Vanguard Investment Stewardship recently
laid out their policies and views on executive compensation and how they will evaluate changes made in response to a crisis such as the pandemic. The overall philosophy is straightforward: compensation policies should incentivize long-term outperformance versus peers and drive sustainable value for a company’s investors.
The publication contains clear views on actions compensation committees took in response to the crisis:
- Highlighting the experience of long-term shareholders, Vanguard “remain[s] steadfast in the view that compensation committees should not retroactively adjust performance targets or time horizons, despite the challenging environment.”
- Discretionary actions may not be appropriate in the case of mass layoffs or the acceptance of government financial aid.
- To prevent windfall risks, long-term compensation programs should reflect relative outperformance, rather than broad-based market recovery.
- Compensation committees should consider how executive compensation decisions could damage a company’s reputation.
- If modifications to the compensation structure are made, compensation committees should provide clear, detailed, and meaningful disclosure that provides appropriate context and enables peer comparison. “Periods of crisis and distress are not the time for boilerplate language.”
As a long-term investor, Vanguard tends to vote with management; As You Sow’s
annual shame-fest of CEO pay noted Vanguard voted against only 17% of Say on Pay proposals for highly paid CEOs on the list and 4% of S&P 500 Say on Pay proposals overall. Blackrock is the only analyzed firm to be less likely to vote against management (8% of CEOs on the list and 2% of S&P 500 proposals overall). However, several high profile Say on Pay failures this year have highlighted that even during the pandemic, investors (and investor watchdogs) are paying close attention to how compensation committees handle pay during unusual circumstances.
