Boards of UK companies have had to adapt over the last few years to executive
pay taking a disproportionate prominence in corporate life and in the
relationship between a company and its shareholders.
The reason for this prominence has been wholesale changes both in the
information companies are required to disclose on executive pay and the impact
of an annual shareholder vote on a company’s remuneration committee report.
The motives behind these changes are generally commendable providing they are
to encourage companies to explain and justify their executive pay policy to
shareholders. However, the resulting rules have had a significant impact on
management time. In addition, remuneration issues tend to dominate the dialogue
between shareholders and the relevant company. This can be an uncomfortable
place for both the board and shareholders due to the emotive nature of pay.
When the board of a UK company looks at its executive remuneration policy and
sets out the actual levels of compensation paid, it has to be mindful of a
number of issues. Executives should look at regulations setting out detailed
disclosure of all aspects of executive compensation out in the past year and the
proposed policy for the next year.
The remuneration aspects of the combined code, which applies to all UK listed
companies, is also significant. Voting guidance issued by shareholder
representative bodies, such as the Association of British Insurers and Research,
Recommendations and Electronic Voting, on how their members should vote on
remuneration matters shouldn’t be disregarded.
This guidance is based on how a company’s remuneration ‘stacks up’ compared
to their guidelines on acceptable pay which go significantly further than is set
out in the statutory regulations and combined code.
Also institutional shareholders will have guidelines on acceptable pay. Some
of which will be consistent with the ABI and RREV guidelines, while others will
be consistent with each other, but also some of which will be individual to that
particular investor is pertinent.
Maze of regulations
The final arbitrator of whether a company has successfully negotiated the
maze of regulations and guidelines above is the advisory vote on the
remuneration committee report.
‘Advisory’ in this context is a bit of a misnomer, as while legally the
company is not obliged to make any changes to its executive pay as a result of a
‘no’ vote, in practice the resulting vilification is enough to make boards
comply! Those companies that have experienced a no vote have generally spent a
material amount of management time and incurred significant third party costs in
remedying the situation.
There has, perhaps, been a perception in the US that this is a quaint British
problem resulting from our media’s obsession with ‘fat cats’ and the national
past time of knocking anyone who has been successful. Compared to their UK
counterparts, US executives have until very recently had a very benign pay
environment. Required US disclosure is cursory compared to the UK, with US
investors being positively apathetic on both the issue of disclosure and the
levels of compensation provided.
The current situation in the UK is that executive remuneration is managed
through a mixture of regulation, self regulation and informal pressure. This is
far from perfect but the detailed legislative approach would be far worse. The
idea of binding votes on US executive pay would be a disaster for all concerned
and would not work in practice as ultimately the board has to be responsible for
running the company not shareholders. The role of shareholders is to appoint the
board to run the company not to start running it directly themselves. However,
the difficulty of shareholders influencing US board appointments is another
issue, which is currently getting significant air time in the US.
I do not believe that UK style votes on executive remuneration will happen in
the near future in the US.
However, there is an awakening of US shareholder interest in this area. Further,
the US has historically demonstrated the capability of a knee jerk response to
corporate issues (Sarbanes-Oxley). Therefore it might only take a few high
profile cases involving inappropriate executive pay for US regulators and
shareholders to look at the UK model and consider whether to ‘Americanise’ it!
A SEA CHANGE
Recently we have seen option expensing affecting the results of US companies
one thing guaranteed to make shareholders sit up and take notice.
This has been coupled with remuneration excesses coming to light in the
corporate scandals to hit the US in recent years.
Most recently we have seen a mass confession from companies who have been
selective when setting the strike prices of the historic option grants to their
In this context it is interesting to note that the reason the option pricing
issue has hit the headlines is as a direct result of the increased disclosure
required by new accounting standards.
Even with these issues and the resulting changes proposed by the SEC, the US is
still a long way from shareholders voting on executive pay.
However, experience in the UK tends to suggest once the disclosure bandwagon
is given a ‘push’ it starts building up momentum quickly with more and more
details being required by regulators and investors.
Further, if the US goes on the same journey as the UK, once the information is
disclosed the following may start to happen:
• investors will start to compare and contrast companies;
• investors will look at the total cost of a company’s executives compared to
• investors will start to give their opinion to companies on what levels and
structures they feel are appropriate;
• some companies will ignore these views giving rise to shareholder concerns.
In these circumstances it only takes one or two further high profile issues
surrounding company performance and executive pay to act as a catalyst for
shareholders to press for a greater say. This greater say may well end up in a
UK style vote.
If the above scenario happens what could the US regulatory response be?
Hopefully not the remuneration equivalent of Sarbanes-Oxley!
Marcus Peaker is chief executive of Halliwell Consulting
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