In 2023, we engaged with four companies for the third and last time: Adobe, Nike, Cisco and Prologis. All four have made improvements since we started engaging with them, as shown in our scoring sheet.

 202120222023Δ 2021/2023
Adobe5.15.16.11.0
Cisco5.05.45.90.9
Nike7.49.19.01.6
Prologis6.37.47.71.4

Triodos IM remuneration principles

We analyse the remuneration packages of companies with excessive remuneration using a framework of remuneration best practices. The overview below shows our remuneration principles, which we have slightly updated over the past year to keep up with new market developments.

One such development is that companies increasingly implement ESG metrics in their remuneration plans, but often-heard criticism is that the chosen metrics are either not relevant to the company, not challenging enough, and/or highly qualitative which often leads to maximum awarded CEO payouts on such metrics. Therefore, we now also assess the extent to which ESG metrics are relevant, challenging and measurable, and discussed this with the companies we engaged with in 2023.

#1: Disclosure transparency and responsiveness

  • Companies should provide clear disclosure on their remuneration plans.
  • Companies should be transparent about the calculation of payouts and remuneration policies.
  • Companies should allow for say on pay proposals and exhibit sufficient responsiveness to shareholder unrest/questions on executive remuneration.

#2: Risk-taking

  • There should be a cap on variable pay to prevent excessive risk-taking.
  • Options should not be part of the long-term incentive plan (LTIP).
  • Companies should set maximum payout thresholds for performance targets.

#3: Pay-for-performance

  • The LTIP should be primarily based on performance-based targets.
  • Companies should not include total shareholder return (TSR) as a performance metric due to its limited scope and short-term focus.
  • Payout should be based on performance metrics reflecting the real underlying company value, e.g., FCF (free cash flow) and ROIC (return on invested capital).

#4: Sustainability and alignment with long-term success

  • ESG metrics should be relevant to the business, challenging and measurable.
  • Remuneration plans should include a claw-back/malus policy*.
  • Double-trigger provisions** should be in place for severance payments in different scenarios.

 

* A claw-back/malus policy ensures that a company can recoup performance-based awards in the event of CEO fraud, restatement of results and errors/omissions.

** A double-trigger provision refers to the acceleration of equity awards based on the occurrence of two distinct events (typical triggers are a change in ownership and involuntary employee termination). It provides a safety net for the employee, for example in case of the company being acquired, and it reduces dilution for shareholders from automatic acceleration.

Since all four companies have improved their remuneration structure, now achieving satisfactory scores, we decided to keep them in our investable universe after successful engagement. However, challenges and room for improvement remain. This is mainly related to the level of CEO pay and narrowing the gap between CEO and median worker pay.

Remuneration improvements

Adobe

Most important improvements made

Adobe has introduced an ESG metric in its short-term incentive plan (STIP), related to people, organisation and culture, including diversity and inclusion. CEO-specific goals are: (1) role model a culture of feedback, learning and growth; (2) continue to make progress toward Adobe's representation goals; and (3) communicate, inspire and engage to activate Adobe's values and culture.

Remaining areas for improvement

  • Adobe does not address shareholder concerns on remuneration in its proxy statement.
  • The objectives as part of Adobe's ESG metric are rather vague and poorly quantified.
  • Adobe has no performance metrics related to cash flows and capital efficiency.
  • Performance-based payout in the long-term incentive plan (LTIP) is solely related to relative total shareholder return (TSR). We would prefer other metrics, and more diversity in metrics.

Cisco

Most important improvements made

  • Cisco has extended its claw-back policy to the STIP awards, whereas before it applied only to the LTIP. In addition, the policy is not limited to financial misstatements but now also applies to ethical misconduct.
  • In the STIP, Cisco has reduced the maximum potential payout as a percentage of target from 240% to 200%. This results in a lower chance of excessive payments.
  • Cisco has included an ESG metric in its STIP. Remuneration is now partly based on the CEO’s efforts towards providing an inclusive, safe, and healthy work environment, as part of Cisco’s 'Conscious Culture’ program. This metric is included in the CEO’s individual performance factor (IPF) scorecard.

Remaining areas for improvement

  • It is not exactly outlined how the ESG factor score is derived.
  • Cisco has no performance metrics related to capital efficiency.

Nike

Most important improvements made

  • Nike will over time increase the proportion of performance-based pay in the LTIP mix from 30% to 50%.
  • Nike has integrated an ESG metric in its LTIP. This metric considers Nike’s progress towards its 5-year Purpose targets. These include increasing the representation of women and racial and ethnic minorities, operating more sustainably with respect to carbon, waste, water and chemicals, and improving responsible manufacturing in its supply chain. As we also engage with Nike on the payment of living wages in its supply chain, it is positive that CEO pay is now also partly tied to this topic.

Remaining areas for improvement

  • The Board has discretion to adjust performance metrics and award payouts after the performance period has ended.
  • Options still make up a considerable part of the LTIP payout. Due to its non-linear payout structure, this may encourage excessive risk-taking.
  • Nike has no performance metrics tied to cash flows and capital efficiency.
  • Performance-based payout in the LTIP is solely tied to relative TSR (notwithstanding the ESG adjuster). We would prefer other metrics, and also more diversity in metrics.
  • The payout of the ’People & Planet’ modifier is holistic and not quantitative.

Prologis

Most important improvements made

  • There was shareholder backlash at the 2023 AGM after the CEO was awarded a USD 48 million payout. In response, Prologis has decided to cap the CEO annual payout at USD 25 million. Although still high, this is a step in the right direction.
  • The Prologis Outperformance Plan was eliminated, simplifying the company’s remuneration structure.
  • The company has become more transparent in disclosing how exact payouts are derived under its incentive plans.
  • LTIP awards are no longer at the discretion of the board.
  • ESG now has a 10% weight in the STIP. Before, the weight was more arbitrary.
  • Prologis has extended its claw-back policy to its STIP awards, whereas before it applied only to the long-term awards. Also here, the policy is not limited to financial misstatements but also applies to ethical misconduct.
  • Due to the addition of a new member, we now consider the Compensation Committee to be majority independent.

Remaining areas for improvement

  • Prologis can further simplify its remuneration structure by also eliminating the PPP.
  • Increasing the proportion of base salary, which is now a symbolic USD 1.

The other companies we engaged with in 2023 are Gen Digital (for the second time) and AT&T (first time, new in portfolio). And although the company was not part of our remuneration engagement program, we also discussed executive remuneration with Corbion. We are the lead investor on behalf of the Dutch institutional investor organisation Eumedion. Some positives are that Corbion now has:

  1. incorporated FCF as a new STIP metric,
  2. increased the weight of ESG in the LTIP (from 12.5% to 25%),
  3. increased the weight of ROCE in the LTIP (from 12.5% to 20%),
  4. decreased the weight of relative TSR in the LTIP (from 35% to 30%),
  5. removed full accelerated vesting of the LTIP in case of a change of control within the first term of appointment of an executive.

Continued monitoring

Even if we concluded our engagement on this topic with several companies last year, we will keep monitoring their pay levels and structure. As with the companies still in our engagement program, we will keep urging them to reduce the gap between executive pay and median worker pay. In the end, that’s our main objective.

Read more

Engaging with companies about executive remuneration