Diversity on the Board? Metrics Used by Fortune 100 Companies

Examining the diversity of Fortune 100 boards and questioning the metrics currently used to disclose diversity. Are Fortune 100 companies providing the complete picture?

06.29.2020

This article examines the diversity of Fortune 100 companies’ boards, and questions the current metrics used to disclose diversity of board members. Due to the lack of uniformity of diversity disclosures, is the picture painted by some companies comprehensive enough to truly show diversity on their board?

The topic of diversity has grown in importance over the past decade. Large companies are spending time and resources discovering how having a diverse board of directors is affecting their company’s image, perception, and profits. Many companies focus on appointing employees with different education, experience, race, and backgrounds. This is illustrated through companies’ diversity statements. For example, Amazon.com, Inc. in their 2019 Proxy states,

“We take seriously our commitment to diversity and respect for people from all backgrounds, including gender, race, ethnicity, religion, sexual orientation, disability, and other dimensions of diversity, which are enduring values for us as reflected in a number of Company policies, including the Amazon Global Human Rights Principles.”[1]

 

Even with inclusive diversity statements, such as Amazon.com, Inc.’s, when calculating how diverse companies’ boards are, two main diversity metrics are used: gender and race. While acknowledging the positive effects of having a diverse board and showing how diversity is being valued in a company is important, examining how transparent companies are with their diversity metrics shines light on a company’s commitment to diversity.

Why is Board Diversity Beneficial for Companies?

The decisions that the board of directors make for corporations are critical for their success. The board impacts how the company is run by making crucial decisions on executive pay, dividend policies, setting yearly goals, and conducting any other business that concerns shareholders. Having a board composed of people with different backgrounds and experience will enrich conversations and allow the board to approach problems with new perspectives and ideas.[2]

Companies should actively try to understand and represent their clients and customers. In doing so, better marketing decisions and tactics can be set. For example, “Having a diverse board can help you better understand purchasing and usage decisions, particularly as studies have found that women drive 70-80 percent of purchasing in the United States.”[2]

CGLytics data of board diversity reveals the percentage of gender diversity and nationality dispersion on boards of Fortune 100 companies.

As depicted in the following graphs, Fortune 100 company boards are composed of mostly American men. Unfortunately, we can not determine percentages of race within these companies because very few companies disclose information on race/ethnicity. The missing data and the lack of transparency from these companies questions their commitment to diversity.

Fortune 100 diversity on boards
Source: CGLytics Data and Analytics

Reporting Diversity

Based on the Fortune 100 companies’ 2018 and 2019 proxy statements, 23% of the Fortune 100 companies do not report information on diversity and the other 77% report the information using different metrics.

The reporting companies focus on gender alone, combine gender and race/ethnicity, or on nationality. There is no uniformity between companies or industries.  While most companies have statements in their proxies outlining the value of diversity and how they define it, the statements are not always represented in the graphs or numbers that break down their board diversity.

This is clearly shown in Caterpillar Inc.’s 2019 Proxy statement. The company lists one of their key characteristics of their board as being diverse of “race, ethnicity, gender, cultural background or professional experience.”[3]  This diversity statement implies that the board would be diverse. But it is unclear if it is as they combine gender and race in their data. In their governance highlights, Caterpillar Inc. lists their board as 45% diverse (gender and race combined).[3] By combining the percentage of gender and race, and not providing a breakdown of the directors’ backgrounds, it is difficult to determine if the board is diverse in race, ethnicity and gender.

Lack of uniformity when reporting diversity

When examining Fortune 100 companies for diversity, we find that it is difficult to compare companies’ information due to the lack of uniformity of how they are reporting data on board diversity.

For example, Delta Air Lines, Inc. and American Airlines Group Inc., both in the same industry, report their diversity metrics differently. At first glance, both companies report roughly equal percentages of diversity (38.5% and 40% respectively). However, American Airlines Group Inc. displays their information by separating gender and race/ethnicity.

Diversity of boards: Delta Air Lines and American Airlines
Source: Company disclosures found in the CGLytics software platform

Why would a company combine race/ethnicity and gender in their diversity graphs? One reason could be to increase the appearance of a diverse board.

Hypothetically, if Delta Airlines, Inc.’s board consisted of four white women and one non-white male and mirrored the American Airlines Group, Inc.’s diversity chart, it would show 38.5% diversity with 7% racially/ethnically diverse and 30.7% gender diverse. While the 30.7% gender diversity would be high for their industry (as shown in the follow graph), the racial/ethnically diversity would be low. This example could be switched with gender diversity being low and would highlight a similar problem. However, without clear diversity metrics, consumers and shareholders are left questioning Delta Airline’s commitment to diversity, which could result in a loss of business.

By combining the percentages of gender and racial diversity, Delta Air Lines is hiding who is represented on their board of directors. American Airlines Group, Inc. clearly shows their shareholders, investors, and the public that they value diversity and are prepared to make well informed decisions. What does clear diversity metrics look like?

