The manager of Norway’s NOK7.9trn (€861bn) sovereign wealth fund has taken a stand on the contentious issue of top executive pay at listed companies, saying it should be driven by long-term value creation.

In a position paper on CEO remuneration, Norges Bank Investment Management said: “A substantial proportion of total annual remuneration should be provided as shares that are locked in for at least five and preferably 10 years, regardless of resignation or retirement.”

Releasing the report, the manager of the Government Pension Fund Global (GPFG), said that as a global investor its main concern was that CEO remuneration should be value-creating for the company and shareholders.

Apart from making sure remuneration was driven by long-term value creation and aligned chief executive and shareholder interests, boards should also develop pay practices that were simple and did not put undue strain on corporate governance, it said.

They should provide transparency on total remuneration to “avoid unacceptable outcomes”, and ensure all benefits had a clear business rationale, it said.

“We will invite peer investors to consider shared principles for effective remuneration, and we will discuss with boards how this general position could be applied, taking into consideration the company’s specific circumstances,” NBIM said.

Pensionable income should, the manager said, constitute a minor part of a chief executive’s total remuneration.

“The board should commit to not offering any end-of-employment arrangements that effectively shorten or dilute the lock-in of shares,” it added in the paper.

NBIM said that requiring the chief executive of a company to be a long-term shareholder seemed to be an under-utilised strategy for aligning the interests of the CEO with those of shareholders.

It argued that requiring the chief executive to invest a “meaningful” part of their remuneration in company shares was a simple and transparent way of aligning that individual’s interests with those of shareholders and the wider society.

However, it acknowledged the counter-argument that locked-in shares could drive up total pay levels, if chief executives demanded compensation for the increase in perceived remuneration risk.

“Increased equity exposure and deferral is a cost to the CEO, but removing performance conditions will at the same time reduce uncertainty for the CEO,” NBIM said.

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