see now, even in the midst of this crisis.
We’ve become far too used to the idea that large incentive payouts are necessary to align executive performance with shareholder value. We’ve spawned a whole industry that cooks up ever-more-complex formulas to set executive compensation on the assumption that it incentivizes productive behaviour. It’s not at all clear that it does.
As Tom Powdrill at the U.K. pension consultancy PIRC wrote recently, “Watching medical staff worldwide throw themselves into the battle against COVID-19, without any expectation that they will be paid a single penny extra as a ‘bonus’ for their efforts, but with the expectation that some of them will die, requires us to rethink things fundamentally.”
So, what if we take this chance to do things differently?
In the immediate term, we’ll be looking for leadership from more boards and executives, especially when decisions are being made about layoffs, salary cuts, dividend cuts and reduced expenditures that hurt external suppliers. Cancelling discretionary executive pay and taking a pass on director compensation is the least they can do.
That goes double for any firm receiving government assistance. “We’re all in this together” has to mean something.
In the longer term, let’s rethink the way we structure executive pay altogether. Let’s bring it more in line with how the rest of the work force gets paid, both in scale and structure. Let’s get off this endless escalator that assumes the worst of executives – that they’ll only get out of bed if you pay them to do so. It’s not true and it’s not necessary.
By learning the lessons of this emergency, we can build a stronger, more sustainable and fair economy.