Advisory Partners
The FT Moral Money Forum is supported by its advisory partners, High Meadows Institute, Vontobel and White & Case. They help to fund the reports.
The partners share their business perspective on the forum advisory board. They discuss topics that the forum should cover but the final decision rests with the editorial director. The reports are written by a Financial Times journalist and are editorially independent.
Our partners feature in the following pages. Each profiles their business and offers a view on executive pay. Partners’ views stand alone. They are separate from each other, the FT and the FT Moral Money Forum.
Executive Compensation and Sustainability
Chris Pinney, chief executive, High Meadows Institute
Executive compensation has been an emotional issue for decades. More recently, as ESG has become a dominant investment theme, we have seen a push to include non-financial ESG metrics in compensation.
According to research by Glass Lewis, the proxy advisory service company, the number of US businesses that include some type of ESG metrics in compensation climbed to nearly half (49 per cent) of S&P 500 companies in 2021, up from 39 per cent in 2020. This varies considerably between industries. Every S&P energy company includes some form of ESG metrics in compensation, compared with 42 per cent in the information technology sector.
This might seem to be progress but it is hard to measure impact, with a central challenge being the lack of agreed standards to measure and disclose the effects of ESG strategies. This leaves the door open for greenwashing and other forms of gaming (including factoring ESG metrics into compensation).
Critics note that most companies seem to include ESG performance in short-term incentive plans (annual bonuses) rather than the long-term ones that are needed for meaningful progress on issues such as climate change.
ESG, of course, includes more than climate. A 2020 study found that less than 13 per cent of US companies that tied ESG performance to compensation used any environmental targets. Nearly 78 per cent used social metrics, with the most common being health and safety, employee engagement and training, and then workforce diversity.
The larger question is how executive compensation and ESG metrics are related to and reflect the company’s strategy. To address this, corporate boards must ensure that the ESG metrics and targets included in executive compensation reflect their company’s purpose and values. They should also be material to their business’s long-term strategy for risk management and sustainable financial success.
Typically, efforts to refine compensation metrics lead to a ratcheting up of rewards. The elephant in the room when it comes to ESG and executive compensation is that increasing compensation does not necessarily bring better performance. A 2016 study of 429 large-cap US companies found that shareholder returns of companies whose total executive pay was below their sector median outperformed companies where pay exceeded the sector median by as much as 39 per cent.
As Tom Gosling, an executive fellow at London Business School, says: "One of my big fears about this sort of stampede towards including ESG targets in executive pay is that it is likely just to lead to more pay and not more ESG. And we need to recognise that as a potentially big unintended consequence."
Another inconvenient truth is that not only does greater executive compensation not correlate with better performance, but it also directly contributes to rising income inequality, an ESG issue in itself.
The ratio of CEO-to-typical-worker pay rose from 59:1 in 1989 to 366:1 in 2020 and 399:1 in 2022. In this context, when integrating ESG metrics into executive compensation, boards may want to consider both the quantum of compensation itself and how it contributes to performance; only then should they consider additional ESG performance goals to be tied to compensation.
* High Meadows Institute’s views are separate from other advisory partners, the FT and the FT Moral Money Forum
Empowering investors to build better futures
Everyone is an investor. Whether it’s time, money, or attention that you devote, every day you put your capital to work with a goal in mind. That’s investing. And that’s what we do at Vontobel.
Regardless of where you are on your investing journey, we can help. At Vontobel, we focus on helping people put their financial capital to work. The actions of our more than 2,000 employees around the world are guided by one clear mission: empowering investors to build better futures.
Those better futures look different for everyone. Our job is not to tell you where to go, but to help you get there. We aim to provide you with the right knowledge, tools, and investment options so you’re truly empowered and in the driver’s seat.
We plan, we work, and we deliver results
All our clients have one thing in common: They come to us for active investment solutions. Whether you are a private or institutional investor, or an advisor to others, we treat you with the same level of attention.