Fortune 100: Women on boards by sector

Percent of women on Fortune 100 boards by sector
Source: CGLytics Data and Analytics

Transparent diversity metrics should give the consumers and shareholders a comprehensive background of the members on the board. This should include race/ethnicity, gender, age, and industry experience. These metrics broaden the knowledge of the board, giving the board members the tools to make successful decisions.

This is illustrated in PepsiCo Inc.’s 2019 proxy statement. Their diversity statement is clear and backed by their diversity percentages. It states, “Diversity including understanding the importance of diversity to a global enterprise with a diverse consumer base, informed by experience of gender, race, ethnicity and/or nationality”[4]. This is clearly shown in multiple graphs that break down backgrounds of each director.

PepsiCo Inc.’s 2019 proxy statement

PepsiCo Inc.’s 2019 proxy statement
Source: Company disclosures found in the CGLytics software platform

It is recommended for more companies to design their diversity statements and data like PepsiCo Inc. They shared a comprehensive view of their board and proved their board was encompassed with directors of various backgrounds. This provides consumers and shareholders with confidence that the board is well equipped to make the best decisions for the success of the company.

To gain access to Governance Intelligence and Oversight of 5,900+ globally listed companies, contact CGLytics. Within the CGLytics software platform, access 125,000+ professional executives and their skills, expertise and backgrounds for recruiting board members and building a robust, diverse board.

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COVID-19: Changes to Executive and Shareholder Pay in Europe’s Biggest Banks

To evaluate the financial industry’s response to the COVID-19 crisis, CGLytics reviews the executive compensation changes and dividend amendments of 20 listed banks across Europe.

In March 2020, the European Central Bank (ECB) published a recommendation to banks on dividend distribution, asking financial institutions to refrain from paying dividends or buy back shares during the COVID-19 pandemic. The measure was introduced to help banks cope with losses and support lending in times of the crisis and concerned dividends for financial years 2019 and 2020. The ECB suggested banks to amend dividend proposals for the upcoming Annual General Meetings, at least until October 1, 2020[1]. This article reviews the executive compensation changes and dividend amendments of banks across Europe in response to the COVID-19 crisis.

Numerous banks across Europe decided to follow the recommendation and cancelled, or delayed, dividend payments. Furthermore, senior management and non-executive directors of some institutions also decided to waive parts of their compensation to support the business or donate to the pandemic funds. Some other banks, however, have not announced any changes to executive remuneration at the time of generating this report.

To evaluate the financial industry’s response to the COVID-19 crisis, CGLytics has looked at the executive compensation changes and dividend amendments of 20 listed banks across Europe, with market capitalisation varying from EUR 9B to EUR 148B. The geographical representation of the peer group covers eight countries – Spain, United Kingdom, France, Norway, the Netherlands, Italy, Belgium and Sweden.

Changes in Executive and Non-Executive Compensation

Top executives across the industry chose to contribute part of their fixed or variable compensation in order to help their company or society to combat the crisis. 12 out of the 20 evaluated banks announced various actions taken by the executives, among them reductions in a salary, cuts or waiving of a bonus, or agreement to postpone planned compensation increase.

Source: CGLytics Data and Analytics

For example, the CEO of Banco Santander SA, José Antonio Alvarez, contributed half of his base salary as well as his bonus to the medical equipment fund[2]. Chief executives of three UK banks also announced that both their salary and variable bonuses will be affected by donations or cost cuts. These banks are HSBC Holdings plc, The Royal Bank of Scotland Group plc and Standard Chartered PLC.

Out of the reviewed sample, only Barclays plc chose to delay releasing of a portion of the long-term incentives awarded in 2017 and due to vest in June 2020. In addition, both the CEO and CFO of the bank have requested any increase to their fixed pay to be postponed until at least 2021. The bank’s Chief Executive, James Staley, has also volunteered to contribute one-third of his salary for the next six months to charitable causes[3].

Eight out of 20 banks have not reported any changes to the executive remuneration caused by the pandemic, including all Swedish banks represented. However, it is worth noting that senior management of Swedbank AB has been affected by pay cuts due to a money laundering scandal[4].

The situation with compensation adjustments for non-executive directors differs significantly for the chosen peer group. Only six out of 20 banks announced that the Chair or members of the Board of Directors agreed to forego wholly or partially the annual fees.

BOD Compensation Cuts
Source: CGLytics Data and Analytics

Chairs of Banco Santander, Barclays PLC, Banco Bilbao Vizcaya Argentaria and The Royal Bank of Scotland Group took cuts in their fees to support charities. Mark Tucker, Chairman of HSBC Holdings plc, donated his entire fee for 2020 (roughly GBP 1.5m)[5].

Non-executive directors of Banco Santander volunteered to contribute 20% of their fees to charity while Directors of Svenska Handelsbanken AB proposed to recall an increase of the Board fees. However, no other banks from the sample announced any changes to the fees paid to non-executive directors due to the pandemic crisis.

