Barbara Novick is Vice Chairman at BlackRock, Inc. This post is based on a Policy Spotlight issued by Blackrock.
Index funds have democratized access to diversified investment for millions of savers who are investing for long term goals, like retirement. However, the popularity of index funds has drawn critics, who claim that index fund managers may wield outsized influence over corporations through their proxy voting and engagement. Executive compensation is often cited as an example because public company shareholders can participate in ‘say-on-pay’ votes. As discussed in the Policy Spotlight, Proxy Voting Outcomes: By the Numbers, index fund managers are rarely the determining factor in say-on-pay votes. That notwithstanding, the focus on say-on-pay is misplaced, since executive compensation is neither structured nor decided by shareholders. Rather, a process is undertaken by the Board of Directors, often under the advisement of the Board’s compensation committee and/or compensation consultant, to determine the amount and composition of executive pay packages. This post provides an explanation of the process by which executive compensation is determined, and the role of shareholders in that process. First, we begin by outlining the roles of the various parties that are relevant to executive compensation determinations: