Picture: 123RF / LIGHTFIELDSTUDIOS
Picture: 123RF / LIGHTFIELDSTUDIOS

Boston/London — The havoc wrought by the coronavirus crisis could give investors leverage to put new limits on CEO pay packages and link them more closely to a range of social and environmental issues at companies’ annual meetings in the next month or so.

Executive compensation is among issues expected to dominate AGMs around the world, many to be held virtually via video-conferencing, as management and shareholders weigh up the effects of the pandemic on their businesses.

Even before the economic shock, many companies were linking executives’ salaries to new measures. Now there is more political and reputational risk; bumper pay packages for CEOs, who at the top level can earn hundreds of times more than average workers, could prove a sensitive issue for companies at a time when thousands of people are dying, health systems are buckling and millions of people are losing their jobs.

Heading into the 2020 proxy season, a consensus was already emerging among boards and investors that better management of so-called environmental, social and governance-related (ESG) risks would lead to more sustainable profits.

“There is a massive corporate reckoning coming,” said Todd Sirras, MD of US consultancy Semler Brossy, which advises companies on executive pay.

He said he expected boards to increasingly adopt compensation plans tied to new metrics such as worker health or carbon emissions.

AGMs are key dates for companies, when directors seek shareholders' blessing for compensation, board line-ups and other matters.

Even before the so-called proxy season gets under way, more than 30 major companies have responded to the dire economic situation by cutting executive pay, among them aircraft maker Boeing, Qantas Airways and hotel group Marriott International.

‘It's going to be a focus’

In theory, the economic shock from the pandemic could deflect attention from nonfinancial matters in 2020, especially as more AGMs will be held virtually, which could diminish activists' influence.

Nonetheless, heading into the 2020 proxy season, a consensus was already emerging among boards and investors that better management of so-called environmental, social and governance-related (ESG) risks would lead to more sustainable profits.

In a study of roughly 4,800 North American and European companies with some type of pay incentive, roughly 11% included an environmental or social metric for the 2018 financial year, voted on at meetings held in 2019, according to leading investor advisory firm Institutional Shareholder Services.

Brett Miller, head of data solutions for ISS ESG, the responsible investment arm of ISS, estimates the figure could reach 25% for the financial year 2019 and rise even further as boards add new targets as a result of the pandemic.

Also at a time of extreme volatility in markets, directors may embrace ESG targets as something over which executives have more control, Miller said.

“When management is willing to put their compensation at risk over this, it's going to be a focus,” he added.

Most meeting agendas were set weeks before the virus was widely acknowledged as a global problem. But, despite the world changing, several big investors say they are standing by their ESG focus, including the world's largest asset manager, BlackRock.

Britain's Aberdeen Standard Investments said it planned to vote against the board composition of larger UK companies with less than a third of female directors, up from a quarter last year, while in the US it would oppose those with less than a quarter.

“The coronavirus outbreak will, in principle, have no impact — either way — on the focus that we have on encouraging ESG targets in company executive remuneration plans,” said Bill Hartnett, stewardship director at Aberdeen Standard Investments.

French asset manager AXA Investment Managers, meanwhile, said it was “cognisant” of the pandemic's corporate challenges. However, it still plans to “target laggard companies, within certain markets, where no part of executive remuneration is linked to nonfinancial ESG criteria”, said AXA corporate governance analyst Irfan Patel.

Words put to the test

CEOs of S&P 500 companies on average received $14.5m in total compensation in 2018, according to the most recent data from the AFL-CIO union federation. Among the S&P 500 the average ratio of CEO-to-worker pay was 287 to 1.

In Britain, top bosses earn 117 times the annual pay of the average UK worker, according to think-tank the High Pay Centre. High pay inequality makes poor workers vulnerable if they are laid off. Too many layoffs could interrupt consumer spending and put economies at risk.

One of those in the crosshairs of investors this year is retailer TJX Cos, where CEO Ernie Herrman was paid $18.8m in fiscal 2019. That was 1,596 times the median annual pay for all other employees, which includes seasonal and temporary employees.

TJX said on March 19 it would close all its stores in the US and Europe for two weeks in response to the pandemic, but would continue pay workers in that period. A spokesperson declined to comment on what could happen after that.

A shareholder resolution submitted for its AGM in 2020 asks TJX to consider the pay grades and salary classifications of all employees when setting CEO compensation targets, so that CEO pay is “internally aligned” with worker pay.

TJX has argued the change is unnecessary.

Jonas Kron, senior vice-president of resolution proponent Trillium Asset Management, said he hoped the measure would draw strong support.

“There has been a lot of focus on stakeholder capitalism and things like human capital management. This is a time when those words will be put to the test,” he said.

Reuters