Changes in Dividend Payments

All 20 banks announced changes to the dividend payments in response to the ECB recommendations or the losses due to the crisis. Banks chose to cancel or postpone the dividend payments for 2019 financial year until more certain circumstances.

Dividends 2019
Source: CGLytics Data and Analytics

Following the ECB suggestion, the banks did not cancel interim dividends that have already been paid out but amended payments of the final dividends for 2019. Most of the banks chose to postpone the decision regarding the dividends for 2019 until later this year, hoping for clearer overview of the results and forecasts, while allocating the 2019 profits to the reserve accounts. CaixaBank SA decided instead to reduce 2019 dividends and change the 2020 dividend to a cash pay-out not higher than 30% of reported consolidated earnings[6].

Regarding the interim dividends for financial year 2020, some of the banks have already announced that they do not plan to undertake any dividend payments until uncertainties caused by COVID-19 disappear.

Financial regulators and banks across Europe are taking measures in times of the COVID-19 pandemic to support the economy. The recommendation of the European Central Bank to refrain from paying 2019 dividends until more certain times led to many financial institutions cancelling or postponing the dividend payments and using all funds available to combat the crisis or as a reserve backup.

Moreover, top managers and members of the Board of Directors are voluntarily donating part of their fees for 2020 financial year to charities and to support the business. Even though all evaluated banks have chosen to amend dividend payments, only some have been spotted on account of voluntary contributions from the top management. The results and impact of current decisions made by the banks will be visible by the end of the current crisis, when companies will evaluate the state of their business to estimate what kind of return they will offer to their shareholders.

Would you like to see how your executive compensation is viewed by leading independent proxy advisor Glass Lewis?

Click here to learn more about the Glass Lewis CEO compensation analysis and peer group modeling for Say on Pay engagement, available exclusively via CGLytics.

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2020 CEO Pay Review: The Top 50 Highest Paid CEOs

As proxy season progresses and companies file their annual reports, CGLytics surveys the world’s highest paid CEOs (so far) and looks at how executive compensation has grown since the last year.

CEO Pay is again in the spotlight of the 2020 AGM Proxy Season. With the COVID-19 pandemic affecting many aspects of the business, a large portion of companies have proceeded with executive compensation adjustments as a response.

How has the compensation scene changed over the last year? Of course, the proxy season has yet to be finished, hence the ranking of the companies and analysis will change over time. Nevertheless, it is worth reviewing the changes over the year so far, and the impact of any decisions made to the compensation practices of companies.

In this article we have included how the performance of the company has changed to understand how executives are rewarded compared to company performance.

Key CEO pay takeaways in 2020 so far:

    • – The sum of the top 50 total granted compensation has decreased by 53% from 2018 to 2019 ($4.73bn in 2018 down to $2.24bn in 2019).
    • – Last year’s top paid individual and company is not included in this year’s top 50 highest paid executives as he was granted only USD 23,760. He exercised, however, a total of USD 30,483,520 in options. Last year, Elon Musk’s pay accounted for over 50% of the $4.73bn granted of the 50 highest paid executives.
    • – This year’s first place for highest paid CEO, belongs to Sundar Pichai of Alphabet Inc., whose payment represents almost 13% of the $2.15bn.
    • – A few companies that have made it onto the list of the top 50 highest paid CEOs have also made changes due to COVID-19, either on their compensation practices or dividends:

 

  • The Walt Disney Company: The Walt Disney Company (DIS) announced that in response to the business challenges relating to COVID-19, each of the Company’s named executive officers agreed to receive a temporary reduction in their base salaries, effective with the payroll period commencing April 5, 2020. The Executive Chairman, and former Chief Executive Officer, of Walt Disney agreed to forego all of his compensation except a portion of his base salary.
  • Burlington Stores, Inc.: Burlington’s CEO, Michael O’Sullivan, will not take a salary, while the company’s Board of Directors will forfeit their cash compensation, and the Company’s executive leadership team has voluntarily agreed to decrease their salary by 50%.
  • Comcast Corporation: Comcast Chief Brian Roberts, NBCUniversal CEO Jeff Shell and other division leaders at Comcast will donate their salaries to coronavirus-related relief efforts as the world grapples with the devastating pandemic.
  • Fiserv Inc.: Fiserv Inc.’s top executives are taking temporary base salary pay cuts to compensate employees, who experience financial hardship due to the COVID-19. The Company disclosed that its Chairman & CEO, Jeffery Yabuki, and President & Chief Operating Officer, Frank Bisignano, have each agreed to forgo 100% of their base salary.
  • Wells Fargo & Company, Arconic, Inc.,The Walt Disney Company, The Kraft Heinz Company, and Fiat Chrysler Automobiles N.V. have also implemented dividend cuts or changes due to COVID-19.

 

  • – It is also worth noting, the average growth in market capitalization in 2019 (of the 50 highest paid Executives) was 43%. A big increase compared to the growth of 1% seen in 2018.
  • – One-year Total Shareholder Return (TSR) growth also saw an increase of as much as 42%!

