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Say-on-pay voting—those shareholder votes on remuneration at company AGMs—is not being used for “steering companies toward a more sustainable path”, according to new research.

The conclusions come from London School of Economics law professor Suren Gomtsian after placing investor votes and their reasons under a microscope.

The study looked at voting patterns from 2013-2021 and found that few investors—there are exceptions—have used their votes on executive pay to boost corporate performance on ESG.

In an article for the Oxford Business Law Blog, Gomtsian writes: “Say-on-pay is largely an unused tool in the quest of steering companies towards a more sustainable path: except for a small number of asset managers and pension funds… investors do not at present demand linking executive pay with environment or social targets on a broader scale.”

He adds that, on the other hand, investors do not oppose the use of pay as a tool to promote ESG performance.

Gomtsian’s findings come amid other research that indicates executive pay remains the greatest focus for shareholder dissent at AGMs across Europe. And while median pay for CEOs in the FTSE 100 continues to grow, the High Pay Centre, a think tank, said in its most recent report last month that CEO median pay rose 16% from 2021 to 2022, and now stands at 118 times that of the median UK full-time worker’s pay.

Competitive remuneration

That said, some in the City have tried to prompt a debate on potentially further raising CEO pay levels to compete with remuneration in other markets.

Reports towards the end of last year suggested some jurisdictions were beginning to link pay and ESG, most notably the US. A US think tank, the Conference Board , said research suggested 73% of S&P 500 companies tied pay to “some form” of ESG performance.

Elsewhere, research from London Business School suggests 45% of FTSE 100 companies have an ESG target in variable pay components of executive wages.

While that might be the case, Gomtsian’s researchers are yet to find ESG and pay a cause of voting dissent. Only one in five (20.7%) said in 2021 that ESG and pay was a reason for the way they voted. Though that is a rise on the less than 3% the previous year.

Among proxy votes, Glass Lewis appears to have made no voting recommendations based on ESG, while ISS has done so on 3.3% of say-on-pay votes. For independent voters the figure is just 2%.

Reasons given for worries about ESG and pay mainly focus on the “opacity” of the metrics used in calculating ESG-based pay components.

‘Tangible’ metrics

Institutional investors, Gomtsian says, prefer “tangible”, “quantifiable” financial metrics.

“By contrast, opaque qualitative targets can be manipulated to increase the level of pay, thus weakening investor oversight,” he writes.

In one explanation, an investor says it was “hard to judge” whether non-financial targets were “stretching or not”.

The main reasons for investor engagement on executive pay include the long-standing issues of structure and volume of pay, links between pay and performance, and disclosure.

Gomtsian also found that many UK investors tend to step away from proxy advice to engage with companies over pay individually.

There are concerns that regulators may need to monitor and act on some issues uncovered by the research. UK shareholders are in decline and foreign shareholders, reliant on proxy advice, are increasing.

This reliance on proxies places greater importance on governance standards.

That could, in turn, mean ESG or non-financial targets should be integrated into local governance codes or proxies could borrow standards from elsewhere.

Lastly, Gomtsian recommends the stewardship code encourages “pre declaration” of voting intentions, so smaller investors can see the thinking of their larger, better resourced, colleagues.

There is an intense focus currently on the AGM season. Seeing how and why investors vote the way they do raises key questions for corporate governance.

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