Norway’s $1 trillion sovereign wealth fund last year sent a clear message to big US companies: You should rethink how CEOs are paid.
But 18 months after publishing its contrarian views on executive compensation, there’s scant evidence the fund that owns 1.4 per cent of the world’s publicly traded stock is taking directors of major American firms to task.
In the past year, the investment pool endorsed executive compensation plans at about the same clip as the largest US asset managers and at a far greater rate than several European peers. While the fund has said it wants to sell its ideas through discussion rather than ballots, some corporate directors and governance advisers question the chances of gaining much traction.
“The paper presupposes we live in a perfect world where all interests are aligned,” Les Brun, Merck & Co.’s lead independent director, said of the document on executive pay the Norway fund published in April 2017. “Different companies require different drivers to create value—and compensation programmes should reflect that.”
Trond Grande, deputy chief executive officer of Norges Bank Investment Management, which oversees the sovereign fund, said at a news conference on 21 August there’s been “increased dialogue” with some companies that’s been “mainly positive and constructive.”
“We have to some extent increasingly voted against pay packages that haven’t been in line with our principal views,” Grande said. Representatives for the fund declined to comment further.
In the past year, the fund opposed executive compensation plans at eight per cent of the 380 or so S&P 500 companies it holds. That mirrors votes by major US asset managers BlackRock Inc., Vanguard Group Inc. and State Street Corp., which rejected three per cent to seven per cent of pay plans for firms in the index, according to data compiled by Bloomberg and Proxy Insight.
Some European investors took a more radical approach. The asset-management businesses of Paris-based BNP Paribas SA and Deutsche Bank AG opposed or abstained from voting on pay plans for two-thirds and one-fifth of companies in the index, respectively.
The similarity between the Norwegian fund’s voting record and those of US asset managers is striking given their different views on compensation.
Following a string of corporate scandals in the century’s first decade and the 2008 financial crisis, several large institutional investors—including BlackRock, Vanguard and State Street—began pressuring companies to link compensation more closely with firm performance.
Since then, boards have scaled back on cash bonuses and stock options—which some say put undue focus on boosting share prices—and instead pay executives mainly with restricted shares that vest only if specific performance goals, such as revenue or stock returns, are met. Each have said they want pay plans that contain incentives tied to performance to help set up companies for long-term success.
The Norwegian fund, by comparison, questioned the very idea of using incentives for “complex undertakings such as managing a listed company.”
“Designing a robust set of CEO targets is notoriously difficult on a multiyear horizon,” the fund said in its position paper, adding that “engineered incentives crowd out the intrinsic motivation of the CEO.” It also pointed to research that suggests there’s currently no definitive correlation between overall levels of executive pay and firm performance.
Top employees should instead get most of their compensation in restricted shares, free from performance conditions, that can’t be sold for “at least five and preferably 10 years,” the fund said. Pay plans should focus on “the impact that the holding of shares has on aligning incentives, rather than the award of shares.”
The fund’s aversion to performance conditions also is at odds with the two biggest proxy-advisory firms. Both Institutional Shareholder Services Inc. and Glass Lewis & Co., which offer recommendations on how investors should vote at annual meetings, tend to criticise pay plans that lack links to specific goals.
Locking up executive awards for a decade or more goes well beyond the customary three- or four-year vesting periods at US firms. While it may nudge executives to think longer-term, forcing them to keep “all their eggs in one basket” could make them exceedingly risk-averse, said David Larcker, a professor of accounting at Stanford Graduate School of Business.
To be sure, the Norway fund has said it realizes that regional differences in compensation levels and practices will remain, despite its entreaties. A majority of the roughly 9,000 public companies it holds stakes in are based outside the US.
Still, a large number of the world’s best-paid executives work for US companies, and some peers at big firms overseas look to them to gauge what their services could be worth.
Another key point from the fund’s paper was setting a cap on total CEO compensation to avoid “unacceptable outcomes.” No major US firm has such a policy in place. And with executive pay by some measures having grown about 1,000 per cent in the past four decades, hopes for overall payout limits seem unlikely.
The market for skilled executives, “like any other market, is driven by supply and demand,” Merck’s Brun said. “How do you cap the value of that which is in demand?”