Please note: Compensation in USD – exchange rates based on single point of time, end of tax year 2019.

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AGMs: Tactics for a Plague Year

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible. What are the best options for running AGMs during a plague year?

In a time of crisis and confusion, shareholders are more eager than ever to get answers from their boards and management. Yet holding traditional AGMs is nearly impossible.

Postponing them may also not be a good option. Advisors, analysts, shareholders, investors, employees and all other stakeholders are all eager to understand their companies’ way forward in such troubled times, and the AGM offers the best way to address this. Postponing the AGM, even for good reasons, sends a bad signal to the markets at the very time when addressing investor and broader social concerns is critical.

For example, many companies are considering reducing dividends due to the challenging economic conditions, yet CEO pay reductions are not on the AGM agendas. CEO pay continues to rise, regardless of performance. The top 35 highest-paid CEOs on the S&P 500 received a combined Total Realized Compensation (TRC) of almost $3 billion in 2019, yet pay-for-performance alignment is badly skewed at nearly half of the companies on the index as our statistics show.

If postponing is not an option, companies do have two other options at their disposal: Running a ‘hybrid’ AGM, which would combine physical presence with virtual communications, or making the entire AGM virtual. Most companies don’t have such options included in their Articles of Association, but the first step at the hybrid or virtual AGM would mean voting on such changes. The London Stock Exchange is currently pushing for emergency legislation to change the companies act to allow all companies to stage virtual shareholder meetings. 

The hybrid option means that either board members are physically present at the AGM, while shareholders communicate with them via virtual links, or that shareholders send representatives to physically attend the meeting while board members communicate via video or audio communications. Voting ahead of meetings is also an option, working with proxy advisors.

Swedish telecoms and networking firm L.M. Ericsson has chosen the former hybrid option for its 2020 AGM on 31 March. The President and CEO Börje Ekholm will not attend in person, but will participate via links (it is not clear whether other board members will attend in person). A live webcast of the meeting will be available to shareholders.

To keep the numbers of attendees down, Euroclear Sweden will offer shareholders who are individuals the option to vote via proxy, and other opportunities to work with proxies are made available to shareholders. “No food or refreshments will be served,” the official invitation warns.

Ericsson’s official invitation offers links to Nomination Committee proposals as well as to some shareholder motions.

But, in this hybrid approach to the AGM, is it clear that board members will be able to fulfil their fiduciary responsibilities in communicating with shareholders? Will it be possible to hold a dynamic discussion of the company’s affairs? Will shareholders be able to work with proxy advisors on such short notice – how will policies be communicated? Will a shareholder wishing to pose a complex question to the CEO get sufficient airtime?

The alternative hybrid approach to running AGMs would mean that board members are physically present, while shareholders communicate with them entirely via audio, video and messaging. And there is the further alternative, in which all communication takes place virtually.

Each of these alternatives poses many of the same questions that we’ve raised above. One of the virtues of the physically-attended AGM is that a shareholder can follow up on questions, or insist on attention to specific subjects. Can shareholders be sure this will happen online?

The even larger question being asked at some companies will be whether all shareholders have had access to sufficient information to vote before the AGM. For example, under current conditions, it may not be possible for the audit of financial statements to be concluded. Some companies are opting to work with financial reporting that is incompletely audited. This poses a serious corporate governance challenge that the board would have to address at the AGM.

The diffusion of extensive financial and non-financial information to shareholders and their representatives ahead of the meeting is also critical for these virtual or semi-virtual AGMs to succeed. Given that shareholders must accept somewhat limited access to the board, they must be certain that all of the information relevant to decision-making on matters such as executive compensation, director election, Stock Purchase Plan has been provided in advance.

Boards that take all the necessary steps to ensure that shareholders have the information they need ahead of the AGMs will be fulfilling their fiduciary responsibilities to shareholders. At the same time, Shareholders will need to step up and leverage technology and information to support their engagement. The AGM will provide the basis for the company to move forward even in a Plague Year.

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A diverse supervisory board: This is how to unlock a wealth of talent

Aniel Mahabier, CEO of governance data specialist CGLytics, welcomes the fact that selection committees are using corporate governance analytics to assess the diversity of their own supervisory board. Technology is bridging the gap between the available talent and the knowledge and experience that committees already have in-house.

“Selection committees are looking for the right candidates outside their traditional networks”, says Aniel Mahabier, founder and CEO of governance data specialist CGLytics. Such an alternative approach, for example through the use of data analysis, has major advantages: people with unique experience and unique talent are put on the radar.

In many organizations – listed and unlisted – supervision is far from diverse. A supervisory board with only people of the same generation, background and education cannot properly monitor the continuity of the company in the changing society. Such a homogeneous council cannot sufficiently monitor the interests of the various stakeholders.

An important task therefore lies with the selection committees that are responsible for a balanced composition of the supervisory board. We see that selection committees use our corporate governance analytics to assess and benchmark the diversity of their own supervisory board. For example, to be able to answer questions from international shareholders and when planning succession. For example, they test the current composition against the various international corporate governance codes and sustainability regulations. This contributes to effective management and good risk management.  

