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What’s Wrong With Executive Compensation?

LONDON – It’s annual general meeting (AGM) season for public companies around the world, and, as in previous years, one issue has been moving company news from the business section to the front page: executive pay. Companies continue to announce compensation packages for their top managers that leave people agape, not just because the gap between companies’ highest- and lowest-paid workers is so wide, but also because the compensation bears so little relation to firms’ performance.

Nonetheless, a concerted pushback has begun, led by a group that companies and their boards might actually pay attention to: their largest and most influential investors. Hedge funds, pension funds, and sovereign wealth funds are stating that they are looking closely at C-suite remuneration, and that it is time to take reform seriously.

Norway’s sovereign wealth fund, worth $870 billion, has said that it is setting its sights on pay structures. Aberdeen Asset Management and Royal London Asset Management were among a group of shareholders who strongly objected to BP’s proposed 20% increase in compensation for CEO Bob Dudley in a year when BP made record losses, and they joined 59% of investors in rejecting the package. Though the BP vote was non-binding, it was a clear signal to the company and its board.

Similarly, 54% of Renault SA’s shareholders, which include the French state, opposed CEO Carlos Ghosn’s €25 million ($28 million) remuneration package at the company’s AGM in April. It, too, was a non-binding vote, and the board chose to disregard it.