Executive pay: What’s in a number?

Questions about pay are also timely. For a variety of reasons – rising income inequality, the debate around ESG targets and slower growth in corporate profits – executive remuneration is coming under increasing scrutiny. In many cases, corporate remuneration policies are shaped by consultants who benchmark their recommendations against peer groups that the company’s managers have selected themselves. This can lead to a reflexive, upward spiral in executive compensation that is disconnected from a company’s actual performance.

Research firm Sustainalytics looked at six instances in the July 2023 to June 2024 voting period in the US when companies’ remuneration policies did not receive majority support from their shareholders. It found that “a typical feature of these outcomes is that shareholders’ and CEOs’ fortunes diverged dramatically: CEOs took home handsome paychecks while shareholders saw their value erode.”1

One particularly striking example of a shareholder revolt on remuneration involved a pharmaceutical company in the US whose executive pay package was supported by just 20% of its shareholders in 20222. Investors who bought its shares at its initial public offering in 1993 lost more than 90% of their initial investment over the next 30 years – a stark reminder of the consequences of misaligned incentives.

Does the ‘perfect’ remuneration policy exist?

As investors, we spend a significant amount of time analysing the remuneration structures of the companies we look at. Those structures offer us valuable insights into corporate culture, time horizons, and the degree of alignment between a company’s management and its shareholders. Over time, we’ve drawn three main conclusions:

1. There is no such thing as a perfect remuneration structure.
2. No amount of compensation can turn a poor employee into a good one (but it is possible to turn a good employee into a poor one through misaligned incentives).
3. The principal-agent problem arises when the interests of an ‘agent’ (such as a company’s managers) are not aligned with those of the ‘principal’ (its shareholders). We believe the most effective way to mitigate this problem is to hire the right people.

Examples of long-term thinking

While no remuneration structure is perfect, there are a few interesting examples that stick in our mind. The first is Watsco, a US-based heating, ventilation, and air conditioning (HVAC) distributor that uses something it calls “long-term cliff-vesting.” Its restricted stock vests only at retirement (typically at age 62 or over). Over 97% of the shares that this company has awarded over the past 23 years remain unvested, reinforcing long-term alignment3.

The second is Handelsbanken, a Scandinavian regional bank. It has internal profit-sharing funds that grow over time and that only pay out when employees reach the age of 60. These funds are invested in the bank’s own shares, and every employee, from its junior staff through to its senior executives, receives the same allocation based on the bank’s performance. This creates a culture where the long-term health and growth of the bank is a shared priority.

One of the most powerful aspects of long-term remuneration structures such as these is that they are inherently self-selecting: they naturally attract individuals who are thinking in terms of decades rather than quarters. If someone is planning a 20- or 40-year career, they’re more likely to be drawn to environments that reward patience, consistency, and long-term value creation. This, in turn, tends to foster decision-making that is thoughtful and sustainable. That outcome stands in stark contrast to corporate environments driven by short-term incentives like annual bonuses or stock options that vest quickly. Over time, this difference in mindset can have a profound impact on the quality of a company’s leadership, on the resilience of its business, and on the outcomes its shareholders see.

What makes a good remuneration structure?

We believe strong remuneration structures share three essential characteristics.

1. They are long-term in nature, encouraging decision-making that spans business cycles rather than quarters.
2. They are simple and easy to understand. (Sadly, many listed companies produce excessively long and complex proxy voting statements; some run to 100 pages).
3. They rely on straightforward tools, such as awarding shares, rather than on complex financial instruments.

Ultimately, while no remuneration structure is perfect, it is critical that shareholders understand how the incentives of the people who guide a business align with their own. In the absence of hiring perfectly every time, scrutinising remuneration policies remains one of the most effective tools we have as investors to assess whether the interests of a company’s people are aligned with those of our clients and so foster long-term value creation.

Oliver Campbell
September 2025