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Bonuses for underperforming CEOs
5/17/2023 ~ 7:29:20 AM

๐—ง๐—ต๐—ถ๐˜€ ๐—ฎ๐—ฟ๐˜๐—ถ๐—ฐ๐—น๐—ฒ ๐˜„๐—ฎ๐˜€ ๐˜„๐—ฟ๐—ถ๐˜๐˜๐—ฒ๐—ป ๐—ฏ๐˜† ๐—œ๐—ป๐˜๐—ฒ๐—ด๐—ฟ๐˜‚๐—บ ๐—˜๐—ฆ๐—š ๐—ฎ๐—ป๐—ฎ๐—น๐˜†๐˜€๐˜ ๐—๐—ฎ๐—ฐ๐—ธ ๐— ๐—ผ๐—ฟ๐—ฝ๐—ต๐—ฒ๐˜.

When CEOs of large public companies are receiving large wages and bonuses, should these bonuses be rewarded when there is a reduction in company value? Why should shareholders reward poor performance, and therefore reinforce misalignment?

A recent example of this is seen whenย Uber's CEO Dara Khosrowshahi, was rewarded with a 146.9% increase on his $2 million bonus (on top of his $24 million compensation package) in 2022 due to a vague โ€˜better-than-baseline company performanceโ€™ even though the company stock had fallen by 40% (

Alignment and executive pay ย 

One of the most important governance metrics (with the highest number of sub-metrics captured under this metric byย Integrum ESG) is Remuneration Alignment, which evaluates executive pay alignment with company shareholdersโ€™ interests.ย 

A long-standing issue exists (particularly in large public companies with many shareholders), where separation of ownership (shareholders) and control (managers/executives) leads to a loss of alignment with the ownersโ€™ interests, often now called โ€˜the agency problemโ€™.

Executive pay in large public companies can be a controversial topic due to leviathan compensation packages, which are used to combat the agency problem, keeping interests aligned with performance-related remuneration goals and long-term incentives that are of importance to the company, usually containing key performance indicators (KPIs).

Many KPIs are increasingly focused on ESG targets such as aiming for net zero by 2050, in line with the Paris Agreement.ย 

Will things change?

Ultimately, the responsibility of executive pay and alignment is down to the Remuneration Committee on the board.

Theย U.S. Securities and Exchange Commissionย adopted a Pay Versus Performance disclosure rule in August last year. This makes it mandatory for US companies to disclose the relationship between executive compensation actually paid compared to the financial performance of the company.ย 

It is clear that remuneration alignment is building in importance for regulators and shareholders alike, particularly when considering the desired transparency they expect from corporates and fund managers.

๐—ช๐—ต๐—ฎ๐˜ ๐—ฑ๐—ผ ๐˜†๐—ผ๐˜‚ ๐˜๐—ต๐—ถ๐—ป๐—ธ?

Want to share your thoughts? Email us viaย contact@integrumesg.comย or fill in this formย HEREย to book in a demonstration on our own approach to ESG analysis.

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