The Investment Association represents institutional investors. Last week (on 26/7/2016) their Executive Remuneration Working Group issued ten recommendations for how to “rebuild trust in pay”. They claim to have consulted 360 investors, asset owners and company employees before producing their final report. One of their objectives is to simplify pay structures while improving the alignment of the interests of directors with those of shareholders.
It is widely acknowledged that the pay of directors of public companies has got out of hand and one reason for this is the excessive complexity with multiple bonus and LTIP schemes which makes it very difficult for investors to understand the implications of what they are voting for – one example of this is Persimmon. Even our new Prime Minister, Theresa May, seems to recognise that past reforms of pay to improve transparency and give more power to shareholders have not gone far enough.
The report criticises the fact that companies feel they are forced to adopt a “one-size-fits-all” LTIP model which is both very complex and is not always recognised as being valuable by the beneficiaries which leads to rising pay levels. They think companies should be able to choose a remuneration structure that best fits their circumstances.
There are ten recommendations in all but these are some of the key ones:
- They wish to strengthen remuneration committees.
- They want to improve shareholder engagement as misunderstandings are common.
- Transparency around bonus targets needs to be improved.
- Levels of executive pay need to be tackled.
- Alternative pay structures to the current LTIP models need defining.
The full report is available here: http://www.theinvestmentassociation.org/assets/files/press/2016/ERWG%20Final%20Report%20July%202016.pdf and it is well worth reading.
Writer’s Comments: This is a useful contribution to the debate on how to tackle the pay issue. Some simplification of pay structures so that it is clear what the likely outcome of a pay scheme will be is surely essential. And the complexity also makes it difficult for investors to see and understand the details of pay schemes (Remuneration Reports are now sometimes horrendous reading).
But is surely fails to tackle one of the key problems – namely that Remuneration Committees consist only of board directors and hence they are almost bound to try and please their colleagues. Indeed, their own pay, even their jobs, may depend on them pleasing their colleagues on the board. It is too late to rely on shareholder votes to overturn poor Remuneration Committee recommendations as major investors will try to avoid direct confrontation.
Mrs May has suggested one way to tackle this problem is to have workers and consumers on boards but that might be only marginally effective. In a more revolutionary approach ShareSoc has suggested in the past that shareholders should primarily determine remuneration and board nominations by the use of independent committees (albeit with some board representation). This is along the lines of corporate governance in Sweden. ShareSoc published a paper on this subject in 2011 entitled “Shareholder Committees” which can be read here: https://www.sharesoc.org/Shareholder%20Committees.pdf
It’s not at all outdated which just shows you that not a lot as changed in the last five years in terms of tackling the underlying causes of the pay problem.
Perhaps the best comment on this topic was by Merryn Somerset Webb writing in the FT on the weekend after the Investment Association announcement. She said: “If we really want to see corporate governance reformed – and pay in particular – we need real shareholders (not just middlemen) to vote and we need those votes to count. Get that sorted and I think we might soon end up with a genuine ‘radical simplification’ of executive pay – in the form of high (but not nuts) flat salaries, some of which we might encourage leaders to buy shares with. I want that. You want that. Surely everyone wants that?”
So shareholder rights and voting by those in nominee holdings is also an important area for reform, which is of course another campaign topic ShareSoc has been pursuing.
Roger Lawson
