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IPE special report May 2018

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Institutions 'overwhelmingly' support say-on-pay voting

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  • Institutions 'overwhelmingly' support say-on-pay voting

EUROPE - Institutional investors overwhelmingly endorse the say-on-pay (SOP) vote process because they believe it protects their rights and strengthens the accountability of corporate boards, according to a survey by consultancy Sodali.

Four out of five respondents to the survey rated the value of the SOP vote either 4 or 5 on a scale of 1 to 5, with 1 being the lowest and 5 the highest.

The vast majority of investors - 77% and 66% of respondents, respectively - expressed a strong preference for the SOP vote to be held annually, and for the vote to be advisory rather than binding.

With regard to the structure of the SOP vote, 54% of respondents said they wanted to vote on general compensation policies rather than on specific elements of compensation.

However, while some investors view the vote as a means of rating board policies, others dig deeper and examine the details of pay plans. Dialogue is clearly necessary to determine the meaning of SOP vote results, Sodali said.

In terms of the factors considered when making an SOP vote decision, respondents showed a clear preference for factors relating to companies' financial performance.

The top score of 4.48 went to performance criteria for short/medium/long-term incentives.

The second choice, rated 4.21, was company financial performance.

With only 2.43 out of 5, proxy advisers' recommendations were by far the lowest ranked factor in their SOP vote decisions.

The survey asked whether proxy advisory firms' reports and vote recommendations were important to investors' SOP vote decisions.

Only 5.7% of respondents said they 'fully trust the analysis and judgment' of proxy advisers.

More than half (57%) of respondents, said proxy advisors were 'helpful but they would also review the company's information and establish dialogue when appropriate'.

And 37% said proxy advisers' views were 'informative only but would trust their analysis when strong misalignments with market practices are highlighted'.

In addition, respondents indicated that, following a significant negative SOP vote, companies should either commence outreach and dialogue with shareholders (77%) or revise the remuneration policy (74%) rather than simply writing a letter of explanation (42%).

Besides SOP, board independence is expected to be the issue that is of greatest importance during the 2013 AGM season.

Thirty-five institutions - asset managers and pension funds - from 10 countries representing nearly $13trn (€10.1trn) of assets under management responded to the survey.

On a similar note, consultancy Mercer has said that the UK government's focus on using shareholders to oversee executive pay is compromised by failure to apply the changes to all types of organisations and a lack of action in three other crucial areas.

It says that while change is undoubtedly necessary, applying the changes only to listed companies gives other organisations a competitive edge.

Mark Hoble, partner in Mercer's executive remuneration team, said: "There is undoubtedly a problem with executive pay - the government's focus on shareholders holding company boards to account is right, but not sufficient.

"We need a more systemic solution to help boards recover their grip on executive pay in the context in which executives are managed.

"Ultimately, boards have the power to require their remuneration committee to instigate changes to how executive pay is determined, managed and governed - delegating this task only to shareholders will not do."

Hoble said the focus on listed companies was one of Mercer's main concerns.

"They represent only a small proportion of all organisations that employ the highly paid," he said.

"Partnerships, private companies, the UK divisions of multinationals, private equity and hedge fund firms and all represent a larger proportion of the senior executive labour market, but it isn't clear the government's standards will apply to them.

"It's entirely likely that, if not, some executives will opt out of the scrutiny that comes from working in a listed company. The extent to which this fractures the market, we will have to wait and see."

Mercer believes company remuneration polices need to be simpler and more transparent and should show a stronger link between pay and performance.

It has recently welcomed the Financial Reporting Council's proposals on the topic that illustrate how a simple move towards transparency and simplicity can be achieved.

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