Op-Ed by Former Head of UK Investor Association Argues for Simplification of Executive Compensation Design
March 4, 2017
A recent Op-Ed in the Financial Times by Daniel Godfrey, founder of the UK-based The People’s Trust, argues that to rein in executive compensation, an approach that combines cash with regular deferral into long-term equity would be simple, transparent and “over time, bring down both absolute amounts [of pay] and inequality.” Mr. Godfrey served as the head of the Investment Association, the trade body for UK-based asset managers until he resigned under pressure in 2015, and since has founded the People’s Trust, an investment trust he founded to operate according to the principles he sought to instill at the association. The principles in his op-ed reflect comments heard in the US from both companies and investors: “Pay needs to align incentives to sustainable, long-term wealth creation, reversing the short-termism of the current model.” “Leadership and performance management by boards need to be restored, not abdicated to pay formulas.” “Pay needs to be simple and transparent.”
Under Mr. Godfrey’s suggested approach, shareholders should trust the Board to identify senior leadership talent and decide how much is required to attract and retain them, and Boards “should explain their thinking to shareholders.” However, rather than provide the bulk of pay through incentives, compensation should be provided in salary only, but a significant amount would be paid in company shares purchased monthly at market price that would be held for at least seven years. Mr. Godfrey acknowledges that some individuals may need more support for retention purposes, but ongoing lack of performance should be cause for replacement, and the process would put more pressure on compensation and nominating committees. The approach to some extent mimics the use of “salary stock” under TARP and similar programs, in which organizations subject to restrictions on incentives, paid executives in fully vested stock that could not be transferred for a certain amount of time, usually 1-3 years. The approach limited incentives, but some firms reported that it created an entitlement mentality among employees.
Mr. Godfrey’s approach reflects growing concern among large investors regarding the complexity and effectiveness of incentives and overall executive compensation. In a thought piece to Subscribers last year, the Center asked whether a simpler approach should be considered that used larger annual incentives and deferral into long-term restricted stock was worth consideration. It is available on our website here.