It started on 14 April this year, when BP’s 20 percent pay rise for its CEO was rejected by 59 percent of its shareholders. That was the start, but it was hardly the end. On the same day, just hours later, 53 percent of Smith & Nephew’s shareholders voted against the remuneration committee’s decision to pay out bonuses even though performance targets were not met. A substantial minority—15 percent—voted against gas utility Centrica’s pay package just a few days later on 18 April. On 21 April, 42 percent of Anglo American shareholders voted against the CEO’s pay package. Even though it was lower than the previous year, it was still too much for shareholders who saw their investment fall by around 70 percent. On the same day, 14 percent of shareholders voted against CEO pay at information company RELX (formerly Reed Elsevier).

Later in the month, 28 April, 72 percent of Weir shareholders voted against, one of the largest protest votes ever and certainly the largest since pay votes became binding two years ago. Then at pharmaceutical company Shire, almost half of shareholders objected to a salary rise for the CEO. And in the third shareholder revolt that day, construction group CRH saw 40 percent of shareholders vote against an increase in the potential bonus to 590 percent of salary. Some 21 percent of Countrywide shareholders voted against pay at the company. Finally, on 5 May, 24 percent of Reckitt Benckiser shareholders voted against the company's pay policies.

Shareholder power was also seen at HSBC Holdings, where shareholders approved the bank's executive pay by a larger majority than last year after the CEO took a cut in his bonus and pension and the bank lengthened the deferral of bonuses from five to seven years. More than 90 percent voted for the executive pay report, while in 2015 about 24 percent of shareholders opposed it.

While not all the votes against pay reports were majority objections, this level of protest is still not common; and it is early days in the annual meeting season. As well as the mainstream coverage of all these votes, there have been a number of editorials bemoaning the state of CEO pay in the United Kingdom. In the first of two Guardian/Observer op-eds, the author endorsed the Labour Party’s view that worker representation on remuneration committees would have a dampening effect on high payouts. In the second, the author quotes a paper by Max Steuer, reader emeritus at the London School of Economics, called “Headhunter Methods for CEO Selection,” which was published in the Journal of General Management. The findings of the research showed that most executive headhunters were of the opinion that many CEOs were mediocre and that pay cuts would not lead to a brain drain.

In the midst of all this the Shadow Chancellor John McDonnell sent a letter to The Times on 26 April, which outlined plans for an executive pay commission that would consider giving more power to shareholders and some power to employees. “An institutional overhaul is required, particularly in executive pay where a dysfunctional set of institutions have developed over the last few decades,” he wrote. “It’s time to end the remuneration racket and break up this old boys’ network. Pay, particularly for the most senior staff, needs to be set in a fair and transparent fashion, and remuneration should be overseen by those from all levels in a company, from shop floor to director.”

Not necessarily associated with the current Shareholder Spring, the Investment Association (IA) published an interim report last month that led with the following statement: “The Working Group believes the current approach to executive pay in U.K.-listed companies is not fit for purpose, and has resulted in a poor of alignment of interests between executives, shareholders, and the company.” In other words, the system is broken and discussions about pay take up far too much of investor/company engagement time that could be better spent talking about more productive issues—such as long term value growth.

The report is the product of a working group set up by the Association of five members, composed of representatives from companies, investors, and asset owners “to ensure views from across the investment chain are represented.” The working group was set up in September 2015. The IA, as secretariat, gathered the views of more than 50 stakeholders, and these were discussed at an initial meeting of the group in November last year. Discussions continued, and the form of a response was developed during February, with the interim paper composed during March. The projected further tasks for the group include roundtables with important stakeholders during April and May, which will allow the group to get feedback and ask specific questions around the range of new structures proposed. The final response will be published in early summer, which will be followed by a review of the principles by the IA.

“I don’t want to be too curmudgeonly about the protests, especially where progress is actually being made, but you can’t tinker with just one part of the system, you have to mend all the pieces.”

