Why did we engage?
Following an extended period of poor business performance, this global food and beverage producer was subject to growing shareholder activism. This was manifested in poor "Say on Pay" support for executive compensation packages in previous years.

At the same time, the company was undergoing significant boardroom changes.

The new executive management and reconstituted board revamped the company strategy to focus on sustainable value creation by driving profitable revenue growth across its global and local brands. This could lead to higher gross profits and therefore high quality earnings growth.

How did we engage?
We engaged with the board on its executive compensation program and linkage to the new strategy. The board took feedback from JPMAM and other shareholders on the matter.

The board reduced the high weight given to personal goals and increased the weightage toward objective measures of annual performance. It also added volume growth as an annual metric, as directors considered it an important indicator of underlying performance. Gross profit margins were replaced by gross profit dollars to emphasize the company’s goal of growing cash flow. The board introduced an overlay of market share to the annual incentive, consistent with its objectives.

Outcome
The company made important changes to its annual executive incentive plan, creating a program that demonstrates accountability and transparency at the top of the company. The changes have been received well within the company because management understands their linkage to strategy and its role in and responsibility for managing them. The plan also aligns incentives with aims to create long-term shareholder value by incorporating strategic elements of growth and execution, as well as culture.

In addition to linking executive compensation with elements of business strategy, the company has implemented several features that improve the plan. For example, by prospectively disclosing target levels against performance metrics, the company offers greater transparency than many.

The board has also built in further alignment by subjecting all vested awards to an additional year of withholding. Options make up a small proportion of long-term awards, and the company is also judicious in its valuation of options.

Retaining key performance indicators related to sustainability initiatives in the company’s annual incentive plan will drive better long-term outcomes.

Why did we engage?
We had concerns around the pension provisions a European food producer was making for its executive officers. For example, the CEO had received a much higher proportion of his base salary in pension contributions than the wider workforce. While pensions may have retention value for executives, they have little linkage with corporate performance and are therefore scrutinized by investors. Outsized pension benefits to senior managers who are responsible for driving shareholder returns not only fail to align pay and performance, but also create the impression of inequity in the workplace. This can be deleterious to morale and company culture.

As part of UK best practice, companies must set a credible plan to pay all executive directors the same level of pension contribution as the majority of their workforce by the end of 2022. This sentiment is echoed in the UK Corporate Governance Code. Executive remuneration, of which pension contributions are a significant part, is a reputational issue for companies with potential adverse impacts on their long-term value. In addition, we had concerns around some long-term and short-term metrics.

How did we engage?
The board had told investors these payments were obligatory under the CEO’s employment agreement, under contract law. Our concerns were echoed by the broader investor base, noted by low support at the 2020 annual meeting.

Outcome
The company pledged that new executives would receive the same pension contribution as the wider workforce. Incumbent executives also agreed to cap future pension contributions for the CEO and CFO. However, we believed contributions for executives were still high.

Next steps
We will continue to engage with the company and encourage it to improve remuneration practices.

Why did we engage?
As a long-term shareholder, we were concerned about the company’s compensation program. In our opinion, there was a disconnect between shareholder returns and management compensation, and the compensation plan did not hold management accountable for its past strategic decisions. We believe the company had allocated a significant amount of capital toward questionable acquisitions, compromising long-term returns.

Although the company had to take significant charges related to these acquisitions, executive compensation remained relatively unaffected because such charges were excluded from adjusted earnings. This resulted in skewed key metrics being used to drive the compensation plan. Consequently, performance share units have paid out at very high levels, and even after the underperformance period of 2017-19, executives earned above-target rewards.

How did we engage?
The JPMAM stewardship team and analysts held several discussions with company representatives to share our concerns around the problematic features of the compensation program. At the 2020 annual shareholder meeting, we voted against the compensation program and some members of the board’s compensation committee. The say on pay received low support, reflecting investors’ concerns. The company then reached out to its large shareholders, including us, seeking feedback and suggestions.

Next steps
We will review the compensation discussion and analysis presented at the next shareholder meeting to determine if problematic practices have been corrected. While we do not want to micromanage the compensation plan, the board should do a better job of exercising its judgment to ensure metrics are evaluated in a manner that drives management accountability.