In scenes that took us back to the ‘shareholder spring’ of 2012, April 2016 saw several instances where shareholders revolted against perceived boardroom excess by voting against proposed remuneration packages for executives.
‘Last chance saloon’
In particular on 14 April 2016 almost 60% of BP’s shareholders voted against a £14million pound pay package for its CEO.
Since then shareholders of other companies have followed the lead set by BP’s shareholders:
- 72% of shareholders at the Weir Group AGM voted against its remuneration policy which included a share award for the CEO of up to 165% of his £750,000 salary without the need to fulfil performance criteria; and
- 49% of the shareholders of Shire Pharmaceuticals voted against the company’s remuneration report objecting to a 25% pay rise for the CEO.
The Director General of the Institute of Directors, Simon Walker has warned that “British boards are now in the last chance saloon, if the will of shareholders in cases like this [BP] is ignored, it will only be a matter of time before the Government introduces tougher regulations on executive pay.”
Most listed companies use share schemes known as ‘long term incentive plans’ (LTIPS) as part of their executive remuneration packages. Under these schemes, shares will typically vest in the executive based on company performance against pre-arranged targets over an agreed period, often three years. By linking the performance conditions to the creation of shareholder value, the interests of the executive are aligned with the long term strategy and objectives of the company.
Current approach ‘not fit for purpose’
In a demonstration of perfect timing, the Executive Remuneration Working Group published an interim report on 21 April saying the current approach to executive pay was “not fit for purpose, and has resulted in a poor alignment of interests between executives, shareholders and the company.”
The main concerns of the Working Group are:
- lack of transparency with how targets are calculated;
- lack of shareholder engagement;
- lack of accountability, in particular the interests of the executive not being aligned with those of the company; and
- lack of flexibility.
They also go on to explain that the inherent uncertainties of LTIPs, together with measures designed at clawing back remuneration, have driven up fixed income.
An alternative approach?
The Working Group recognised that the LTIP model may be appropriate for some companies but not for all. In light of these concerns, and the recent shareholder revolts, many companies are now going to need to consider an alternative approach.
Some of the alternatives proposed by the Working Group which aim to address issues with the current approach are:
- deferral of bonus into shares – part of a bonus is paid in cash with a significant proportion paid in shares that vest over a fairly lengthy period of time;
- performance on grant – this is similar to an LTIP but is fixed to a longer performance timetable and the grant of shares is based on the performance of the company in the previous three years; and
- restricted share awards – an annual grant of shares is made which vest after a period of continued employment.
Time will tell whether or not the above alternatives are more widely utilised and the warnings headed in an attempt to avoid the need for further regulation. In the meantime we’ll have to see how many more shareholder revolts occur in the 2016 AGM season.