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The end of 'excessive' executive pay?

19 May 2014

Executive remuneration has been a long standing concern of shareholders as they believe the level of remuneration received by executives and directors can be 'excessive' and is not always aligned with the performance of a company.


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This results in diminished shareholder returns, weakened corporate governance and reduced public confidence in the corporate sector. In the past year, executive pay at the largest UK listed companies has increased by 14% but these raises are often not linked to the performance of the company.

The new directors' remuneration regime

The new regime was introduced in the UK in October 2013 requiring listed companies to: (i) publish certain information in the Directors' Remuneration Report (DRR), including the company's future remuneration policy for directors, payment on loss of office, and details of the amounts paid to directors, which is an annual advisory vote and already a requirement; and (ii) put to shareholders for approval at least every three years the directors' remuneration policy part of the DRR, which is a binding vote. This means that all payments to directors must be consistent with the approval policy and cannot be made until approved by shareholders. Where the original policy has been voted down, an additional general meeting would need to be held to vote on revised pay proposals. This encourages companies to provide as much information as possible in the DRR to avoid the embarrassment of having the unsuccessful resolution.

Shareholders' voting patterns at AGMs

The first companies to be affected are those with a financial year ending September 30.

Aberdeen Asset Management, Imperial Tobacco Group, TUI Travel and Compass Group were a few of the first companies to hold their AGM since the new legislation was introduced. All of these companies issued further information following discussions with their shareholders and before their AGM to clarify the remuneration of new executive directors.

Some companies have received a substantial vote against their DRR in the 2014 AGM season. For example, Sir Stelios Haji-Iannou, founder and largest shareholder (37%) of EasyJet Plc, exercised his vote to oppose the DRR and policy. However, the resolution was eventually voted through with 55.4% of votes for and 44.6% of votes against; the vote may have been swayed by the generous special dividend announced by the company. SThree, a listed recruitment firm, narrowly voted through its DRR with 50.5% of shareholder votes.

Fidelity International, one of the largest mutual funds in the world, has outlined its plans to vote against any long-term incentive plans that allow a director to cash in their shares within five years. A holding period of at least five years, in their opinion, is more likely to better align the interests of executives with shareholders. This shows that executive and director pay is high on the list of priorities of investors. Pension funds and insurance companies may also be supportive of this approach as they need to match their long term investments with their long term liabilities that often stretch decades into the future. Recently, two shareholder advisory groups, Pirc and the Local Authority Pension Fund Forum, advised its members to vote against Barclays Plc's DRR. At the company's AGM, 34% of shareholders rejected the DRR. If other large fund managers also follow suit, it may result in a drastic change in the way companies approach the AGM season.

Following the introduction of the new rules, there appears to be an increase in the level of shareholder engagement and a change in the voting patterns of shareholders. On the other hand, companies have made a conscious effort to disclose to shareholders the necessary information about executive and director remuneration to avoid the relevant resolutions being voted down. Rather than limiting executive pay, these new rules should be seen to link remuneration appropriately to performance and promote engagement between companies over executive pay. At this stage, it is too early to conclude whether the new rules will actually deliver the intended outcome and it should be revisited at the end of the 2014 AGM season.