The in-house manager of the world’s largest sovereign wealth fund wants proxy advisers to favor longer-term pay incentives for CEOs of U.S. companies over structures that are targeted at shorter time horizons.
Norges Bank Investment Management made the plea to proxy-voting firms Glass Lewis and Institutional Shareholder Services, which have invited market participants to respond to their annual policy surveys by Aug. 30 and Sept. 5 , respectively. The surveys are part of the proxy advisory giants' reviews of their voting policies.
In separate letters dated Aug. 21, NBIM — which manages the assets of the 17.74 trillion Norwegian kroner ($1.64 trillion) Government Pension Fund Global, Oslo — said its $628 billion equity portfolio holds shares of 1,803 companies, including most of the S&P 500. It has an average ownership holding of 1.1%.
The wealth fund has long advocated for simpler pay structures, with CEOs building up and holding shares for the long term, and set out its position in a 2017 paper. It voted against 314 pay packages globally in the first half of 2024, with the U.S. market accounting for about 37% of those votes, according to an NBIM report
The two firms had asked market participants for views on performance shares — shares that the CEO of a company earns if certain benchmark or performance conditions are met over a set period of time — vs. simpler, longer-term equity incentives. “The question is appropriate because proxy advisors’ policies have substantially narrowed the freedom that compensation committees believe they have in the choice of incentive designs,” NBIM wrote in the letters, which were co-signed by Carine Smith Ihenacho, chief governance and compliance officer, and Ola Peter Krohn Gjessing, lead investment stewardship manager.
The sovereign wealth fund wants ISS and Glass Lewis “to no longer view performance shares as favorable compared to simple equity incentives,” and also suggested that equity grants with longer time horizons are seen in a more favorable light vs. those with shorter time horizons. It is more likely to support a pay report if the vesting schedule — which details when an employee can take benefits or vest their shares — is at least five years long, “or if a long-term and meaningful equity exposure for the CEO is secured in comparable ways,” the letters said.
NBIM added in its letters that companies not offering performance share units — known as PSUs — face “a markedly higher risk” of ISS and Glass Lewis recommending that clients vote against the ‘say on pay’ at annual general meetings. “We observe in our engagement with U.S. companies that this policy has provided a strong impetus for compensation committees, and subsequently the board of directors, to grant performance shares even if their preference was to incentivize the CEO on long-term stock performance more directly and transparently through simple, restricted shares,” it said in the letter to ISS.
It also noted that ISS said in its survey that a growing number of investors have become “skeptical, or even critical, of performance equity practices in U.S. executive pay. We believe this is an accurate statement. Paradoxically, PSUs have at the same time grown in popularity among U.S. listed firms, often in the belief that investors prefer this incentive design,” NBIM wrote.
The letters are available for download on NBIM's consultations website.
