April 7, 2013 10:31 pm
Companies: Up in arms
Investors are eager to maintain the momentum from last year’s spring revolt and keep the lid on executive packages
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In January last year a handful of shareholders, representing some of the most powerful investment groups in the City of London, met Vince Cable, the business secretary, to discuss ways to restrain the excessive pay of some of Britain’s bosses. More than a year later, shareholders who were at that meeting say it was a catalyst for the City’s 2012 spring pay rebellion that led to deep-rooted changes in the way companies set executive salaries – not just in London but across the globe.
In Britain, executives will face a binding shareholder vote on pay that comes into force in October. There will also be stricter rules on the presentation of remuneration reports, which should set out an executive’s performance targets for bonuses and stipulate an individual’s overall pay.
The pay debate has intensified since, with the EU proposing curbs on the bonuses of bankers and asset managers while a referendum in Switzerland last month backed radical proposals to limit executive earnings. In France there are plans to increase shareholder rights over pay and restrict pension deals. Even in the US, where there has traditionally been more tolerance of high salaries, there are signs of more restraint as shareholder activism has increased.
Earnings of chief executives v full-time employees
Yet attention remains focused on the City, where the pay debate first kicked off and another spring season of shareholder votes is about to start in earnest. Observers are looking for signs of whether government reforms and a new mood of restraint among company bosses will lead to a lasting cultural change, with pay more closely aligned with performance.
Peter Montagnon, senior investment adviser at the Financial Reporting Council, the UK regulator that oversees shareholder engagement, says: “Last year was a stage on a journey. There is more dialogue between companies and investors and more shareholder activity. This has helped to produce more sensible pay policies.”
Keith Skeoch, chief executive of Standard Life Investments, one of the UK’s biggest asset management groups, adds: “Last year’s so-called shareholder spring is an unfortunate phrase. It gives the impression that it was some kind of Arab spring, which involved dramatic changes. But it was not like that. This is not a revolution. It is evolution. We are gradually moving forward.”
Investors argue that changes have been taking shape since the financial crisis in 2007, when falling stocks and the economic slowdown jolted shareholders out of their complacency. In hard times, shareholders were no longer prepared to accept big pay increases that were often not linked to strong performance.
The head of corporate governance at a UK asset management group says: “Stocks and performance went down yet pay was going up. As investors, we were losing money as our shares dropped yet company bosses were not losing money in their pay. That wasn’t acceptable.”
The investor was at the January meeting with Mr Cable, held in the minister’s office near the Houses of Parliament. “There wasn’t a eureka moment at the meeting,” he says. “But views did harden that we, as shareholders, had to take a tougher stand against [excessive] pay and vote against egregious rewards. If we hadn’t, there was a sense the government might have come up with more draconian measures beyond a binding vote on pay that would limit not just the salaries of chief executives but possibly our own.”
Investors generally do not balk at multimillion-pound salaries but the boss must perform. This is something chief executives are increasingly aware of and explains a shift in pay towards bigger bonuses and long-term incentives through shares at the expense of the fixed part of the salary.
The chief executive of one FTSE 100 company, who earned more than £2m last year, says: “I am up at 6am and I work a 12-hour day. Can I justify my pay? Yes I can. But more than half my salary came from shares in the company that vested. I have skin in the game. When the company does well, my salary does well. Performance is paramount. It is harder now for executives to earn large amounts if they do not produce.”
He says there should be restraint and, like other executives, has come under pressure from shareholders to justify his salary. From evidence this year, this pressure to rein in excesses appears to be working. Consultants Towers Watson say that of the 35 FTSE 100 chief executives who have disclosed their salaries for 2013, 11 have had their pay frozen and the median increase was 2.5 per cent, below the rate of inflation.
Robert Hingley, investment director at the Association of British Insurers, which represents shareholders holding a fifth of the UK stock market, says: “We are hoping for a relatively quiet pay season and, genuinely, that seems to be happening. So far the indications are that most companies are exercising restraint.”
Tom Gosling, head of the reward practice at PwC, the professional services firm, adds: “I think the message of restraint has hit home. We are unlikely to see the same level of shareholder rebellion as last year.”
Investors say it is difficult to assess which companies will face rebellions this year, although there are rumblings at groups where there was dissent in 2012. These include WPP, the advertising group, where Sir Martin Sorrell, the chief executive, suffered the biggest pay defeat of the year among FTSE 100 bosses, Tullow Oil, the explorer, SABMiller, the brewer, and Resolution, the insurer. However, all these groups insist they are working closely with investors to insure there is not a repeat of the protests.
It is also significant that banks are no longer a focus for dissent as they were last year. Although there are still concerns about the banks, pay has been curbed. The chief executives of Barclays, HSBC, Lloyds Banking Group and Standard Chartered face pay freezes in 2013.
