In the United States, the CEOs of the largest 350 companies earn more than 300 times of what the average worker makes. Total remuneration packages (salary, pension costs, variable performance pay, share options and other bonuses) are on average USD 16 million, compared to the average salary of USD 53,000. In 2000, the gap was even higher at 376 times, in 1995 122 times, whereas in 1965 it was only 20 times. Outside the US, CEO remuneration is usually more moderate, but excessive payments are occurring with increased frequency. In the Netherlands the average gap is 40 to 1, but in individual companies, such as RELX (formerly Reed-Elsevier) and Heineken, the ratio touches 200 to 1 and higher.

Rising opposition

Politicians, regulators and investors are gradually becoming more active in their opposition to excessive remuneration. At financial institutions within the EU, the variable pay (which is often at stake when controversies occur) may not exceed more than 100% of the fixed pay component. If shareholders vote to agree, this may be stretched to 200%. In The Netherlands, the proportion of variable pay is restricted to just 20%. In the US, from 2017 onwards, publicly listed companies will have to publish the ratio of wage gap between the CEO and an average employee. Investor platforms such as International Corporate Governance Network (ICGN), the UN Principles for Responsible Investment, and Eumedion have been seeking transparency and moderation for several years. Large pension funds such as Californian Calpers and Dutch PGGM often oppose ‘say-on-pay’ resolutions at shareholders meetings.

Before we invest

During the assessment of a company for potential investment, we investigate the different aspects of compensation and are currently considering extending our requirements. We scrutinize pay-related controversies and closely follow cases of massive shareholder protest. In the past, we have rejected companies from potential investment because shareholder concerns were ignored, for example Novartis and Oracle. If there is reason to, we will do so again.

Keeping a close eye

We remain critical of the remuneration practices of the companies we invest in. This year during annual general meetings, we have opposed 75% of say-on-pay resolutions. Our main reasons were lack of transparency, no challenging targets for the variable component, no sustainability related targets and excessive payments. When preparing our voting decision, we look at the CEO’s total compensation, the ratio between their fixed and their variable salary (bonuses), and the ratio between the CEO’s remuneration and the average wage within the company. We also take into account if the company has a so-called ‘claw-back’ provision – a special contractual clause which allows employers to pursue the repayment of bonuses if, after some time, it appears that the bonus was based on misleading accounting statements. In the US, such a provision is compulsory, but in other countries this is often not the case. As we do not want to reward failure, we also review if an increased remuneration aligns with an increase in company performance.

Note: The issues explored in this article are relevant for sustainable investments on the stock market. Triodos Bank believes that our socially responsible investments are a powerful means of promoting our values and working for greater sustainability, while enabling us to offer a complete range of attractive investment options to customers who choose to invest on the stock market.