Stefan Stern, Director, High Pay Centre

The interim report recommends a number of different principles. These include:

transparency over incentive targets and actual achievements

remuneration committee accountability

shareholder engagement from fund managers rather than just corporate governance specialists

flexibility over long-term incentive plan (LTIP) structure – moving away from the one-size-fits-all pay structures and relying more on judgment

The group noted “that a growing and disproportionate amount of shareholder-company engagement is spent discussing executive remuneration, to the detriment of other potentially more significant issues. A simpler, more aligned remuneration structure could allow companies and investors to focus their engagement time on a wider set of strategic and governance issues.”

To this end, the report also recommends a range of alternative long-term incentives alongside the U.K.-standard LTIP model—performance shares awarded based on a three to five-year performance period. This has been widely criticised but also recognised as being appropriate in only some cases. The alternatives include:

bonus deferred into shares

simple time-restricted shares

performance at grant, i.e. a grant of shares based on prior long-term performance that vest over time

Writing about Weir’s massive no vote on pay, Manifest, the U.K. proxy voting service, felt that the company may have fallen foul of the IA’s report by getting too simple too soon. It quotes the company’s annual report which said: “… we also recognise that we are one of the first companies to seek shareholder support for a restricted stock programme that applies to all executives. We support the drive for simplification and will keep our policy under review so that it responds to market and best practice developments as these emerge.” That simplification and the choice of restricted stock as an LTIP—widely known as ‘pay for pulse’ in the United States—appears, contends Manifest, to have tripped the company up at the proxy ballot box.


Below is a summary of the Investment Association Working Group Remuneration Guidelines.
1. Structures should be aligned with:

The interests of shareholders—reward for creating shareholder value which should be linked to the shareholder experience

The performance of the company—reward for contribution to good company performance and penalty for failure

The implementation of the company’s long term strategy—reward for successfully implementing the strategy

The interests of other employees in the organization—remuneration structures for executive directors should be able to be applied to other employees in the organisation

Wider corporate and social responsibility goals
2. Structures should be simple—meaning that they should be easily understandable for the participant, remuneration committees, investors, and other stakeholders
Source: Investment Association Working Group

Commenting on the IA’s interim report, the High Pay Centre’s director Stefan Stern noted that “simplicity is what is really missing—cash is a misunderstood medium. We’ve long been skeptical about tying a CEO’s pay so closely to share price.”

Stern continued, “After all, there are all sorts of influences that can affect stock price that have absolutely nothing to do with the CEO. And even five years is hardly long term. We are supportive of the call from the IA for companies to disclose all the fees paid to the remuneration committee adviser, not just those related to pay advice.”

Questioned on whether the sudden flurry of oppositional votes to remuneration committee reports might presage a new Shareholder Spring, such as was seen in 2012, and again in 2013, Stern said: “I’m somewhat tentative on this. There was a lot of noise in 2012 but no lasting change. On the other hand, the size of the vote at BP was very unexpected. Clearly this is a signal that asset managers are talking to each other, potentially via the Investor Forum here in London. More than that, shareholders are voting no, not just abstaining. But still, is it permanent change or just a momentary emotional response about remcos [remuneration committees] just not doing their job? I don’t think they’re faking it; I think they are voting how they actually think.”

Out of 188 resolutions that Legal & General Investment Management (LGIM) voted against in 2015, approximately 50 percent (93) were remuneration resolutions, according to the company’s 2015 voting report—news that sparked some ambivalence with Stern. “It’s good that LGIM is taking a leadership role and sending a signal, but without coordination, it’s just a lone voice.”

“I don’t want to be too curmudgeonly about the protests,” he continued, “especially where progress is actually being made, but you can’t tinker with just one part of the system, you have to mend all the pieces; the remco, the pay consultants, the asset managers, and CEOs themselves should show restraint and should set an example for the organisation.”

While there is no doubt that there have already been a small number of significant protest votes on pay in the United Kingdom, this is no guarantee that this will become Shareholder Spring III. On the other hand, The Telegraph, in reporting on the latest spate of failed and nearly failed votes, warned that there may be more to come, including for Britain’s highest paid CEO, Martin Sorrell of advertising giant WPP, as well as at RBS and Standard Chartered.