During the Shareholder Spring of 2012 shareholders won the argument that non-executive directors alone could be trusted to keep directors’ pay under appropriate scrutiny and control. Accordingly, the UK government took action and put in place a new remuneration reporting regime for listed companies (not including companies with securities admitted to trading on AIM or the ISDX Growth Market).
The new regime, intended to provide additional information to shareholders and to increase transparency, was built around two votes:
- an annual advisory vote on a new-form remuneration report; and
- a binding vote on a three year prospective remuneration policy.
This new package for listed companies came into effect in the 2013-2014 voting season.
As the blossom appears and the mercury creeps upwards, there are signs that pressure is building for a renewed 2016 Shareholder Spring with major companies failing to secure investor support for remuneration packages.
Criticisms of pay packages include:
- failure to link remuneration with contribution;
- setting inappropriate risk appetites;
- too much complexity; and
- quantum simply being too high.
It will be interesting to observe how the 2016 shareholder voting season develops and what takes place in 2017, when companies will need to adopt new triennial policies on remuneration companies. Companies will start to engage shareholders on a new triennial policy in the next six months.
Remuneration policy should be consistent with effective risk management policies. Performance metrics should relate to the company’s articulated strategy and risk tolerance. Any good remuneration package will reflect an alignment of interests between the executive and the shareholders, incentivise through challenging performance criteria and deploy appropriate claw back arrangements which focus the mind.
In this final year of the first triennial cycle we can see significant votes against the remuneration report of major companies, including rejection by the shareholders of each of BP, Smith & Nephew, Weir Group and Shire. Each of these companies is simply making payments within the scope of an already approved policy. Both companies and shareholders need to consider why support has not been given.
The Executive Remuneration Working Group of the Investment Association has embarked upon a project to encourage simplification of pay practices for companies on the UK markets. The Investment Association is hopeful that it can drive a change in behaviours away from the complexity and potentially distortive effect of Long-Term Incentive Plans, believing such plans to often result in a poor alignment of interests between executives and shareholders.
Small and mid-size quoted companies rarely attract the attention of the largest companies and often, given the high-growth and entrepreneurial nature of many of them where directors hold significant direct equity stakes. Indeed, most of these companies are not subject to the rules set out in the 2013 remuneration reporting regime. The Quoted Companies Alliance has recently revised its Remuneration Committee Guide for Small and Mid-Size Quoted Companies and will be launching the document in June 2016, focussed on companies having an open and frank engagement with shareholders on remuneration issues and putting in place packages which can be well understood by both executives and shareholders.
Finally, ShareSoc, the body which supports individuals who invest directly in the stock market, has created a document setting out the expectations on pay for its members which, again, repeats the call for good engagement, removing unnecessary complexity, and ensuring a good alignment of interests.
By Edward Craft