Click here to continue reading the full article.

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What’s your flavor? Companies get a taste of CEO pay for the proxy season

This article, originally published in Dutch in Mgmt. Scope, CGLytics examines CEO compensation issues going into the 2020 proxy season

This article by CGLytics CEO, Aniel Mahabier, first appeared in Dutch in Mgmt. Scope on 11th March 2020: https://managementscope.nl/opinie/bestuurdersbeloningen-bedrijfsprestaties

Executive compensation gains attention in the run-up to annual shareholder meetings. The key question is whether compensation plans are socially responsible and align with company performance relative to its peers.  In 2019, companies already got a taste of the increasing interest in CEO pay from shareholders. “That attention is only increasing,” says Aniel Mahabier, founder and CEO of CGLytics, the leading global provider of governance data and executive compensation tools. “Executives  and directors  who are not sufficiently prepared are facing reputational risks.”

As shareholders and other stakeholders prepare themselves for annual shareholder meetings, it’s the moment to speak out on these important issues. Shareholders will again make themselves heard this year. For several years now, engagement between shareholders and companies has been growing. Parties are more likely to vote and use their voting rights to steer business policy: the number of votes against remuneration policies are increasing proportionally at the meetings of the 5,900 listed companies we track. An increasing number of shareholders want compensation to reflect the company’s long-term performance and value creation (in other words, pay for performance and earnings per share).

Pay for performance

It is obvious that the compensation of executives should reflect the company’s performance, however data shows a different picture.

In a large number of the publicly listed companies, there is pay for performance misalignment. The CEO’s compensation is – consciously or unconsciously – not in line with the value create by the company over multiple years.

More than half of companies in the US S&P 500 Index lack a correlation between CEO compensation in 2019 and the development of the company’s earnings per share over the past three years.

In some instances, the CEO compensation is lower than expected based on CEO value creation. With a much larger proportion of companies, the value created by the CEO is much lower than you would expect based on the level of their compensation received. In many situations, at the general meeting of shareholders, companies proposed increasing executive pay, although the company’s performance declined.

Mismatch

This misalignment between CEO compensation and company performance is increasingly gaining the attention of shareholders, employees, governments and other stakeholders. The top 35 executives of companies in the S&P 500 collectively earn almost more than $3 billion, which contributes to the discussion. In Europe we see a similar picture. For a third of the listed companies in the Benelux, the CEO’s compensation does not align with the realized value creation. A similar picture is seen at a third of companies in Britain’s FTSE 350 Index.

Drivers of change

The focus on responsible compensation is in line with the focus in society on sustainable business growth.

Large investors – pension funds and insurers – are drivers of the change in compensation.  Passive investors, such as asset managers Vanguard and BlackRock, are also increasingly using their control to influence compensation proposals.  We see that they are trying to encourage a more socially responsible compensation policy in different ways. For example, by engaging  on compensation  policies and proposals with shareholders and other stakeholders before the general meeting of shareholders and underpinning this with data. We see signs that this is reducing the number of dissent votes against the proposed policy.

Shareholders do not hesitate to enforce change where necessary. For example, by voting against incentive proposals including equity plan proposals at the meeting. A large investor has stipulated that if more than 25% of shareholders speak out against a compensation proposal, they will in turn vote against the reappointment of the chairman of the compensation  committee. The same strategy is used if the compensation proposals provoke a substantial number of counter-voters in two consecutive years.

Reward regulators

All efforts to promote sustainable value creation are having an effect: short-term pay is making way for a long-term performance-based compensation structure. Several listed companies have either decreased, shifted or changed the variable compensation component of their executives’ pay plan into fixed compensation. The latter includes, more often, a combination of cash and shares of the company. Using shares as an incentive, there is a direct alignment between the pay of the CEO and the performance of the company.

The same development is also seen when looking at the compensation of directors (non-executive directors). Where it is common practice in the United States to reward directors with, among other things, shares of the company, this was not common, or even prohibited, in Europe for a long time. That has changed. For example, the new corporate governance code in Belgium offers the possibility to reward non-executives partly in shares. This creates a shared interest with shareholders.

Sustainable criteria

An important development is seen in the use of non-financial metrics for executive and CEO compensation.

Shareholders expect companies to include non-financial guidelines such as ESG criteria in their compensation system in addition to financial guidelines – such as earnings per share and Total Shareholder Return (TSR). These criteria show how the company takes into account various ESG  sustainability criteria: Environmental, Social (social policy) and Governance (good governance).

In many countries in Europe, listed companies are obliged to include such non-financial disclosure in their annual reports. It therefore seems logical to also link the compensation of the executives to the goals set by the company in the field of corporate social responsibility. The recent governance crisis at a major Swiss bank illustrates how the lack of good governance can affect the oversight and value creation of a company in the long term.

