S&P 500 failing to implement diversity or align pay with performance

Mar 25, 2021
CGLytics report questions whether pandemic-driven exec pay cuts were mere ‘facade’

The largest firms in the US are failing to align their executive compensation with company performance, according to new research from CGLytics, which finds an ‘arbitrary’ approach being taken to executive pay among S&P 500 companies.

CGLytics’ second annual S&P 500 report, titled ‘Do 2020 trends foretell the future?’ questions whether the pay cuts announced by companies in the grip of the ongoing Covid-19 pandemic were a ‘facade’, with an average cut of just 6 percent on CEO pay for the financial year 2019.

Long-term incentives (LTIs) continue to dominate CEO average pay, says CGLytics, a Diligent company, with LTI awards representing more than 70 percent of the average CEO pay. Base pay, adds the governance consultancy, ‘forms an insignificant portion’. Its analysis suggests that base pay constituted only 5.9 percent, on average, of total CEO compensation in the S&P 500 in 2020.

CGLytics says that for the year in review, ‘more than three quarters of S&P 500 companies displayed a misalignment between compensation and performance.’

‘This report has highlighted the disconnect between pay and performance,’ Dottie Schindlinger, executive director of the Diligent Institute, tells IR Magazine. ‘Investors should be concerned about what ‘pay cuts’ actually mean. What investors should be looking at when a company announces a pay cut is that is that it does not have the likelihood to materialize as ‘bumper pay’ in the future.’

Some issuers actually announced salary cuts in the form of deferred restricted stock units, Schindlinger explains. ‘These measures could actually negate the whole intent of pay cuts,’ she says. ‘Investors could also introduce measures in their governance philosophies that could make it more difficult for issuers to institutionalize structural changes to remuneration policies.’ Ultimately, however, she says investor views on pay depend primarily on their governance philosophies, ‘which we have seen differ.’

She says companies could address high pay by arguing that they aim to attract the best of talent in the sector under review: ‘To ensure investors are engaged on this topic, however, they should also endeavor to start engagements with their shareholders as early as possible, ideally as soon as their boards make the decision on managements’ emoluments to ensure investors understand that their concerns are of primary interest.’

Failing on diversity

As well as looking at executive compensation, the report examines diversity at the top levels of S&P 500 companies, noting that investors are increasingly focused on diversity, particularly around gender and race.

Some progress has been made on gender, but certainly not enough. The report notes that ‘in 2008, 73 companies that are currently part of the S&P 500 did not have any female directors; in 2019 they all had at least one woman on the board. [But] the same progress has not been observed at the executive level. Only 5 percent of companies in the S&P 500 were headed by women in 2019, and women are still vastly under-represented in executive roles.’

Where proxy proposals were put forward on diversity, CGLytics also notes that support was low – despite investors being increasingly vocal on diversity. It cites Amazon as an example: its shareholders did not approve shareholder proposals to establish reports on community impacts, viewpoint discrimination and promotion data. Only 15 percent of Amazon’s shareholders voted to create a report on pay disparities based on gender and race.

Another example is Google parent company Alphabet, which did not pass any proposed motion to establish a human rights risk-oversight committee or to issue reports on racial/gender pay and sustainability metrics.

The only company in the S&P 500 that voted to establish an annual diversity report was Fortinet (69 percent in favor), says CGLytics.

‘The topic of diversity is usually a very sensitive subject for companies,’ says Schindlinger. ‘What we usually see is that companies are not expanding their scope enough at the beginning of their search to fill the board. They are still using the traditional ways of filling board seats through their own network, which is essentially a closed circle.’

She is seeing differing levels of enthusiasm within different areas of companies, too. ‘Some might have concerns about the possibility of disruption that comes with onboarding new directors, particularly those who see the world differently – and that can contribute to lackluster efforts around increasing diversity,’ she explains. ‘There might also be internal conflicts as to the level of diversity the board wants to achieve vs what management wants to achieve. Typically, as the C-suite appoints below C-level (senior vice presidents) or higher-level staff, its thirst for diversity may not be the same as that of the board, which appoints the C-suite.’

Schindlinger explains that while the vast majority of companies (81 percent in a study the Diligent Institute conducted with the ICE/NYSE in October) say their board either already has a plan for increasing boardroom diversity or will soon have one, less than half (45 percent) have a specific timeframe for meeting diversity goals – and this is a big obstacle to progress.  

‘Not setting a specific timeframe to meet the goals is going to serve as a barrier to progress for boards on diversity,’ Schindlinger says. ‘We also learned that the refreshment practices that correlate strongly with progress on diversity are the least likely to be implemented by boards.’ Specifically:

  • Only 8 percent limit directors’ terms or overall tenure
  • Only 6 percent have asked long-tenured directors to retire or resign
  • Only 4 percent have created diverse-only slates of candidates for open board seats
  • And only 3 percent have set diversity quotas.

‘These four strategies would clearly help provide natural opportunities for board refreshment and help to accelerate diversity efforts, but they are not being implemented – and are not likely to be implemented soon.’

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