Council of Institutional Investors called on companies to simplify their executive compensation plans and allow a longer time frame for measuring performance for incentive pay.
The revised policy, announced Tuesday at CII's ongoing fall conference, "reflects concerns on excessive complexity in U.S. executive pay plans, and questions the effectiveness of some approaches to pay-for performance," said Ken Bertsch, CII executive director, in a statement.
Mr. Bertsch said that despite mediocre market performance, average executive pay is steadily rising, which "suggests that pay-for-performance can be a mirage."
The new policy acknowledges that corporate boards of directors need to tailor pay packages to their specific company, but it recommends that firms consider adopting "simpler" plans for salary and restricting how long it takes stock shares to vest to five years or more. The policy also recommends that companies consider barring CEOs and chief financial officers from selling stock before their departures to keep management focused primarily on long-term success.
Boards and investors should also take a closer look at stock awards based on achieving corporate performance milestones, the policy said. Performance-vesting shares might work well for some companies, but CII found that recent research does not support whether there is a strong enough connection to long-term company performance, in part because goals and metrics can be too numerous or hard to understand.
The new policy expands the circumstances for which boards should be able to claw back executive pay such as financial restatements, personal misconduct and ethical lapses that harm the company's reputation.
It also addresses the widening gap between compensation for workers and executives by recognizing rank-and-file pay as a valid "reference point" for setting executive pay.
Separately, the House Financial Services Committee prepared to approve legislation Wednesday that would require public companies to disclose the pay raise percentages of executives and median employees over the past year and compare each to the rate of inflation. The committee heard testimony in 2018 and 2019 that CEO compensation has continued to rise while median worker wages have remained stagnant and have not kept up with inflation. According to Economic Policy Institute data, the average CEO of the 350 largest firms received a 17.6% raise in 2017, while the typical worker's raise in those same firms was 0.3%.