Although attention to the inclusion of non-financial metrics is increasing, the application is still limited in practice. Only 27% of FTSE 350 and ISEQ 20 companies have included some form of measurable ESG criteria in incentive plans. And even in these companies, the proportional share of compensation determined by ESG performance is small. This deserves attention: if the sustainable objectives are not included in executive compensation, there is a risk that the compensation policy will lose connection to the business strategy.

Risk factors

A responsible compensation plan based on financial and non-financial metrics is more important than ever. An increasing number of directors, regulators, compensation committees and investors are therefore scrutinizing CEO compensation and use CGLytics data and pay for performance benchmarking tools to review compensation proposals and policies. Directors are using this information to prepare their engagement with active shareholders, proxy advisors like Glass Lewis and other stakeholders. Investors are looking for red flags, undiscovered risk factors that threaten the quality of governance in the company. Having access to similar information and tools ahead of the proxy season, is allowing compensation committees to respond in a timely manner to pitfalls in the existing compensation plan and proposal to avoid potential reputational and activism risk.

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About the Author

Aniel Mahabier: CEO of CGLytics

Aniel Mahabier  is CEO and founder of CGLytics, the leading global provider of governance data and executive compensation tools. Mahabier interviews and writes for Management Scope about the remuneration of directors and corporate governance analytics.

Latest Industry News, Views & Information

Understanding ESG & Annual Incentive Plan

Understanding ESG & Annual Incentive Plan ESG refers to a series of environmental, social and governance criteria taken into consideration by the funds during the investing process. Investing in ESG funds allows shareholders to support companies in transition, that wish to act and develop in a more sustainable and responsible manner. In practice, many indicators … Continue reading “Understanding ESG & Annual Incentive Plan”

Pay for Performance: The Largest Institutional Investors’ View

Pay for Performance: The Largest Institutional Investors’ View   Executive compensation has been one of the trickiest issues within the corporate governance space as of late. Across the board, there seems to be no end in sight to finding the perfect compensation package or philosophy for corporate executives. In this article, we will discuss the … Continue reading “Pay for Performance: The Largest Institutional Investors’ View”

How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

CEO Pay Continues to Increase, but Performance Often Lags

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

Shareholders, including large institutional investors, are continuing the growing momentum to link executive pay to company performance.

The UK Investment Association, which represents more than £7 trillion ($9 trillion) in assets, responded to investor dissent of FTSE350 companies not acting on executive pay concerns by issuing a new version of executive pay guidelines for disclosures in 2019. With a statement claiming, “companies need to demonstrate the link between pay and company performance. If they don’t, they should brace themselves for more shareholder revolts”. It is clear from this statement that executive pay and pay regimes are still hot topics.

In the US, the Council of Institutional Investors (CII) have also commented in the past on the “excessive complexity in U.S. executive pay plans, and questions on the effectiveness of approaches to pay-for performance.”

There are indeed vast disparities between compensation at select companies within the S&P500 index and their Total Shareholder Return (TSR).  CGLytics, as part of its S&P 500 CEO/Executive Compensation review, has developed an extremely granular view of CEO pay in comparison with performance for the index, helping to focus the debate on the issue.  The review examines different aspects of CEO pay among the constituents of the S&P 500index, including fixed v. variable compensation mix, overview of Pay vs. TSR, and a pay for performance review on a one- and three-year basis.

Realized Pay Correlates with Growth

CEOs received an average of $14,748,284 in Total Granted Compensation (TGC) and $19,276,476 in Total Realized Compensation (TRC) in 2018, the report shows.  Yet the average TSR for S&P 500 companies in 2018 was -6 percent. While this is an improvement from 2008, in which average TSR was -39 percent (average granted pay was $9,563,165 and average realized pay was $10,318,656), it is not a result that is likely to satisfy shareholders.

Indeed, the report indicates a trend that supports the need for performance-related incentives: Granted pay steadily increases from year to year while realized pay tends to coincide with absolute growth.

 

That need is further supported by the comparison of CEO pay with TSR. Naturally a zero-percent margin or zero disparity between a CEO’s realized pay and the company’s TSR is considered perfect alignment.

Historic number of shareholders oppose boards on executive pay

Companies such as Michael Kors Holdings Limited, NVIDIA Corporation, Constellation Brands, Inc., Goldman Sachs Group, and Capital One Financial Corporation all had CEOs rank in the top of their sectors for Total Realized Compensation in 2018. Yet, each of these companies also had a 2018 TSR in the bottom 20 percent of their industry.

Not surprisingly, this leads to shareholders questioning the pay practices of the board, and, in fact, opposition from shareholders for executive compensation issues is at an all-time high. In total, about six percent of director nominees have received less than 80 percent support, and 0.3 percent have not secured majority support. Eight percent of Say on Pay votes have secured less than 70 percent support, and two percent have not achieved majority support.

These numbers may seem small, but they are actually historic in significance compared with previous years’ levels of opposition for related AGM items. It is clear that large passive investors have become more hesitant to approve large one-time retention awards, unrestricted equity to executives, and executive incentive grant with no performance criteria.

