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Addressing executive compensation misalignment at a U.S. homebuilder

  • ISSUE

    Through our proxy voting review process, we identified concerns with the structure and size of the executive compensation program at a U.S. homebuilder; specifically, the overall size of the compensation package at the CEO level significantly outpaced peers at a 2.5x peer median. A large driver of that was an annual bonus program that paid out in cash to the executives.

    We generally believe, as we state in our executive compensation statement, that pay should promote long-term decision-making and align with and support the company’s values and achievements. We also evaluate changes in the level of executive compensation relative to changes across the larger employee base and look for companies that understand and appreciate the contributions from the broader organization.

  • ACTION

    The investment professionals and the ESG team had a dialogue with the chair of the compensation committee and the CEO ahead of the annual general meeting. Our teams discussed with the company the executive compensation program and the overall quantum of pay for executives and expressed our preference that a good portion of compensation should pay in equity that vests based on performance over a three-year (or more) period. We believe such performance vesting shares best align management with long-term shareholders.

  • OUTCOME

    Subsequent to our meeting, the company filed a public statement committing to changes to their executive compensation plan. The company reduced the bonus pool by 25% for executives and redistributed that amount to associates at the lower end of the company’s compensation levels. This was a means of addressing the concerns with overall size of executive awards while finding a novel solution to retain talent. The company also committed to defer 50% of the annual bonus into time- and performance-vesting stock. The performance component will vest based on achievement against financial metrics over a three-year period.

The case studies shown here are for illustrative purposes only, do not represent all of the investments made, sold, or recommended for client accounts, and should not be considered an indication of the ESG integration, performance, or characteristics of any current or future Manulife Investment Management product or investment strategy.  

Manulife Investment Management conducts hundreds of ESG engagements each year but does not engage on all issues or with all issuers in our portfolios. We also frequently conduct collaborative engagements in which we do not set the terms of engagement but lend our support in order to achieve a desired outcome. Where we own and operate physical assets, we seek to weave sustainability into our operational strategies and execution. The case studies shown are illustrative of different types of engagements across our in-house investment teams, asset classes and geographies in which we operate. While we conduct outcome-based engagements to enhance long term-financial value for our clients, we recognize that our engagements may not necessarily result in outcomes which are significant or quantifiable. In addition, we acknowledge that any observed outcomes may be attributable to factors and influences independent of our engagement activities. Our approach to ESG investing and incorporation of ESG principles into the investment process differs by investment strategy and investment team. It should not be assumed that an investment in the company discussed herein was or will be profitable. Actual investments will vary and there is no guarantee that a particular fund or client account will hold the investments or reflect the characteristics identified herein. Please see our ESG policies for details.

We consider that the integration of sustainability risks in the decision-making process is an important element in determining long-term performance outcomes and is an effective risk mitigation technique. Our approach to sustainability provides a flexible framework that supports implementation across different asset classes and investment teams. While we believe that sustainable investing will lead to better long-term investment outcomes, there is no guarantee that sustainable investing will ensure better returns in the longer term. In particular, by limiting the range of investable assets through the exclusionary framework, positive screening and thematic investment, we may forego the opportunity to invest in an investment which we otherwise believe likely to outperform over time.

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