Leading Investor Group Urges Companies to Simplify Executive Compensation

September 23, 2019

On September 18, the Council of Institutional Investors (CII) announced that it had overhauled its Policies on Executive Compensation to urge public companies to, among other things, “dial back the complexity of their executive compensation plans and set longer periods for measuring performance for incentive pay.”

“The policy revision reflects concerns on excessive complexity in U.S. executive pay plans, and questions on the effectiveness of some approaches to pay-for performance,” said CII Executive Director Ken Bertsch. “Steadily rising average pay, even when market performance is mediocre, suggests that pay-for-performance can be a mirage.”

The new policy questions the use of performance-vesting shares because the associated “goals and metrics can be numerous, wide-ranging, adjustable and hard to understand.” Instead, the new policy encourages companies to consider “adopting simpler plans comprised of salary and restricted shares that vest over five years or more.”

The new policy also:

  • Suggests that companies consider barring top executives from selling stock awarded to them until after they depart;
  • Recognizes that rank-and-file pay should serve as a valid “reference point” when setting executive pay; and
  • Encourages expanded use of clawbacks to cover “not only financial restatements but also personal misconduct and ethical lapses that cause material reputational harm.”

In other news, CII has responded negatively to the Business Roundtable’s recent statement on the purpose of a corporation, discussed elsewhere in this edition of The Ticker. According to CII, the Business Roundtable’s statement “undercuts notions of managerial accountability to shareholders.”

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