pay has defied a fall in company performance, according to a new study
published today, which calls on investors to wield their power by
exercising their right to vote on remuneration reports.
report, which studies the impact of the "say on pay" power handed to
investors at annual meetings since 2002, shows an inverse correlation
between the cash paid to executives and the performance of the
FTSE All-Share index.
The divergence is clearest
in the FTSE 100 where cash payments to executives increased by 80%
between 2000 and 2008, when the FTSE 100 fell by 30%.
The report, by the corporate
governance body Pirc and pension fund Railpen, found some investors were
not exercising their votes effectively as the average vote against a
remuneration report had fallen by the end of 2008 from its peak in 2004.
Alan MacDougall, Pirc's
managing director, said: "Shareholders need to use the rights that they
have to challenge companies over remuneration if we are to encourage the
implementation of pay policies which reward long-term success."
Bankers' pay in the run-up
to the crisis has been used an example of shareholders' ineffectiveness in
overseeing companies in which they own shares. Acknowledging this,
MacDougall said: "There is more work to be done" in shifting directors'
pay towards performance.
Even so, Pirc and Railpen
argue that since the introduction of a vote on remuneration reports, the
element of a director's pay that is influenced by long-term performance
has increased. After the "say on pay" was introduced, there was a sudden
spike in the number of incentive share schemes introduced and a move away
from share options to long-term incentive plans (Ltips), preferred by
investors for offering better links to performance.
MacDougall said: "The
introduction of a shareholder advisory vote in the UK has clearly led to
more engagement on remuneration and the shift towards a greater proportion
of total rewards being performance-related is evidence of this."
Even Ltips do not guarantee
a link to performance as the report notes that directors made significant
gains in their Ltips in 2004 "when the preceding three-year performance
period would have included the downturn years of 2002 and 2003".
The possibility for golden
parachutes – a big payoff when a director is ousted – has been lessened as
the length of directors' contracts has been reduced. In 2001, 75% of
directors had one-year contracts but that has risen to 95% now, limiting
any payoff to no more than one year. The Greenbury report in 1995 first
recommended that contracts be of one year or less.
The first ever remuneration
report to be defeated was at GlaxoSmithKline in 2003 over a possible
golden parachute for the then chief executive Jean-Pierre Garnier, who had
a two year contract.
"This served to raise the
profile of the remuneration report resolution," the report said. GSK
overhauled its pay plan in 2004 and again this year as the trans-Atlantic
company shifted more towards UK-style packages.
The introduction of the vote
on pay – following large payouts to the former directors of Marconi – has
led to more consultation on pay deals by companies. The authors of the
report are cynical about this new level of so-called engagement.
"Sometimes an incentive plan
which does not meet best-practice criteria is an opening gambit. Therefore
shareholders have to be careful not to interpret a shift from this opening
position towards best practice as a 'win'. The revised scheme could be
what the company wanted all along, but it had put forward a less
acceptable version initially in order to manage the consultation process,"
the report said.
Deborah Gilshan, corporate
governance counsel at Railpen, said the UK's experience of "say on pay"
should help bring in similar rules in the US. She said: "The UK's
experience demonstrates there is nothing for companies to fear from the
introduction of a vote on remuneration, and much for then, and their
shareholders, to gain."
The report's authors note
that since their research, 2009 had proved "unprecedented in the frequency
with which companies are facing strong opposition in their remuneration
practices". Royal Bank of Scotland suffered a 90.4% vote against its
remuneration report because of the pension pot awarded to former chief
executive Sir Fred Goodwin. Royal Dutch Shell's pay scheme was also voted