To be successful, companies need to attract and reward leaders who create value over the long term, but executive remuneration often focuses on short-term targets. Shareholders and their advisors similarly focus on short-term returns as a primary metric in the design and evaluation of pay plans. It’s no surprise that executive remuneration stands out as one of the most visible and closely examined aspects of a publicly listed company’s corporate governance program.
Companies are facing increasing pressure on executive pay amid rising shareholder scrutiny of pay plan proposals. Last year’s proxy season in the United States saw a record number of say-on-pay failures. Yet say-on-pay voting at publicly listed companies has arguably had the opposite of its intended effect, driving up executive compensation and showing little relationship to long-term shareholder interests.
Total shareholder return is the most common metric that tries to align interests, but it is inherently short–term–oriented. By tying executive pay to stock prices over short periods of time, companies and investors are actually putting their long-term interests at risk. The most effective remuneration structures are matched to a company’s objectives, strategy, and management. The simplest solution is direct stock ownership by executives, with long-term holding periods.
This report offers practical tools to aid corporate boards in designing executive remuneration, calibrating long-term equity awards, and effectively communicating remuneration policies to shareholders. These actions include the following:
- Replacing approaches that are counterproductive in the long term, and focusing on rapidly building executive share ownership through restricted stock and share retention policies
- Applying alternative indicators to gauge compensation structure and incentives
- Streamlining corporate disclosure of pay practices, emphasizing the decision-making narrative
Likewise, investors require a simplified approach to say-on-pay voting that is aligned with long-term remuneration design. We propose a framework that focuses on five key elements: holding period, quality, targets, instruments, and progress.
The prevailing approach to executive pay has proven ineffective and counterproductive. To address these challenges, a fundamental shift is needed. These strategies offer a clear path forward for boards of directors, executives, and investors to foster responsible compensation practices that genuinely align with and advance long-term value creation.
The CEO Shareholder: Straightforward Rewards for Long-term Performance