Norway's sovereign wealth fund demands changes to executive pay.
Norway's sovereign wealth fund, Norges Bank Investment Management (NBIM) part of the Norwegian Central Bank, is reported to be "by far the largest in the world" and it's not happy with declining returns on its investment. Companies, it says, are granting salary and bonus packages that deplete companies' resources and promote short-termism in management. It says that C level executives should be properly remunerated but that dashing the cash isn't the way to do it.
In May last year, , the Norwegian government's oil-rich investment fund, announced that it was planning to review executive pay to provide protections for shareholders and better returns on investment.
Today, it has said what it plans to do about it.
First amongst the targets is so-called Long Term Incentive Plans which were, according to the London Institute of Banking and Finance, a response to the Greenbury Report on Directors' Remumeration which, in the 1990s, criticised share / stock options as a means of remunerating bosses. LTIPs are still a form of remuneration by shares, which are not options but, rather, part of a hypothecated share issue placed into trust and allocated to staff based on performance.
The Norwegian fund sees nothing wrong with shares in lieu of salary, indeed its proposals advocate expanding the scheme but subject to substantial safeguards and constraints. But its startling innovation is "Share allotment without performance conditions." In short, we'll give you shares in lieu of salary then what you earn from those share is up to you and your management team.
It says that pay should be simple, and stock grants should be complicated with a minimum period of holding (so discouraging short-termism) and that they should be subject to, what it doesn't call but amounts to, clawbacks if decisions turn out to be poor. It would also prevent C level executives selling shares to capitalise on an isolated bump in prices from a single good year or, even, a piece of good news.
The proposed minimum period of holding would be ten years, which it is hoped will reduce frequent changes at the top of many companies which is considered de-stabilising.
The Fund hopes that the idea would also, to a degree, homogenise executive pay globally: the USA pays people extraordinary amounts and some EU countries are not far behind. Norway's CEOs, it is argued, earn less even for a very similar job. Tying salaries to shares, in the way proposed, would encourage mobility of the best people while discouraging a brain-drain from those countries where salaries cannot hope to compete with the larger foreign scales.
NBIM does not intend to go it alone, and undertake forceful investor action or so it says today "We will invite peer investors to consider shared principles for effective remuneration, and we will discuss with boards how this general position could be applied, taking into consideration the company’s specific circumstances."
But it is not going to wait until the world catches up, either. It is going to immediately begin dealing with companies in which it invests.
The statement is brutally clear.
The board should ensure that remuneration is driven by long-term value creation and aligns CEO and shareholder interests. A substantial proportion of total annual remuneration should be provided as shares that are locked in for at least five and preferably ten years, regardless of resignation or retirement.
The board should develop pay practices that are simple and do not put undue strain on corporate governance. Allotted shares should not have performance conditions and the complex criteria that may or may not align with the company’s aims.
The board should provide transparency on total remuneration to avoid unacceptable outcomes. CEO remuneration should be determined and settled in cash and locked-in shares each year. The board should also disclose a ceiling for total remuneration for the coming year.
The board should ensure that all benefits have a clear business rationale. Pensionable income should constitute a minor part of total remuneration. The board should commit to not offering any end-of-employment arrangements that effectively shorten or dilute the lock-in of shares.
The objective is clear: to align the interests of directors with the interests of the company and its shareholders.
It's hard to argue with that.