𝗧𝗵𝗶𝘀 𝗮𝗿𝘁𝗶𝗰𝗹𝗲 𝘄𝗮𝘀 𝘄𝗿𝗶𝘁𝘁𝗲𝗻 𝗯𝘆 𝗜𝗻𝘁𝗲𝗴𝗿𝘂𝗺 𝗘𝗦𝗚 𝗮𝗻𝗮𝗹𝘆𝘀𝘁 𝗝𝗮𝗰𝗸 𝗠𝗼𝗿𝗽𝗵𝗲𝘁.
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 when 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 ‘better-than-baseline company performance’ even though the company stock had fallen by 40% (https://www.cmswire.com/leadership/what-the-heck-is-happening-at-uber/).
Alignment and executive pay
One of the most important governance metrics (with the highest number of sub-metrics captured under this metric by Integrum ESG) is Remuneration Alignment, which evaluates executive pay alignment with company shareholders’ interests.
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 owners’ interests, often now called ‘the agency problem’.
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.
Will things change?
Ultimately, the responsibility of executive pay and alignment is down to the Remuneration Committee on the board.
The U.S. Securities and Exchange Commission 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.
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.
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