Investments

Say-on-Pay: Accountability Is an Integral Part of Corporate Engagements

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In January 2011, a new rule granted shareholders in U.S. publicly traded companies the right to vote on executive compensation.

Although the “say-on-pay” vote is advisory and not binding, it was expected that it would rein in excessive CEO pay.

However, the results to date haven’t been promising. Track records show that pay continues to go up while performance has been lagging far behind.

The fact that the “say-on-pay” vote is advisory means that companies can ignore shareholder votes and face no consequences. This led to CalPERS implementing a voting practice to hold corporate board members accountable for pay that is too generous but which is not aligned with company performance. CalPERS votes against compensation committee members whenever we vote against an executive compensation plan.

“The stats are there,” Simiso Nzima, head of our Corporate Governance, told Bloomberg. “You have to believe they know they’re overpaying but not doing anything about it, or that they don’t realize it, and someone has to tell them.”

That’s where CalPERS comes in. We cast votes against pay plans at 1,165 firms – 52% of portfolio companies that had an executive compensation vote in the U.S. – in the first half of 2020. We also voted against 2,716 directors who are responsible for setting executive compensation at these companies, to hold them accountable for poorly designed compensation plans. We also wrote letters to the board leadership at these companies requesting meetings to discuss executive compensation and performance misalignment.

As part of our corporate engagements, we engage our portfolio companies to encourage them to consider how environmental, social, and governance (ESG) risks and opportunities affect their ability to create value over the long term. As expressed in our Investment Beliefs, we believe long-term value creation requires effective management of three forms of capital: financial, physical, and human.

Executive compensation is an integral part of incentivizing management to create long-term corporate value, which helps CalPERS earn returns to sustainably pay benefits to our beneficiaries.

In 2019, we launched a new Executive Compensation Analysis Framework (PDF) for evaluating executive compensation plans at our portfolio companies. The framework details our five-year quantitative pay-for-performance model and the three main objectives:

  • To assess whether pay is aligned with performance as measured by total shareholder return (TSR) over a five-year cumulative period.
  • To determine whether pay is reasonable relative to peers after taking into account performance.
  • To evaluate whether the design, structure, and practice of compensation plans promotes long-term shareholder value creation at an acceptable level of risk.

Our votes are based on that analysis.

Nzima added, the broader investor community spends “a lot of time decrying bad pay-for-performance. But the voting record hasn’t reflected that.”