Council of Institutional Investors

PGGM Plans to Play Hardball on Pay with Portfolio Companies
Thursday, July 9, 2015
by: Rosemary Lally

Section: CII Governance Alert




Pension fund manager PGGM recently committed to using its tough new pay guidelines when dealing with its portfolio companies. In its Remuneration Guidelines for Portfolio Companies, it pledges to “take affirmative action against the most excessive remuneration practices in our portfolio.” This action includes engaging with the firms, and, if efforts do not lead to the desired outcomes over time, excluding these companies from PGGM’s investment portfolio.

The guidelines also say PGGM will no longer support the following pay practices that it views as heavily aligned only with management’s interests and not with the creation of long-term returns and/or the interests of a broader stakeholder group:

• Contractually agreed-upon minimum bonus payments
• Previously unvested incentives that were awarded for retention purposes when a new employees was hired
• Accelerated vesting of variable remuneration
• Pay plans that do not include clawbacks for recouping variable remuneration under certain circumstances
• A lack of transparency about different types of termination payments made
• Payment of variable remuneration when the environment or society is negatively impacted by a company
• Payment of variable remuneration in the form of stock

“Fixed salaries are payment for achieving what is expected; only performance that meets or exceeds challenging targets should result in grants of variable remuneration,” asserts the PGGM guidelines. They also specify that variable remuneration should:

• only take the form of restricted common shares of the company and/or cash, with a preference for restricted common shares
• vest over time in five equal annual installments
• be held through to a minimum of one year after departing from a company, provided the vested variable incentives are retained for a minimum period of five years
• be subject to maintaining the favorable conditions under which the awards were first granted
• be clawed back when granted on the basis of incorrect financial information
• be clawed back when they have led to decisions that have had negative impacts on society and/or the environment
• be limited to a reasonable multiple of fixed remuneration per individual per annum

Furthermore, the guidelines say when an employee or member of management leaves voluntarily, they should forfeit any rights to unvested incentives.

In her introduction to the guidelines, Catherine Jackson, PGGM’s senior advisor of responsible investment, notes that they will be phased in over the coming years. “We have already incorporated some changes into our voting guidelines, and will continue to do so. Our practice of engaging with companies will continue, but our engagements will be much more focused than they have been in the past,” she added.
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