Directors' remuneration issues: An introduction
This guide is based on UK law.
Introduction
The remuneration of directors remains a “hot” business topic,
with companies under increased pressure to get it “right”. Pay
policies must not only attract and retain the best executive talent
but also be fair and justifiable.
The 2002 Directors’ Remuneration Report Regulations (“the
Regulations”) extended the power of shareholders, entitling them to
an advisory vote on the remuneration report at each annual general
meeting. The 2003 Higgs review on the role and effectiveness of
non-executives led to changes to sections in the Combined Code
dealing with remuneration.
UK institutional investors have been swift to respond to the new
regulatory environment. The annual vote on remuneration reports has
given them an opportunity to comment each year on those aspects of
companies’ remuneration that do not meet their views of what is
acceptable good practice. Since these views evolve over time,
remuneration committees now need to consider each year whether
their policies remain appropriate.
As well as demands from the government, the UK Listing Authority
and investor bodies, companies, of course, have the media to deal
with. Clashes between investors and companies make good stories.
Get remuneration wrong and your public, your customers, will soon
hear about it.
The environment, though, is not all bad from a company’s
perspective. Many companies have used the new regulatory framework
as an opportunity to engage with institutional shareholders and to
demonstrate how remuneration policies fit within broader and
changing company strategies. As a consequence of improved dialogue
with shareholders, some are able to achieve “bespoke” remuneration
arrangements that fit their specific outlook and circumstances.
The guidelines of institutional investors are not rigid: there
is room for flexibility, if a good case can be made.
While headline-grabbing cases of “no votes” are likely to
continue, they are far from the norm. For every United Business
Media or Amvescap (see case study below), there are many
other companies that successfully review remuneration arrangements
ahead of the AGM. Research by Deloitte, published by the DTI in
January 2005, found not only a significant increase in compliance
with the Regulations but also evidence of better investor
relations: more than 90 per cent of shareholders said
communications with companies had improved.
Case study: Shareholder power over pay:
United Business Media
Although the shareholder vote
on the remuneration report, compulsory since 2003, is only advisory
it can have a powerful impact. This was demonstrated in May 2005 by
investors in publishing group United Business Media.
The annual remuneration
report disclosed the payment of a special £250,000 bonus to the
company’s chief executive Lord Hollick for ensuring a successful
handover to the new chief executive David Levin. This triggered a
major rebellion, with 76 per cent of shareholders voting against
the 2004 remuneration report at the AGM.
UBM claimed it was
contractually bound to pay the bonus whatever shareholders said,
and Lord Hollick appeared defiant, saying he had earned the money.
The shareholders protested that ensuring a smooth transition was
one of the “normal duties” of a chief executive and did not merit a
special award.
Peter Montagnon, head of
investment affairs at the Association of British Insurers (ABI),
the voice of some of the UK’s biggest institutional investors, was
quoted in the Financial Times of May 13, 2005 as saying: “The
company’s owners have spoken. If Lord Hollick insists on keeping
the payment then he will be remembered for defying 76 per cent of
shareholders – and not for his good performance as chief
executive.”
A few days later, Lord
Hollick agreed to waive his right to receive the money.
Since the UBM case, builders’
merchants Travis Perkins and fund management group Amvescap have
both been subject to shareholder revolts over “handover” bonuses.
Although Amvescap did have its remuneration report approved in
2006, only 51 per cent of shareholders were in favour.
Reference points
Employers in general – and quoted companies in particular –
should today be aware of the following when setting pay
policies:
- the Combined Code on Corporate Governance,
particularly Section 1B (remuneration) and Schedule A (provisions
on the design of performance related remuneration);
- the Financial Services Authority’s Listing
Rules, particularly LR 9.8.8 (relating to disclosure of
directors’ remuneration) and LR 9.4 and LR 13.8.11 to 13.8.15
(relating to approval of share plans by shareholders);
- the Companies Act and regulations made under
it that legislate for the contents of the directors’ remuneration
report for quoted companies, as well as setting out the basic
remuneration disclosure requirements for all companies, quoted and
unquoted;
- the guidelines of UK institutional investor
bodies, particularly those of the Association of British
Insurers or ABI (“Executive Remuneration – ABI Guidelines on
Policies and Practices”) and the National Association of Pension
Funds or NAPF (“Corporate Governance Policy”).
