The Council of Institutional Investors on Sept. 17 overhauled its policy on executive compensation, urging public companies to dial back the complexity of their plans and set longer periods for measuring performance for incentive pay.
The update suggests firms explore adopting simpler plans comprised of salary and restricted shares that vest over five years or more. “For some companies, emphasis on restricted stock with extended, time-based vesting requirements—for example, those that might begin to vest after five years and fully vest over 10 (including beyond employment termination)—may provide an appropriate balance of risk and reward, while providing particularly strong alignment between shareholders and executives,” the CII’s policy states.
The policy recommends companies consider barring the CEO and CFO from selling stock awarded to them until after they depart. “The ownership guideline should apply until at least one year following the executive’s departure from the company,” the CII said. “Those not in compliance should be barred from liquidating stock-based awards (beyond tax obligations) until satisfaction of the guideline.”
The updated policy also:
- Suggests boards and investors step up their scrutiny of performance-vesting shares;
- Recognizes rank-and-file pay as a valid “reference point” for setting executive pay at appropriate levels; and
- Expands the circumstances under which boards should have legitimate discretion to claw back executive pay.
“The policy revision reflects concerns on excessive complexity in U.S. executive pay plans and questions on the effectiveness of some approaches to pay-for performance,” said CII Executive Director Ken Bertsch in a statement. “Steadily rising average pay, even when market performance is mediocre, suggests that pay-for-performance can be a mirage.”