‘Tone Deaf’ Executive Pay Is Virus Focal Point for ESG Investors

(Bloomberg) -- With millions out of work or now reliant on the government for their pay checks, ESG investors are preparing to scrutinize executive pay like never before.

While a number of companies had already begun to link the compensation of top managers with their performance on social and environmental issues before this year, the idea is set to gain much greater traction following the coronavirus outbreak, according to $1.1 trillion asset manager Nuveen LLC. The economic consequences of the spreading Covid-19 pandemic will cause investors to question the existing structure of executive pay and how to incentivize corporate bosses to put greater focus on environmental, social and governance issues, said Peter Reali, Nuveen’s New York-based head of engagement.

“No compensation plan will be left unchanged by Covid-19,” Reali said. “Companies can’t afford to be tone deaf on compensation in terms of the societal context, and the virus will only further the conversation among investors on how ESG should impact wages, bonuses and incentives for executives.”

Fallout from the deepest worldwide downturn since the Great Depression, which has seen businesses respond to lockdowns by laying off staff or putting them on furlough programs, is unevenly distributed and has magnified economic and social inequality from the U.S. to Italy. With this context, executive payouts will be followed more closely than ever, as will the metrics by which managers are graded: Are bosses encouraged to think only of the company’s share price, or are managers also looking at how they treat their employees and the environment?

Companies across the world, including Barclays Plc, L’Oreal SA and Renault SA, have reduced the compensation of senior executives in recent weeks because of loses from the global pandemic.

Guggenheim’s View

Scott Minerd, the chief investment officer of Guggenheim Investments, said in a note on Sunday “the most financially vulnerable households are experiencing the majority of layoffs” and a tepid economic rebound could lead to a “populist revolt to address massive inequality of income and wealth” in the U.S. Soon “pressure will mount on policymakers to bolster the social safety net and increase things like health care and job security, and maybe even institute a guaranteed living wage,” he said.

The International Corporate Governance Network, which is led by investors that oversee $54 trillion of assets, said last week that executive pay “should reflect the experience of the overall workforce, particularly in relation to staff redundancies, furlough programs, pay level reductions or bonus awards.” Remuneration policies should “seek an equitable treatment of ordinary staff with that of senior executive management and financial sacrifice appropriately shared.”

Tying executive pay to ESG targets is not a new idea — a Bloomberg analysis last year revealed 500 corporations worldwide from Danone SA to General Motors Co. already do so to some extent — but coronavirus will accelerate the trend. And there is plenty of room for improvement: Deloitte said earlier this month that just 14% of companies in a survey of 350 global executives currently tie senior leaders’ compensation to environmental-sustainability goals.

Compensation Programs

And even for those companies that have ESG-linked pay policies, it’s often not clear how those ESG factors actually impact pay outcomes, Reali said. Nuveen says it expects boards of directors to establish executive compensation programs that both “appropriately incentivize and hold accountable” executive management and which should include environmental and social metrics “where material.”

The 2020 proxy season, which kicked off this month, could prove a good test of growing investor interest in the topic, said Reali. The response to shareholder proposals on pay filed late last year at companies such as Apple Inc., Amazon.com Inc. and United Airlines Holdings Inc. will be illustrative of how investors continue to view ESG as an investment risk, he said.

“Covid-19 only highlights the importance of ESG, which should have already been part of the conversation around issues related to supply-chain risk and health and safety of workers,” said Reali. “It also exposes companies that are unable to deal with future incidents of rapid and unexpected global turmoil where there’s some big shock to the market. Some would say climate change falls into that category.”

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