When it comes to executive compensation issues at the corporations in CalPERS' portfolio, pension fund officials have made corporate board member actions personal.
In 2020, the $410 billion California Public Employees' Retirement System, Sacramento, for the first time voted against compensation committee members when voting against executive compensation plans, said Simiso Nzima, investment director and head of corporate governance, in an interview.
In the 2020 proxy season, CalPERS voted against 2,716 board members on the annual meeting ballot due to their roles as compensation committee members in failing to properly align executive pay and performance.
If CalPERS officials are unhappy with a company's compensation plan, they are now holding corporate directors accountable for failing to institute a plan in which executive pay and performance are aligned, Mr. Nzima said.
Out of 2,256 say-on-pay votes cast as of June 30, CalPERS voted against the executive compensation plan 52% of the time, down slightly from 53% during the 2019 proxy season. CalPERS voted against compensation committee members at every company it voted against executive pay. It did not vote against members who had been on the compensation committee for a year or less, he added.
"I don't think others of our size are voting against members of compensation committees," he said.
Since say-on-pay votes are advisory, voting against compensation committee members is a way to hold company executives accountable for their actions.
"We don't want to say that we don't like what you are doing, but will vote for you anyway," he said.
Typically, say-on-pay shareholder proposals are supported by an overwhelming majority of shareholders. Executive compensation proposals received 90% average support in the 2020 proxy season, about the same as last year, according to analysis from Willis Towers Watson PLC released in September. The majority of shareholders voted against 3% of say-on-pay proposals in 2020, also flat with the year-earlier proxy season.
The Willis Towers Watson analysis was based on information from 2,003 Russell 3000 companies from Jan. 1 to July 17.
Proxy advisory firm Institutional Shareholder Services Inc., Rockville, Md., recommended negative votes on say-on-pay proposals 11% of the time in 2020, down from 13%. ISS recommended shareholders vote against compensation committee members at only 14% of the companies at which the most shareholders voted against say-on-pay proposals, Willis Towers Watson analysis revealed.
This is the second year CalPERS has used a new five-year quantitative pay-for-performance model as part of the framework it uses to review executive compensation proposals, Mr. Nzima said. CalPERS officials compare the pay of the company's CEO with the pay of his or her peers. For example, if a CEO's compensation is in the 50th percentile but the company's performance is in the 25th percentile, then the CEO is being overpaid relative to peers, he explained.
CalPERS officials also consider the CEO's compensation compared to rank-and-file workers, Mr. Nzima said. The problem is that how companies pay contract workers is not standardized. Every company uses a different business model for employee pay relative to its peers, he said.
Also new this year, CalPERS not only voted against committee members when it voted against say-on-pay plans, pension plan officials followed up with requests to discuss their votes with company executives.
The response rate was low, 30% as of the end of August, most likely due to the pandemic, Mr. Nzima said. He added that the rate is likely to rise as some companies wait to respond to meeting requests in September, October and November.