An interesting recent article in the Financial Times FTfm supplement helped to explain why pay is so out of control in public companies. In an interview with Rakhi Kumar of State Street Global Advisors, she made it plain what the problem is.
State Street may not be a household name in the UK, but they are one of the world’s largest fund managers. Fourth in size behind only Blackrock, Vanguard and UBS according to Wikipedia. Last year State Street had more than 4,000 pay proposals to review globally. They used a filter to identify 1,000 proposals that were the most controversial (implying that they did not even look at the other 3,000 and automatically voted “for” the others rather than abstained). They only voted against 300 of them.
It’s actually even worse than the above comments indicate because only this year have they started to include “quantum” of pay in the screen. In other words, the amount of money paid to chief executives was not even considered in the screen. So outrageous levels of pay would not even have been looked at. One can see exactly why companies like State Street, Vanguard and Blackrock who dominate all major stock markets have been criticised for their role in letting pay get out of hand.
Now this writer has a large portfolio consisting of over 70 stocks. I receive all their Annual Reports and vote all my shares at the AGMs where practical to do so (regrettably not always easy in nominee holdings). I have the same problem as State Street in that I do not have time to read the detail of all the Remuneration Reports which now can stretch to more than 30 pages. So here are a few tips on how to handle the task to help folks like State Street:
-
- I speed read the comments of the Remuneration Committee Chairman to see if there is anything of note.
- I review the quantum of pay for the two highest paid directors (which for UK companies is easy now there is a “single figure audited remuneration” table). Is it reasonable in relation to the size and profitability of the company? If not, I vote against the Remuneration Report (and Policy if that is on the agenda). Any figure over £1 million, regardless of the size of the company I am likely to consider unreasonable. Similarly, any company where pay has gone up while profits and/or dividends have gone down is viewed negatively. The pay of non-executives I would also glance at.
- I look at the LTIPs (which I generally don’t like at all) and bonus schemes. Any of those that enable more than 100% of basic pay to be achieved I vote against.
So that’s it. A quick and effective approach to making decisions on pay which can take about 5 minutes. It may not be perfect, but it is better than abdicating one’s duty altogether.
ShareSoc has published some Guidelines on how to set pay which gives more details and may be more helpful for smaller companies if you want to consider things in more detail.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
THANK YOU ROGER FOR HIGHLIGHTING THIS. I have just read your blog and then read the State Street Corporate Governance Policy for the UK and Ireland – here is the link for those who wish to also read it. https://www.ssga.com/investment-topics/environmental-social-governance/2017/Proxy-Voting-and-Engagement-Guidelines-UK-IE-20170320.pdf
The key points about remuneration are only 3 paragraphs and are copied and pasted below.
Remuneration
Executive Pay
Despite the differences among the types of plans and awards possible, there is a simple underlying philosophy that guides SSGA’s analysis of executive pay—there should be a direct relationship between remuneration and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance. When assessing remuneration policies and reports, SSGA considers factors such as adequate disclosure of different remuneration elements, absolute and relative pay levels, peer selection and benchmarking, the mix of long-term and short-term incentives, alignment of pay structures with shareholder interests as well as with corporate strategy and performance. SSGA may oppose remuneration reports where pay seems misaligned with shareholders’ interests. SSGA may also vote against the re-election of members of the remuneration committee if we have serious concerns over remuneration practices and the company has not been responsive to shareholder pressure.
Equity Incentives Plans
SSGA may not support proposals on equity-based incentive plans where insufficient information is provided on matters such as grant limits, performance metrics, performance and vesting periods and overall dilution. SSGA does not generally support options under such plans being issued at a discount to market price or plans that allow for re-testing of performance metrics.
This policy is so loosely worded that if fails to tell SSGA clients/customers what they will and what they won’t accept. It also fails to mention the recent change that now for the first time they will be looking at quantum.
Another problem is that by only voting against the worst 8% (300 out of 4,000) say on pay votes they are condoning the other 92% as acceptable.
The ShareSoc Remuneration Guidelines say that for larger companies pay should be reduced to less than half current levels and that annual bonus should be a maximum of 100% of salary and LTIP awards should not normally be more than 100% of salary p.a. see https://www.sharesoc.org/ShareSoc-Remuneration-Guidelines.pdf
The summary of the ShareSoc policy is:
For larger companies, ShareSoc believes and recommends:
* Current levels of FTSE100 CEO pay are excessive. An appropriate level of compensation should be less than half of the amounts currently being awarded.
* FTSE 100 CEOs’ maximum bonus should be 100% of salary (currently 200% is typical) and LTIP maximum normal annual award should be 100% of salary (currently 300% is typical). It may be necessary to offer more to externally recruited CEOs, in their first year.
* Remuneration creep needs to be reversed. Remuneration has tripled over the last 18 years, but the FTSE 100 share index has barely increased at all.
* To strengthen the executive board’s focus on the company’s long term performance, share options should be a central element of the remuneration package, with the requirement that a meaningful portion of share incentives must be held throughout tenure.
Please note also that Manifest has agreed to allow ShareSoc to publish Manifest reports on its website. These reports contain a detailed analysis of remuneration for main market and larger AIM companies.