The Reform of Executive Reward
26 April 2017
When Mrs May embarked on her premiership, one of the themes of her address was – the Reform of Executive Pay proposing to give UK shareholders more powers to rein in excessive pay.
These remarks follow what has been called Britain’s second Shareholder Spring – as investors in 2016 voted against the remuneration policies of companies including BP, Anglo-American, Shire, WPP, Smith & Nephew and Weir.
At the same time, a Working Group set up by the Investment Association (“I.A.”) was proclaiming that: “… the current approach to executive pay in UK listed companies is not fit for purpose and has resulted in poor alignment of interests between executives, shareholders and the company.” Whilst the FTSE is trading at broadly the same levels as 18 years ago, executive pay over the same period has more than trebled and there is an increasing disparity against average wages. “This misalignment has resulted in widespread scepticism and loss of public confidence”.
In the US, BlackRock has been petitioned by over 4,000 clients over fears that they are too soft on excessive remuneration at the companies in which they invest.
The I.A. Working Group concluded that the answer may lie in greater use of “bonus deferral”, “pre-grant performance conditions”, or “restricted share awards”. Such alternatives, with their greater certainty, should be matched inter alia by discounted grant levels, longer vesting periods and avoiding ‘payment for failure’. But the Institute of Business Ethics disagreed, saying that “the debate needs to encompass more radical changes”.
Meanwhile, the FRC announced its intention to “name and shame” asset management groups who fail to engage properly with companies over pay, succession and other corporate governance issues.
So where does this all leave the Reform of Executive Reward?
• Do we yet understand the exact nature of the problem that we are trying to solve?
- Is it quantum and social acceptability?
- Is it governance, i.e. perceived RemCo or investor failure – requiring tougher regulation?
- Is it pay design, including the link to sustainable business performance?
• How do companies and investors plan to address these issues – as companies renew their
remuneration policies in 2017? What genuinely practical solutions are being put forward?
• Or is this just a populist distraction from Brexit?
Our meeting will seek to address these issues – with informed comment from key stakeholders.