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Executive pay: City report stops short of backing binding shareholder votes Executive pay: City report stops short of backing binding shareholder votes
(about 3 hours later)
A report by City grandees has set out a number of measures to help restore public confidence in executive pay, but stopped short of endorsing Theresa May’s proposal for binding shareholder votes on senior management salaries.A report by City grandees has set out a number of measures to help restore public confidence in executive pay, but stopped short of endorsing Theresa May’s proposal for binding shareholder votes on senior management salaries.
The report, which acknowledges executive pay is difficult to justify, did not set out how much directors should receive, either in absolute terms or compared with their wider workforce.
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Executive pay is hard to justify and needs to be compared with the levels of the wider workforce, according to the report, drawn up by a committee which met under the auspices of the lobby group the Investment Association. It sets out 10 recommendations, including the use of pay ratios, but refused to back the binding shareholder votes on executive pay suggested by the new prime minister.
It sets out 10 recommendations, including the use of pay ratios, but steps back from endorsing the use of binding annual general meeting votes on executive remuneration suggested by the new Conservative prime minister. Drawn up by a committee that met under the auspices of the lobby group the Investment Association, the report also called for more flexibility in the way executive bonuses are structured away from the traditional long-term incentive plans (Ltips), which pay out over three or five years in shares.
“Growing complexity has contributed to poor alignment between executives, shareholders and the company, sometimes leading to levels of remuneration which are difficult to justify,” according to report published on Tuesday. “Growing complexity has contributed to poor alignment between executives, shareholders and the company, sometimes leading to levels of remuneration which are difficult to justify,” the report said.
“We need to restore public confidence in executive pay,” said Nigel Wilson, chief executive of insurer Legal & General, who chaired the committee behind the report. It also included the chairman of Sainsbury’s, David Tyler, and Helena Morrissey, who chairs the association and runs Newton Investment Management. The chief executive of the insurer Legal & General, Nigel Wilson, who chaired the committee behind the report, said: “We need to restore public confidence in executive pay.”
An interim report in April set out the views of the participants that the current system of pay was not fit for purpose and needed to be overhauled. It was published just as the annual general meeting season was getting under way and as shareholders handed rebukes to boardrooms over pay at major companies such as BP. He added: “We have not commented specifically on the quantum of executive pay.” Boardroom pay had trebled since 1998 during a period when the FTSE 100 had remained flat, said Wilson, and “in the next twenty years we’d like a much better outcome”.
May, who was appointed prime minister after the vote to leave the European Union, has put the issue of executive pay back on the political agenda. During her leadership bid, May spoke of new votes for shareholders on executive pay and putting workers on boards. The panel also included the chairman of Sainsbury’s, David Tyler, and Edmund Truell, chairman of the strategic advisory board of Lancashire and London Pensions Partnership.
The working group suggested an “option to inform the debate” on binding votes on pay could be by having such a vote on companies which failed to receive 75% the previous year. Truell, when asked what “alignment” between shareholders and executives meant, said: “For me this whole thing is about simplicity. I want my management teams to be incredibly wealthy because as a shareholder I’ve made a lot of money.”
“The recent intervention from our new prime minister shows that investors and companies need to work together and address the concerns with executive pay. Our industry is clear that it expects UK listed companies to work with us to tackle the lack of trust that has resulted from the UK’s complex and ineffectual pay regimes,” said Andrew Ninian, director of corporate governance at the Investment Association. Complicated bonus schemes meant executives did not know how they were being paid and set up secret spreadsheets to work out what their bonuses could be, said Truell. He advocated the use of so-called restricted shares, which pay out at a predetermined point in the future.
The report sets out that boards should explain the rationale for their bosses’ pay levels “with consideration of relativities such as the pay ratios between CEOs and different employees”. Work on the report started last year and coincided with the appointment of May, who became prime minister in the wake of the vote to leave the European Union, and put the issue of executive pay back on the political agenda. During her leadership bid, she spoke of new votes for shareholders on executive pay and putting workers on boards.
It also says there should be a move away from the long-term incentive plans (LTIPs) used by many companies to pay bonuses in shares over a three- or five-year period. To do this, the aim is to make the remuneration committees which set executive pay stronger and to make the targets being set for directors more transparent. But the working group expressed caution about a binding vote on pay deals and suggested an “option to inform the debate” could be by having such a vote on companies that failed to receive 75% approval the previous year.
One leading investment house, Aberdeen Asset Management, welcomed the report. Paul Lee, head of corporate governance, said: “Investors and companies have done each other a disservice on pay for too long. Investors have set ever more prescriptive expectations which have tied companies up in knots. Company boards have become trapped in a mindset that their function on pay is to do what the majority of shareholders say.” An interim report in April – published just as the annual general meeting season was getting under way and as shareholders handed rebukes to boardrooms over pay at major companies such as BP – set out the views that more flexible pay deals were needed.
Tyler, who said it would be difficult to set out three-year pay deals amid the uncertainty created by the Brexit vote, said less use of Ltips would slow the drain of executive talent to private equity and family run businesses. But, he said, it would not lead to higher pay but to lower average pay because executives did not know how to put a value on their complex long-term schemes.
Tyler said firms were competing internationally for the best management and, at the same time, investors such as pension funds were the beneficiaries of good company performance. “Sometimes, if I may say, the media makes it out to be more simple that it really is,” he said, claiming that a big pay packet is reported one year but a fall in pay the following year is ignored.
At a launch event, the panel faced questions about whether more flexibility would lead to more fees for the pay consultants hired to design schemes, and how the foreign shareholders who held stakes in UK-listed companies would react to change.
Stefan Stern, director of the High Pay Centre, told the Guardian: “If they are going to be squeamish about [defining] quantum then the disconnect and screaming headlines will keep coming.”
A government spokesperson said the report would contribute to the debate. “The prime minister has said she wants to see stronger shareholder oversight of executive pay and greater transparency including better reporting of bonus targets and pay ratios. She has also called for a simplification of the way bonuses are paid so that incentives are better aligned with the long-term interests of the company and its shareholders,” the spokesperson said.