Executive Compensation Proposals
Strive views the advisory vote on executive compensation (“Say-On-Pay") as the single most important opportunity to use the shareholder voice on the proxy ballot. While say-on-pay votes are non-binding, the potential for misalignment between executives’ and shareholders’ interests focuses corporations and shareholders alike on incentives that will drive management in the coming fiscal year.
During the 2023 proxy season, Strive voted against 52 percent of say-on-pay proposals, primarily due to the presence of opaque, non-financial factors, such as ESG and DEI included in compensation metrics.
The inclusion of ESG metrics in executive compensation has grown at an alarming pace over the last year, with 73 percent of S&P 500 companies incorporating some form of ESG metric into their compensation plans in 2023—up from 68 percent in 2022.[27] Such metrics reward executives with lavish bonuses for cutting carbon emissions, using race-conscious hiring to meet preset quotas, and meeting other ESG goals, even when doing so hurts the company’s bottom line. They thereby encourage executives to put their own financial interests ahead of those of their shareholders.
Those who support ESG-linked executive compensation packages typically claim that these policies are aligned with shareholder interests and promote long-term strategic initiatives, which in turn increase shareholder value. However, a 2022 survey of corporate governance professionals found that 90 percent of respondents selected “Signaling that ESG is a priority” as a driving factor in their decision to include ESG performance goals in executive compensation programs.[28] Other studies have confirmed that linking executive pay to ESG goals does not help the company’s bottom line.[29]
The consequences of ESG-related incentives thus reach far beyond the compensation plans themselves: By implementing such immaterial targets for executives, companies discourage management from achieving strong financial results and avoiding risk—in other words, to sacrifice company performance in order to pursue ventures that provide little value to the company and its investors.
Properly balancing risk and strategic opportunities naturally requires the inclusion of some qualitative metrics in the executive compensation plan or executives would simply emphasize maximization of existing revenue streams, potentially missing opportunities for innovation.
But ESG-infused executive compensation plans are not only vague, but also counterproductive, as they motivate executives to focus on value-destroying ESG initiatives rather than value-accretive innovation, resulting in excessive pay to executives even in the wake of poor financial performance.[30]
Given these concerns, Strive voted against ESG-linked executive compensation plans because, in our view, they destroy value, rather than enhance value, and are therefore unlikely to generate long-term financial gains for our clients.
This past year, Southwest shareholders were asked to vote on a proposal to approve the company’s 2022 executive compensation awards.[31] Southwest’s 2022 executive compensation, however, was among the most troubling awards that we saw. In December, Southwest cancelled over 16,000 flights, stranding tens of thousands of customers amidst the busy holiday season and costing the company more than $1 billion.[32] Its CEO, Bob Jordan, was nonetheless able to collect a record $5.3 million in total compensation, including a discretionary bonus amounting to nearly a million dollars due to the fact that Southwest’s compensation plan ties a significant portion of executive pay to ESG metrics. In Southwest’s case, the Compensation Committee rewarded leadership for exceeding expectations on “DEI and sustainability,” thus allowing management to retain a significant portion of their bonuses despite the billion-dollar loss to shareholders. Because Southwest’s 2022 executive compensation package emphasized non-financial environmental and social goals over business initiatives likely to generate long-term financial returns, Strive voted against this proposal.
This past year, Nike held a say-on-pay vote asking shareholders to approve its compensation plan.[33] Nike’s executive compensation structure includes a “People & Planet modifier” through which an executive can lose up to 20 percent of his stock awards or earn up to a 20 percent bonus based on the company’s progress towards achieving its “Purpose” targets. These goals include strict racial and gender quotas for leadership positions, minimum spending metrics for minority suppliers, and a 70 percent reduction of their carbon emissions by 2025.[34] Because Nike’s executive compensation practices encourage executives to put other stakeholders ahead of their own shareholders, Strive voted against the 2023 say-on-pay proposal.
Because we believe executive compensation is critical to holding executives accountable to shareholders, we believe investors should regularly be able to provide input on such packages. We therefore generally support annual say-on-pay votes, although we may consider supporting less frequent votes on a case-by-case basis so long as shareholders had an immediate opportunity to vote down any efforts to tie executive compensation to ESG metrics.
