Our views on executive compensation

Vanguard's duty to fund shareholders is to maximize the long-term value of the investments held by our funds. We've long believed that sound compensation policies and practices are fundamental drivers of sustainable, long-term performance for shareholders. While we do not want to determine the policies of the companies in which we invest—that is appropriately left to their boards and managements—we believe that the following principles are critical in linking compensation and shareowner value.

Pay for performance

Compensation should incent and reward the creation of value for the company's stakeholders. As such, we believe that a substantial portion of executive compensation should be tied to relevant financial and/or operational outcomes that (a) reflect the decisions and effort of those being compensated, and (b) contribute to the creation of value over the long term. Accordingly, incentives should be structured to reward relative outperformance, as opposed to a general rise in stock prices or other market-wide trends, over the course of a business or product cycle that is relevant to the company. (In the event that a company's financial results are subsequently restated, excess awards to individuals should be reclaimed by the company.) While compensation should ultimately reward long-term performance, incentives for shorter term (i.e., annual) performance objectives may be appropriate to the extent that the incentives support sustainable value creation.

Pay within reason

Compensation levels and performance targets should be sensible within the context of a company's peer group, taking into account differences in company size and complexity, as well as performance. While comparative pay data may factor into the pay-setting process, the board should rationalize the selection of peer companies based on relevant business metrics, particularly when including firms in other industries.


We believe that it is important for board members and company officials to regularly seek input from shareholders regarding compensation. To that end, annual advisory votes provide shareholders with a consistent channel through which to provide directional input on compensation decisions. In addition to these "Say on Pay" votes, we will provide feedback to boards regarding the alignment between compensation and shareholder value creation through our votes on directors and equity compensation plan proposals. In many cases, we will supplement our voting with direct discussions to provide company officials with relevant and specific feedback regarding compensation programs.

Comply and Communicate

While policies and practices will justifiably vary from firm to firm, each company should have a clearly articulated compensation philosophy that serves as the foundation for all of its pay programs and decisions. Disclosures should make clear the board's decision-making process, from the selection of peer groups and performance targets, through performance assessment and award determination. Communicating the rationale for decisions in addition to their outcomes will better enable shareholders to critically assess the board's process and approach as stewards of shareholders' assets

Encourage stock ownership

We value stock ownership and retention requirements because we believe that they reinforce executives "shareholder" mindset. Executives should be expected to maintain a substantial ownership interest for the duration of their employment. Companies should also impose holding-period requirements on shares acquired through option exercise. While we support the use of equity-based compensation as a means to align the interests of employees and other owners, such arrangements should not unduly dilute the value of stock held by public shareholders.

Minimize guarantees

We believe that, in general, senior executives should be engaged without employment contracts that guarantee certain salary or "bonus" payments, or that provide substantial severance payments upon termination (absent a change in control). Such "pay for pulse" or, even worse, "pay for failure" arrangements are at odds with the pay-for-performance philosophy we support. While we do not object to typical change-in-control arrangements, such payments should always be "double trigger" in nature.

Lead by example

Director compensation should be reasonably structured to reward the efforts of directors without compromising the independence necessary to protect shareholders' long-term interests. We believe that payment of a significant portion of directors' fees in stock that must be held for the duration of the director's service establishes alignment with the interests of other shareholders. In addition, those directors serving on key committees should have no relationship with the company outside their service as a director.

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