How Institutional Investors Influence Executive Pay
Feb 27, 2025
25:57
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Quick takeaways
Institutional investors, owning 70-80% of firms, significantly influence executive pay through non-binding votes and engagement practices.
The conversation around executive compensation is evolving toward flexible performance metrics that better align with industry-specific realities.
Deep dives
The Influence of Institutional Investors on Executive Compensation
Institutional investors, such as large asset managers and public pensions, hold significant ownership stakes in public companies, with estimates showing they own 70 to 80% of most firms. This vast ownership gives them substantial influence over executive compensation practices, especially through non-binding shareholder votes that allow them to express their opinions on pay packages. When a company receives a weak vote, it typically leads to engagement with these investors to understand and address their concerns, which often focus on the performance-based aspects of compensation. This process highlights the growing complexity of executive pay and the importance of aligning compensation with long-term performance metrics.
Engagement Between Companies and Investors
Engagement between companies and institutional investors plays a crucial role in shaping executive compensation packages. Companies are increasingly proactive in reaching out to their major investors to gauge their perspectives, especially before issuing proxy statements. This dialogue enables companies to clarify the rationale behind their compensation structures while also seeking feedback to enhance investor confidence. Firms face challenges when trying to balance varying expectations from different investors, making these engagement efforts essential for maintaining positive relationships and ensuring that executive pay is perceived as justified.
Evolving Perspectives on Compensation Metrics
The conversation around executive compensation is evolving as institutional investors reconsider traditional metrics used to evaluate long-term equity awards. While there has been a historical push for performance-based compensation over a fixed three-year term, there is now a growing acknowledgment that this may not be suitable for all companies, particularly in industries with longer product cycles. As a result, investors are advocating for a more flexible approach that considers company specifics and the nature of their performance metrics. This shift reflects an overarching aim to ensure that incentive structures align more closely with company strategies and industry realities, rather than adhering to a one-size-fits-all model.
Today's episode dives into the voice that shareholders have and how executives are paid, including large institutional shareholders. What does that relationship look like between investors and companies, and how does this affect CEO pay?
Host Curt Nickisch chats with Bob McCormick, Executive Director at the Council of Institutional Investors, and Charlie Tharp, Professor of the Practice at Boston University Questrom School of Business.
