Norwegian fund pushes CEO pay reform
CEO remuneration structures are too complicated, put too much of a strain on corporate governance and are not in the best interest of long-term shareholders, according to a position paper released recently by Norges Bank Investment Management (NBIM).
NBIM runs the Norwegian government’s global pension fund, which has a market value of roughly $955 billion and invests in almost 3,000 companies across 77 countries – that’s 1.3 percent of listed companies worldwide. In the paper, the bank advocates for issuers to use shares with long-term lock-in provisions instead of existing long-term incentive plans (LTIPs). This would make executive compensation clearer for investors to predict, the bank argues.
LTIPs are at present governed by a set of pre-defined performance targets. These targets are subject to change throughout the year due to changes in strategy or market factors outside of the control of the chief executive. This leaves investors trying to make sense of a series of different performance-based measures with different targets, according to the NBIM paper.
‘Diversified investors holding shares in a high number of companies struggle to handle this complexity effectively,’ the paper’s authors note. ‘Despite lengthy disclosures, the underlying drivers of pay often remain opaque and non-transparent. The grant-date value of share awards in this environment cannot be calculated authoritatively.’
NBIM also says LTIPs are too short-term, with an average length of between one and three years – shorter than average business and investment cycles. Instead, shares should be locked in for a minimum of five years, irrespective of resignation or retirement, the bank says. It argues that incentivizing chief executives with shares in their company would align their interests more closely with those of other shareholders.
‘It seems intuitive that executives who are long-term shareholders would to a larger extent act in the interest of shareholders than executives who are not,’ the authors write. ‘This effect would be assumed to be particularly strong if the shareholding is substantial in relation to other financial incentives and resources, and is contractually and irrevocably long term.’
NBIM cites a European academic report from 2013 that appears to show that shareholders experience greater returns from companies where the chief executive owns a substantial fraction of shares.