What was the U.S. corporate reaction to the pay ratio rule, slated for introduction in 2018? Fight the rule tooth and nail and even elect an anti-regulation president to make sure it never happens.
What is the U.K. corporate reaction to the pay ratio rule proposed by Prime Minister Theresa May in the government’s recent Green Paper? In many cases, it is to try to figure out how to bring down CEO pay so that the ratio doesn’t look so bad.
What would the U.S. corporate reaction be to a proposed binding vote on executive pay? Anathema, and if the Trump administration has its way, even the advisory vote—Say on Pay—might go the way of all things Dodd-Frank.
What is the U.K. corporate reaction to a binding vote? If the Confederation of British Industry is anything to go by, the answer is a resounding “yes”!
Brexit and Trump’s election was supposed to demonstrate how the U.K. and the U.S are somehow on the same track, but little demonstrates the two countries continuing differences in approach to regulation than their approaches to executive pay.
It’s been a stormy year already, and we are barely out of February. Tobacco company Imperial Brands withdrew a resolution in January intended to amend its long-term share plan after discussions with shareholders demonstrated their concerns over lack of disclosure. Proxy firm Manifest hypothesised that the withdrawal was based on the company’s suspicion that it was unlikely that the resolution would pass the required binding vote to approve it. And at tour operator Thomas Cook, another shareholder rebellion caused the company to back away from its intention to award shares from its new equity incentive plan. The largest protest vote at the February AGM was on the binding vote to approve the company’s 2017 strategic share incentive plan, according to figures from Manifest, which received 32.7 percent votes against. The “backward-looking remuneration report” saw a protest vote of 22.5 percent against, though this was an advisory vote and the “forward looking remuneration policy” vote—a binding one like the vote to approve the new share plan—received 21.6 percent of votes against. Thomas Cook’s remuneration committee members also received substantial minority opposition votes.
Last month, the FT reported that the Royal Bank of Scotland is planning to redesign its pay policies, focusing on its long-term incentive plan (LTIP). The paper said it “would nearly halve the amount that senior executives such as boss Ross McEwan receive via the scheme.” The FT also said that a number of large investment firms have been working to reform pay, including Schroders, Aberdeen, M&G, and Hermes, and that the focus of their attention is typically LTIPs.
The storm does not just surround pay plans. According to a survey from Bloomberg, four of the 16 FTSE 100 companies that responded—GlaxoSmithKline, AstraZeneca, Aviva (which has already seen several years of pay protests), and Anglo American (ditto)—all said they will not be publishing the CEO/worker pay ratio touted by the recent government Green Paper, among others. Most of the FTSE 100 companies surveyed, according to the survey, including Tesco, Sky, Next, and Dixons Carphone, said they had not decided whether to include pay ratios in their annual report yet—it is not a requirement yet, just a proposal. On the other hand, Legal & General Group—a company very active in protesting about pay from its investment arm (LGIM) and Land Securities Group—said they definitely will be publishing the ratio.
As a journalist and commentator, I am rubbing my hands with glee at the prospect of seeing the CEO/worker pay ratio—even though the prospect is diminishing in the United States with every Trump Tweet.
There is wide-ranging support for both pay ratios and amendments to shareholder rights surrounding votes on pay from both investors and industry. The Investment Association (IA) sent a comment letter on the Green Paper on governance last week that indicated it would support a change so that if companies received between 75 and 50 percent support for their remuneration report, then it should be put up for a supermajority vote within the year. If companies got less than 50 percent, it should be put up for a supermajority vote in six months. As far as pay ratios are concerned, the IA said that it supports their introduction, saying: “Boards need to better justify the levels of remuneration which they pay to their executives, and pay ratios is one way this can be achieved.”
At the same time, the Confederation of British Industry (CBI), not always a bastion of shareholder and stakeholder rights, put out a press release also in response to the Green Paper with the following recommendations on pay:
Executive pay: A binding vote regime should be triggered if a company either loses the shareholder advisory vote on remuneration outcomes or has faced a significant vote against this resolution in two consecutive years.
Pay ratios: Must focus on the trends within a company’s U.K. workforce—showing how the variance between executive pay and average worker pay is changing over time.
Finally, the Church Investors Group, with some £16 billion (U.S.$19.5B) in investments released its new voting principles, noting that: “Remuneration structures should incentivise the generation of sustainable, long-term, shareholder value and reflect our members’ values.” The group said it would challenge any pay resolutions if either the current or proposed remuneration plans breached any of the following four principles.
Remuneration schemes should not breach accepted local-market good practice.
Short-term incentive awards should not exceed 100 percent of base salary for “on target” performance and/or 200 percent as a maximum award. Companies should disclose “maximum” and “target” award levels.
Possible awards for short-term performance should not exceed possible long-term awards.
Disclosed “non-financial” metrics should be incorporated into variable remuneration schemes.
Both the Imperial Brands and the Thomas Cook plans would have breached at least one of those principles.
But not everyone believes that regulation is the path to pay salvation. Chris Hodge, policy adviser for the ICSA: The Governance Institute, said in his recent white paper “Detangling Corporate Governance”: “But in over twenty years it [disclosure and regulations] has done nothing to slow the increase of executive pay—some would argue it has contributed to it—or to reduce income inequality. There is no evidence to support the view that those objectives can now be achieved by adding more reporting requirements and voting rights.”
I’ve said it before and I’ll keep saying it, I’m not a fan of the unintended consequences of pay regulation. I agree with Hodge that it has often, especially in the U.S., contributed to preposterous increases in executive pay. I do disagree with his conclusion on reporting requirements, or disclosure since, without these, shareholders do not have the tools to assess whether, for example, incentive arrangements are aligned with long-term shareholder value creation. At least some of the proposals on disclosure included in the Green Paper, and endorsed by the IA among others, will require companies to be more open about the financial and non-financial metrics by which they measure performance, both in the short-term and the long-term. This is the information investors need to make voting decisions. I’m not an absolute devotee of the CEO/worker pay ratio, from a philosophical or practical standpoint, since there are other ratios that might be more revealing about a company’s pay policies. The ratio between the highest paid executives and the next tier down, between that tier and the next, etc., might make more sense in understanding if fairness is a principle in determining pay at the company. But, as a journalist and commentator, I am rubbing my hands with glee at the prospect of seeing the CEO/worker pay ratio—even though the prospect is diminishing in the U.S. with every Trump tweet.
The latest batch of proposed reforms, therefore, appear to be of varying quality. But one on which I may be changing my position, just to prove that I am not averse to being converted, is the shift away from “performance” LTIPs to restricted stock. I have always believed that if you make managers shareholders they will behave like them—for the most part. There are exceptions. It can hardly be said that the behaviour of Mike Ashley, founder and CEO of Sports Direct, was in the interest of all shareholders, or even his own interests, and Bernie Ebbers, founder and CEO of WorldCom, using his major stockholdings as collateral for margin loans to buy more stock was as destructive of shareholder value as they come. But in general, CEOs and other executives with stockholdings worth many times their base salary tend to look after those stockholdings. But if that is going to be the case, and CEOs are going to get restricted stock for just being there and doing their job, why is one rule good for executives and not for workers? Making workers into stockholders will do the job of holding management to account far more effectively than any amount of regulation and codes of culture and governance.