As we embark on another proxy voting season, the ‘problem of pay’ is seldom far from the headlines. Despite intense public debate over the past two decades, we appear to be no nearer to satisfying public opinion that, by and large, executives earn too much.
In a recent FT column, Clare Chapman a non-executive member of two remuneration committees wrote, “top executive pay is a subject that riles many. Politicians, investors and the general public believe that rewards are too complicated and inadequately linked to long-term performance”. That much we have no reason to disagree. However, Ms Chapman has presided over an intriguing experiment at FTSE250 engineer, Weir Group, which suffered a rare voting down of their remuneration policy in 2016. The company has responded with a move that others will surely be watching; to ditch the tried and trusted long term incentive plan (LTIP).1In a recent FT column
In the UK, LTIPs (also known as performance share plans) emerged in the 1990s as an alternative to share options, which as the name suggests given the individual recipient an ‘option’ to buy shares usually at a discounted price. LTIPs largely replaced Options with ‘free’ shares linked to a series of performance hurdles measured over three years. Detractors have long argued that they are opaque, too complex and provide little visibility on the actual reward received.
Weir Group’s response has been to ditch performance measurement in favour of awarding ‘restricted shares’ at a lower multiple, but which guarantee a pay-out after an extended holding period. The company’s AGM held in late April was therefore a test of whether investors were prepared to countenance alternatives to the LTIP. And apparently they are: the plan was approved by 92% of votes cast. Job done.
Or is it? Our problem with pay, exhaustively expressed through multiple oppose votes at company meetings, is not just the opaque link to performance, it is about structure, motivation and the propensity for excess. Where we disagree strongly with Ms Chapman’s analysis is where she states ‘linking executive pay to the long-term share price can encourage innovation and value creation’. This might be true if executives, through their personal endeavours, affected share price, but this is often a moot point. We strongly disagree that rewarding directors with free shares with no performance attached is hardly a sensible way to attack a culture that is already widely mistrusted.
We would prefer to see a debate on the meaning of the word ‘incentive’. In many walks of life there is no additional incentive other than salary. For a FTSE100 company is it really possible that multiple awards in bonus and shares can act as an ‘incentive’ when base salaries are well north of £1m per annum? A previous Chief Executive of Royal Dutch Shell is famously on record as saying that they do not. Incentives have their place; in start-ups and SMEs perhaps (small and medium enterprises) where the company is growing and still entrepreneurial. It strikes us that at the very largest companies a rethink is needed on the role of ‘incentives’ and ‘variable pay’ in driving performance.
Then there are shareholders. Tools were given to investors some years ago with a binding vote on pay policy. This has largely failed to check the ratcheting of pay every three years (policy votes are cast triennially) because shareholders seldom take affirmative action against pay. We tend to concur with the Director of the High Pay Centre2, whom in attacking the reputational damage reaped at Persimmon over egregious pay called shareholders, ‘consistently too supine or too apathetic’ to fulfil their policing function adequately.
2018 is not, by and large, a Policy year, but some we have seen so far this year show little regard for those wider voices in society calling for restraint. At Rentokil Initial, we remonstrated with the company for proposing to increase the CEO potential package by an additional 120% of salary in bonus and LTIP grants for no additional performance. At Jupiter Fund Management, where the CEO was paid 1,400% of salary in 2017, we welcomed the placing of a cap on bonus at last, but this has been accompanied by a large increase in base salary and a new aggregate multiple of 800% of salary, which we view as unnecessarily excessive.
The 2018 voting season is just getting into its stride, and already at EdenTree we have opposed over half of all UK remuneration reports and policies (55%) voted on. Among FTSE100 companies voted the figure is even higher with 86% opposed; on the whole we find little to like and little to commend.
The problem of pay affects the whole of society by exacerbating inequality and social division; at some of the highest paid companies we continue to see resistance, for instance, to paying The Living Wage. We strongly believe we need fairer pay structures throughout the economy that do not only reward the top flight of executives generously. Investors have the tools to prevent egregious excess, and should entertain a debate on structure, alignment with performance and the appropriate level of incentive. Unfortunately given the early results from the 2018 season, we may need to wait a little longer.