Some companies are starting to get the shareholder message on executive remuneration
- UK-listed companies have asked shareholders for their views on executive remuneration.
- Several companies have reduced maximum pay levels for key executives.
- France is moving to binding votes on pay.
Another year, another season of annual general meetings (AGMs) and, almost inevitably it seems, another round of headlines heralding shareholder discontent about executive pay.
It seems as though it is having an effect. According to a mid-season analysis of executive pay carried out by PwC, remuneration levels are broadly flat or down in real terms and pay has fallen sharply at the highest pay companies. This was based on an assessment of the first 40 FTSE 100 companies to publish their remuneration reports in 2017.
Tom Gosling, head of reward at PwC, said: “Companies are under the most intense scrutiny ever on pay decisions, and it’s no surprise they are generally showing restraint.” However, the consultancy also said that FTSE 100 companies were not showing appetite for radical structural changes to pay arrangements; conventional long-term incentive plans remain the norm, it said.
Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management, says that in the run-up to the 2017 AGM season more companies than ever had approached the investment manager to consult with it and other investors on executive remuneration.
Hans-Christoph Hirt, head of Hermes EOS, the stewardship arm of Hermes Investment Management, paints a similar picture. “What is definitely new is the level of engagement of companies with investors and also, overall, the direction of travel on remuneration,” he says. “I think the direction is very clear that at least here in the UK the message has been heard and directors are playing a much better role in putting sensible policies together and adjusting outcomes.”
Sarah Wilson, chief executive at Manifest, a UK-based proxy voting and governance research agency, says there have been some high-profile pay reductions this year. Executive pay has been docked at companies such as BP and WPP, a FTSE 100 advertising and marketing company. At WPP, for example, the board is proposing to lower the total potential performance-related pay for Martin Sorrell, its founder and CEO, from a maximum of 14.1 times salary to 10 times salary (£1.15m/€1.4m).
Explaining this and other changes in WPP’s 2016 annual report, John Hood, the remuneration committee chairman, said shareholder concerns were behind the “significant” reductions to executive pay levels it was proposing. “Notwithstanding the company’s superior performance, we understand share owners’ increasing discomfort with the levels of our programmes’ reward opportunities for outstanding performance,” he said.
“Companies are under the most intense scrutiny ever on pay decisions, and it’s no surprise they are generally showing restraint”
Hirt at Hermes suggests that the increased engagement in the run-up to this AGM season shows that “the system can work if directors are doing their job and if investors are doing their job.
“The system we have in the UK – a binding vote on pay policy and an annual vote on the remuneration report – seems to be working so far,” he says. Hirt says continental Europe is generally behind the UK in terms of engagement between companies and investors.
In light of such comments, it will be interesting to observe developments in France, which is moving from advisory votes to binding votes on pay. Under rules belatedly introduced under the so-called Sapin II law, companies will already this year be required to hold binding forward-looking (ex-ante) votes on pay. From 2018 there will be an ex-post vote on variable pay.
Elsewhere in Europe, Hirt points to Credit Suisse as an example of “where you just need to wonder what went wrong in the thinking [and] judgement of the board and the executive in that particular market and company-specific situation”.
In the run-up to the AGM the Swiss bank was confronted with opposition to its executive pay proposals and subsequently announced it would cut 2016 bonuses (one of the pay elements to be voted on) by 40%.
All the pay votes were passed at the AGM itself, on 28 April, but not without significant opposition. Ethos, for example, stuck with its voting recommendations despite the concessions offered by the board as it considered pay was “still too high”, given the bank’s CHF2.7bn (€2.5bn) loss in 2016.
Addressing the AGM, Credit Suisse’s chairman Urs Rohner said that when the board had made its original decision on pay awards for 2016 “our consultations with investors had not given us any indication that a fundamental difference of opinion would arise here”.
What could be behind this year’s apparent traction on executive pay in the UK? One contributing factor is that three-year binding pay policies are coming up for a vote again at many companies under rules introduced by the Conservative-Liberal Democrat coalition government in 2013.
“Because it’s a binding vote, I think [companies] were a bit nervous,” says Claxton. “There was a lot of rhetoric this year and last year that they would try to speak to shareholders early before it got to the ballot.”
There is also pressure on asset managers from clients and beneficiaries, and larger players like BlackRock have been more vocal this year, it is said.
It is not just shareholders who have corporate governance and executive pay in their sights. Last November, the UK government launched a consultation on corporate governance reform following speeches by prime minister Theresa May.
Tom Powdrill, responsible investment co-ordinator at the International Transport Workers Federation and former head of communications at PIRC, a proxy voting and corporate governance advisory firm, says he questions “to what extent this is being led by investors rather than investors trying to catch up with where the public policy discussion has gone”.
Chris Hodge, policy adviser at the Institute of Chartered Secretaries and Administrators, touched on this matter in a paper published before the onset of the 2017 AGM season. He said that May’s introduction to the government’s corporate governance consultation highlighted how expectations of corporate governance have broadened to encompass “restoring faith in capitalism”.
To the extent this involves reducing income inequality in the listed sector, increasing accountability to shareholders on pay is unlikely to make much difference, he said.