Increased pay structure similarity is associated with lower firm value and shareholder returns.

Guerdon Associates, and others, have long hypothesised that:

• There is a growing convergence of executive pay structures;
• The convergence stems from a combination of improved disclosures, greater scrutiny, and shareholder influence; and
• Companies are less likely to utilise pay structure variation for higher value added and TSR

While there have been several papers over recent decades supporting these hypotheses, a recent paper assessing the negative impact on shareholder value from ‘one size fits all’ US listed company CEO remuneration frameworks does this well, and is summarised here.

Key findings include:

1. The structure of executive remuneration is becoming more standardised.

There has been a significant reduction in the variation of CEO remuneration structures since 2006. Approximately 24% of the variation in the distribution of CEO pay components has disappeared. This trend is consistent across all types of firms, regardless of size, age, profitability, or industry.

2. Institutional investors contribute to the standardisation of executive pay structures.

The influence of institutional investors is a significant factor in the homogenisation of executive remuneration. Firms with higher levels of institutional ownership tend to have more standardised pay structures. This effect has become more pronounced over time.

3. Institutional investors’ effect on pay structure standardisation is stronger when they are more likely to engage with a firm’s management and influence its corporate policies.

The standardising effect of institutional investors is stronger when these investors have higher incentives to engage with the firm’s management. This engagement leads to a greater push towards uniform remuneration structures.

4. Proxy advisory firms foster standardisation of remuneration structures.

Proxy advisory firms play a significant role in promoting standardised remuneration practices. Their recommendations contribute to greater pay structure similarity among firms. Firms receiving negative recommendations from these advisors tend to standardise their remuneration packages in subsequent years.

5. An increase in available information about other firms’ remuneration makes remuneration structures more similar between firms.

Expanded remuneration disclosure requirements have facilitated greater comparison and mimicry among firms. This increased transparency has driven further standardisation in pay structures.

6. An increase in available information about other firms’ remuneration makes remuneration structure more similar, especially when there is a high proportion of institutional investors and when they are more likely to engage with a firm’s management and influence its corporate policies.

The impact of remuneration disclosure on standardisation is more pronounced in firms with a high proportion of institutional investors. These investors use the disclosed information to push for uniform remuneration structures that align with their preferences.

7. Standardisation prevents boards from designing optimal remuneration frameworks – this has a negative impact on firm value.

If standardisation was mainly due to labour markets becoming more efficient and directors being better informed, uniformity can improve firm value. Instead, the paper suggests that increased similarity in pay structures is associated with lower firm valuation and shareholder returns. This negative correlation indicates that standardisation often prevents firms from designing optimal remuneration plans tailored to each company’s specific needs.

While standardisation could streamline governance practices and enhance comparability among firms, the paper highlights the potential costs associated with this uniformity. Now, what boards are up for optimising shareholder value through remuneration frameworks that vary from commonly accepted standards?

The paper is not conjecture. Its hypotheses are backed up with solid statistical research, and is a good read. It can be found HERE.

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