To learn more about the Say on Pay landscape of the S&P 500 index, click here to download the full report.

Latest Industry News, Views & Information

Understanding ESG & Annual Incentive Plan

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Pay for Performance: The Largest Institutional Investors’ View

Pay for Performance: The Largest Institutional Investors’ View   Executive compensation has been one of the trickiest issues within the corporate governance space as of late. Across the board, there seems to be no end in sight to finding the perfect compensation package or philosophy for corporate executives. In this article, we will discuss the … Continue reading “Pay for Performance: The Largest Institutional Investors’ View”

How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

Glass Lewis New Peer Group Methodology for Say on Pay

Due to Glass Lewis now using CGLytics data to power their Say on Pay recommendations and adapting their methodology to peer-based approach, what is the impact on companies’ pay for performance gradings?

Glass Lewis and CGLytics recently held a webinar to explain Glass Lewis’ new peer group methodology, taking effect from January 1 this year.

The new model implemented by Glass Lewis changes the way peer groups are determined for the Say on Pay recommendations in their proxy papers. During the webinar Glass Lewis’ Julian Hamud, Senior Director of Executive Compensation Research, explains:

“The new partnership with CGLytics has given the opportunity to provide better research for our clients. We are moving from a market-based approach to a proven peer-approach, which will improve our say on pay and compensation analysis.”

Hamud goes on to explain in detail the problems they encountered with the previous model including rigidity with no ability for manual adjustments to the peer algorithm when unique context of a company is justified, and large industry favoritism.

The impact on pay for performance grades and recommendations is also highlighted with a case study detailed by Aaron Bertinetti, Senior Vice President, Research and Engagement, Glass Lewis.

Using the example of Franklin Resources Annual General Meeting (AGM) being held on February 12, 2020,  Bertinetti shows the difference in pay for performance grades awarded using both the old and new Glass Lewis model and peer methodology. This example reveals an improved Grade C, whereas using the previous peer groups and model it would result in a Grade D.

Due to the change of Glass Lewis now using CGLytics data to power their Say on Pay recommendations, and adapting their methodology to peer-based approach, companies need to understand:

  • • How the Glass Lewis peer groups are now constructed,
  • • Why you and your company should care, and
  • • The benefits of the new peer group methodology.

 

To learn more, click here to watch the webinar by Glass Lewis and CGLytics.

Latest Industry News, Views & Information

Understanding ESG & Annual Incentive Plan

Understanding ESG & Annual Incentive Plan ESG refers to a series of environmental, social and governance criteria taken into consideration by the funds during the investing process. Investing in ESG funds allows shareholders to support companies in transition, that wish to act and develop in a more sustainable and responsible manner. In practice, many indicators … Continue reading “Understanding ESG & Annual Incentive Plan”

Pay for Performance: The Largest Institutional Investors’ View

Pay for Performance: The Largest Institutional Investors’ View   Executive compensation has been one of the trickiest issues within the corporate governance space as of late. Across the board, there seems to be no end in sight to finding the perfect compensation package or philosophy for corporate executives. In this article, we will discuss the … Continue reading “Pay for Performance: The Largest Institutional Investors’ View”

How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

Gender diversity in Spanish boardrooms

In Spain, the Comision Nacional de Mercado de Valores (CNMV), has put a series of changes to the corporate governance code of public companies under consultation. This is widely regarded as one of the most relevant proposed amendments relating to gender diversity in boardrooms.

In Spain, the Comision Nacional de Mercado de Valores (CNMV), has put a series of changes to the corporate governance code of public companies under consultation. This is widely regarded as one of the most relevant proposed amendments relating to gender diversity in boardrooms.

The new proposal is moving from a “mere” recommendation to a “direct” recommendation of a minimum of a 40% presence of females in boardrooms, significantly up from the current 30%. Besides, the CNMV also acknowledges that the current recommendation hasn’t been given enough attention by Spanish corporates. To address the issue, the new proposal recommends to include executive selection policies and processes in order to promote diversity of knowledge, experience and gender.

Considering these substantial and at the same time exciting changes, I decided to take a look at the current state of gender diversity in Spanish boardrooms, selecting both the IBEX35 and the remainder constituents of the IGBM. The result of the analysis is as follows:

Within the IBEX35, only 3 constituents already meet the new recommendation of the CNMV. Much worse is that only 43% meet the current threshold that has been introduced in 2015, and 20% have less than 20% of females on their board.

Within the rest of constituents of the IGBM (82 corporates), the situation is mixed:

  • • 2 corporates have already achieved real gender parity
  • • 3 corporates meet or exceed the new threshold of 40%
  • • 18 corporates are already above or meet the current recommendation
  • • 59 corporates are below or significantly below the current recommended 30%. Within this group, there are 11 companies which have no females at all in their boardrooms. Following Larry Fink’s latest letter, it is likely that these companies will be facing tougher environments and questioning from investors and stakeholders in the future, as well as higher financing costs.
chart2
Source: CGLytics Data and Analytics

Considering that the current recommendation was set by the CNMV in 2015, it is clear to see that companies will have a challenging future ahead if they want to meet the new recommendation for gender diversity, either via succession planning or boardroom expansions.

