First the good news: At least in the UK there is both lively debate and a mechanism for action. In much of the developed world there is still little disclosure on pay and even less ability for shareholders to act – in France and Germany shareholders do not get a vote, in Japan the situation is even worse with little or no disclosure; in the US shareholders have only recently been given an advisory vote on executive compensation, and then not necessarily on an annual basis.
Nor can dissenters complain at the lack of disclosure; true, remuneration schemes are unnecessarily complex, and seem to roam in packs, but even a cursory glance at an Annual Report for a FTSE100 company will reveal pages of detail, graphs and comparisons. So where do we go from here?
The advisory vote on remuneration has failed, triggering the government’s flagship proposal of making the vote mandatory. Detractors assert this will make no difference, others, after a decade of dithering feel this is a pyrrhic victory for common sense.
As participants in the proxy voting process, we have some views on where we feel debate needs to go from here, so as our starter for ten here are some proposals for closer policing of executive pay in the UK:
· A vote on remuneration should be binding, but it should go further; where a combination of oppose and withheld votes exceeds 50% the Board should return with new proposals.
· The remuneration report should be forward looking and shareholders invited to vote on pay proposals for the forthcoming 12 months; the current vote is retrospective and largely makes no difference
· Remuneration Committee’s should be required to explain the rationale for the pay policy rather than just what it is; disclosing that base salaries have been increased 8% to reward at market median is no longer acceptable – we need this to be justified
· The number of schemes companies operate should be limited; there should be more understanding of the choice of performance metrics used and why these are the most appropriate ones for the business; directors should as far as possible only be rewarded for the difference they have made, rather than benefitting indirectly from wider market behaviour
· The market habit of making maximum grants under long-term performance schemes should be qualified by a ‘state of the business’ test based on the past year’s performance
· No award of shares should be granted for median performance; the occasional habit of rewarding directors twice for the same performance (under two identical schemes) should be outlawed
· There is a case for examining the composition of remuneration committees, but more importantly there needs to be more robust enquiry into the role of advisors and their influence on market outcomes
· A commission should investigate meaningful and appropriate disclosure on pay ratios within the business
It is almost certain that whatever the government comes up with will please no-one; it will be too interventionist for the free marketers and will not go far enough for those who feel market abuse is now so deeply entrenched that it is irreversible. There is more talk about values, responsibility and ethics in business; it can only be good for society and business if part of that discussion examines the role of absolute and relative excess in executive pay.
Neville White is Senior SRI Analyst at Eccelsiastical Asset Management
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