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A year on from last spring’s rebellions, investors and executives say one of the biggest worries is the dominance of remuneration in company discussions. This overshadows other important areas such as company strategy, succession planning and the quality of management and auditing.
The chairman of one FTSE 100 company says: “We spend too much time on remuneration. It was only natural in a way as it is very important to get pay right, but it is just one part of governance. Pay is dominant because that is what politicians and the public are interested in. Auditing doesn’t capture the imagination.”
The spread of the pay debate to Europe, where Brussels wants restrictions on bonuses of bankers and asset managers, has also alarmed some big investors. “The pay debate started in London last year because it is the main financial centre, and the debate was a sensible one,” says the head of equity at one of Europe’s biggest asset managers. “But the reforms Europe wants will have negative consequences.”
He says Brussels’s plans to restrict the ratio of fixed salary to bonuses for bankers and asset managers to 2 to 1 will lead to job losses as costs will rise. This is because a limit on bonuses will lead to higher fixed salaries that cannot be cut in a downturn, meaning jobs will be lost instead.
However, some policy makers on the continent disagree as momentum behind pay reforms builds. In France, there are plans to ban golden goodbyes while the Swiss supported a binding shareholder vote on pay, similar to the UK moves. Angela Merkel, the German chancellor, also wants tighter regulations on executive pay.
Elsewhere, the debate has been at a lower key. In the US, companies have not come under the same pressure as in Europe. A survey of 2,215 companies in the US carried out by Semler Brossy Consulting Group found that only 57, or 2.5 per cent, failed to receive majority support on pay.
“Aspiration to make big bucks is part of the American dream. In Britain and Europe, there is a different mindset,” says a US fund manager, now based in London. But even in the US, investors say the new threat of a vote on pay, although not binding, has forced companies to engage more with shareholders.
The critical question, however, is whether shareholder activism and pay restraint will stand the test of time.
John Kay, the author of last July’s far-reaching report on the UK equity markets, fears the 2012 shareholder spring will leave no legacy. “I’m not sure anything will come of the shareholder spring. The problem is that investors in the UK are a disparate lot. Usually, top 10 shareholders only hold between 2 per cent and 5 per cent of a company. Nobody has very much influence.”
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Deborah Hargreaves, director of the High Pay Centre, the think-tank that monitors remuneration, agrees. “The worry is that there is an element of ‘If we keep our heads down, then we can go back to normal in a few years’ time and start paying ourselves big salaries again.’ This is why we have to strike now to put structures in place to restrain pay when the economic cycle picks up again.”
She would like to see workers represented on company boards as they are in Germany. “It is important to challenge the cosiness of boards, which are made up of the same sort of people, usually bankers or executives.” She cites FirstGroup, the UK rail and bus company, which has appointed a train driver to the board’s remuneration committee, as an example of where worker representation has proved effective.
Others say the pay debate is far from over. “This is going to snowball up until the 2015 UK election campaign,” says an equity fund manager at a UK group. “Labour will look at capping bonuses and will probably call for workers to sit on boards. I think Vince Cable would like to see workers on boards, too.”
Pay, he says, will be a central part of the UK election campaign, highlighting the continuing evolution of the corporate governance debate. Last year’s rebellions were a significant but small step in this evolution, he adds.
In years to come, people will say that this period was an important stage in this debate, says another investor who was also at the meeting with Mr Cable.
“That meeting will go down as a little footnote in the corporate governance story. But it will be an important one as it helped trigger the protests and emboldened investors to say enough is enough. I don’t think this is a passing fad. I think the rebellions have left a lasting imprint on the City and the way it functions.”
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Attracting talent: Life in a different world
Increases in chief executive pay in the UK have far outstripped the salaries of workers since 2000.
The median earnings of a FTSE 100 chief executive have risen 266 per cent to £3.24m over the past 13 years, according to data provider IDS. In contrast, the median earnings of a full-time worker have risen 40 per cent to £26,462.
This means the salary of a FTSE 100 chief executive is 120 times that of the average worker. It is a pay differential that is hard to justify, says Deborah Hargreaves, director of the High Pay Centre, the independent think-tank that monitors company remuneration.
“I think the pay situation is unjust and unsustainable,” she says. “Companies are run by people who do not live in the same world as the rest of us who struggle to pay bills and the mortgage. They lead these sheltered lives of luxury – lives that are made easier by having these huge pay packages.”
However, investors typically argue that high pay is essential to attract talent, adding that a good chief executive is often worth a big salary because of the value they add to the company and its stock.
Richard Belfield, director of executive remuneration at consultants Towers Watson, says: “Institutional investors do not mind a chief executive being paid a lot of money, if they perform and produce strong returns.”
An equity fund manager at a European group adds: “For investors, it is about alignment with performance. We do not have a problem with a multimillion-pound salary, if the boss is good.”
Copyright The Financial Times Limited 2013.
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