In view of the above, how can CGLytics support public corporates’ growing demand for board diversity and effective succession planning, at the required pace?

Whilst at the same time guarantee they achieve a well-balanced board, paramount to maintaining good corporate governance for long-term success?

CGLytics’ Nominations & Governance solution is the answer. Basically, Nominations is a strategic tool through which nomination committees and HR teams are empowered to maintain a pulse on how the board composition of their organisations measures up against peers, investors’ requirements and market standards.

Using Nominations & Governance, nomination committees and HR teams can benchmark the skillset of their boards versus peers and competitors, prepare for investors’ pressure related to board composition, identify the right skills needed now and in the future to best serve the board’s ability to make the right decisions and build a talent pipeline, getting instant access to 125.000+ (including over 20.000 females) global executive profiles of key decision-makers from listed companies, including comprehensive biographies containing employment, compensation, education and extracurricular activities, to search, find, engage and network with the best-quality prospects for boardroom recruitment and succession planning.

Please get in touch should you want to know more.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills?

Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Request a demo to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, currently utilized by world-leading institutional investors, activist investors and advisors.

Request a Demo

About the Author

Francisco Lopez, Regional Sales Director

Francisco Lopez is a senior sales professional with two decades of successful experience in delivering growth to organizations and building long-lasting, profitable and sustainable relationships with clients and stakeholders worldwide. Francisco has developed his career in the market intelligence, information services and technologies industries, having fulfilled senior business development positions at blue-chip organizations such as Nielsen and GfK. Prior to joining CGLytics, Francisco was the global head of the Industrials sector at a global supplier of SaaS solutions for third-party risk & performance management. Francisco holds a Master’s degree in Business Administration from the Complutense University of Madrid.

Latest Industry News, Views & Information

Understanding ESG & Annual Incentive Plan

Understanding ESG & Annual Incentive Plan ESG refers to a series of environmental, social and governance criteria taken into consideration by the funds during the investing process. Investing in ESG funds allows shareholders to support companies in transition, that wish to act and develop in a more sustainable and responsible manner. In practice, many indicators … Continue reading “Understanding ESG & Annual Incentive Plan”

Pay for Performance: The Largest Institutional Investors’ View

Pay for Performance: The Largest Institutional Investors’ View   Executive compensation has been one of the trickiest issues within the corporate governance space as of late. Across the board, there seems to be no end in sight to finding the perfect compensation package or philosophy for corporate executives. In this article, we will discuss the … Continue reading “Pay for Performance: The Largest Institutional Investors’ View”

How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

About the author

Edna Frimpong: Lead EU Research Analyst

Edna holds a degree in LLM Finance and Law Programme from the Duisenberg School of Finance. In addition she completed her Bachelor’s Degree in Administration in Accra, Ghana. She gained work experience during her internships as a research analyst at Sustainalytics and as a finance and business development intern at Carnomise SAS.

Randstad make data-based decisions going into the AGM season

“At Randstad we are looking at the remuneration policy on a continual basis and it’s an important topic. Prior to the AGM we want to fully understand how all our stakeholders look at our remuneration policy. “

Randstad N.V. is a leading global HR services company. The company, which is headquartered in Diemen, Netherlands, provides work for more than 670,000 people
around the world each day.

With anything less than 80% of approval from shareholders on remuneration policies now deemed as negative by stakeholders (compared to 50% five years ago), and justification requirements increasing (inpart due to implementation of the Shareholders’ Right Directive II in Europe), companies’ remuneration policies are coming
under greater scrutiny.

Going into the next proxy season, Randstad wants to know which KPIs are being used by other companies to form their own opinion and they also want to compare executive remuneration against peers’ and understand how they will be perceived by proxy advisors like ISS and Glass Lewis.

Read the full story here and find out why Ranstad now goes into their AGMS with greater confidence and how they are able to make data-based decisions rather than assumptions.

Latest Industry News, Views & Information

Understanding ESG & Annual Incentive Plan

Understanding ESG & Annual Incentive Plan ESG refers to a series of environmental, social and governance criteria taken into consideration by the funds during the investing process. Investing in ESG funds allows shareholders to support companies in transition, that wish to act and develop in a more sustainable and responsible manner. In practice, many indicators … Continue reading “Understanding ESG & Annual Incentive Plan”

Pay for Performance: The Largest Institutional Investors’ View

Pay for Performance: The Largest Institutional Investors’ View   Executive compensation has been one of the trickiest issues within the corporate governance space as of late. Across the board, there seems to be no end in sight to finding the perfect compensation package or philosophy for corporate executives. In this article, we will discuss the … Continue reading “Pay for Performance: The Largest Institutional Investors’ View”

How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"