Our multi-boutique structure enables us to offer distinct and independent options spanning equities, fixed income, and multi asset. As a leader in financial products, we provide access to expertise in structured solutions. We also offer a variety of wealth planning services. We firmly believe that bringing all of these different aspects of investing together in one investment firm has made Vontobel a clear choice for investors worldwide.
Investing is at the core of everything we do
300+ investment professionals across six independent investment boutiques and other specialist teams.
We are an ESG early mover with 20+ years’ experience
We operate our business globally as a pure-play buy-side investment firm.
Winner of awards for our products, services, and insights.
Our 6 Sustainability Commitments
With ESG issues seen by many as among the world’s most serious and urgent, ESG investing has become more prevalent in recent years. It is crucial to stay on top of what’s happening in the space and to understand what kind of challenges and opportunities present themselves across the various regions of the world.
At Vontobel, we incorporate ESG considerations into our investment process as we believe this enables our clients to better achieve their objectives. Our six sustainability commitments are:
Achieve net-zero by 2030 in our banking book investments and operations.
Continue creating a great workplace where everyone can thrive.
Empower our stakeholders to challenge us through governance and transparency.
Advise our private clients on the benefits, opportunities and risks of ESG investments.
Incorporate ESG consideration into active investment decisions.
Be an active member of the local community.
We’re with you for the long haul
Our history is one of constant growth. Underpinning this long-term success: We are both family-controlled and listed. Involvement of the Vontobel family allows us to stay the course through market turmoil, true to our strategy. Yet, as a listed company, we diligently meet strict market requirements and operate with maximum transparency. As Dr. Maja Baumann, member of the Board of Directors and 4th generation Vontobel family, succinctly explains, “As owners thinking for the long term, we support Vontobel’s efforts to play an active role in the sustainable transformation of our economy and society for future generations.”
The cost of living crisis means that investors and consumers are scrutinising businesses’ ESG credentials more closely, especially over executive pay. Despite public support for curbing excessive remuneration, legislation has been slow to catch up.
In the UK, most standards on executive pay are found in best-practice guidelines and codes published by shareholder advisory and industry groups. The advantage of this for investors is that guidance can be updated quickly to reflect changes in sentiment. The disadvantage for companies is that the risk of easy change can create uncertainty.
Remuneration legislation has been reformed relatively recently. In 2013 the rules over which topics companies had to include in their reports became more prescriptive. These reforms focused on legislating for enhanced disclosure, largely to increase transparency. The premise was that having to show any inequity between executives and their workforce would change behaviours.
The UK’s disclosure-based regime adapts better to changing attitudes and conditions, especially when it is coupled with investor stewardship. It also allows companies to fit their pay to their stakeholders. On this basis, rather than relying on legislation to control pay, perhaps the focus should continue to be on investor stewardship.
The most recent EU legislation on the topic, the Corporate Sustainability Reporting Directive (CSRD), formally adopted in November 2022, will impose mandatory ESG-related reporting requirements on in-scope EU and relevant “third country” companies. In particular, companies will have to disclose the ratio between the remuneration of their highest-paid individual and the median employee compensation. Purely from a remuneration perspective, the legislation does not significantly change the obligations placed on companies but it adds to the list of tick-box disclosure requirements.
One area where there is arguably a gap in remuneration legislation is large private companies. Most rules and guidance on remuneration apply to public companies. Private companies can set executive remuneration as they see fit; there is no need to make such policies public or to seek shareholder approval. This can create difficulties for any private company that wants to go to an initial public offering: the adjustment to market expectations can be hard.
The 2023 AGM season will be interesting from a remuneration perspective. The corporate governance committee of the OECD has flagged concerns that some boards might have rearranged the terms for executive compensation to evade or mitigate reductions in executive pay resulting from the pandemic.
Investors already want companies to disclose the steps they have taken towards supporting low-paid staff. High-level pay outcomes are likely to receive greater investor and stakeholder scrutiny, particularly in the context of rising inflation as well as windfall gains.
* White & Case’s views are separate from other advisory partners, the FT and the FT Moral Money Forum