The Big Question: Does shareholder resistance impact on executive bonuses?

We ask the experts for their answers… have your say online at the Employee Benefits forum

Marc Jobling, assistant director of investment affairs at the Association of British Insurers:

The dialogue between shareholders and board remuneration committees is constructive in most cases, and where shareholders have concerns, they are generally listened to.

The problem we might find is that sometimes the conversations are not sufficiently focused on strategy and the interests of shareholders, and can get too bogged down in technical detail. It is not a perfect process, but it is worth noting that only a few remuneration reports are voted down, and not that many reports receive significant votes against.

On the other hand, when you do have a significant vote against, or a report is voted down, that really is the time to open up to shareholders, talk to them and understand their concerns. The concerns could be because they do not think the bonus is justified, or because they do not think the remuneration policies are suitably aligned to the company’s strategy.

If you are starting to get over 10% of your shareholder base not supporting your remuneration report, then it behoves the remuneration committee chairman in particular, and, to an extent, the chairman himself, to properly go out and engage with shareholders and listen to their concerns.

We have found that companies that have lost remuneration reports or have got many votes against have generally come back to shareholders with a willingness to listen, and that must to continue.

What we do not want is for companies to become almost immune to high levels of dissent and continue to operate as normal.

Ceri Ross, senior manager in Ernst and Young’s performance and rewards team:

The recession has increased both the visibility of UK executive compensation practices and the potency of emotion around the issue. Regulation and control of such practices is no longer being left to press activists and regulators. There are well-documented examples of purposeful shareholder resistance to top-level remuneration packages at a number of high-profile organisations. This kind of shareholder scrutiny will lead (and has led) to changes to both the formulation and, in turn, composition of bonus packages for executives.

Recent examples of shareholder activity indicate multiple reasons for challenge. One of the more substantive trends is closer shareholder examination of performance measures. There is a perceived requirement to ensure measures are not only effectually linked to corporate goals, but that each executive has a personalised, truly challenging and robust set of goals. In many cases, robust has translated to a move away from softer-style behavioural metrics and towards quantifiable financial evaluation.

One consistency has been with opportunity-to-earn levels, which have (as a percentage of base salary) remained broadly unchanged. A target-hitting FTSE 100 executive would still hope to retain bonus opportunities (current median is 150% of base salary). However, shareholders are likely to be more vigilant in opposing the award of either discretionary part or full bonus payments to those who do not meet targets. Equally, and conversely, in what we might presume is an appreciation for the general mood of the public, regulators and shareholders, a number of top executives have refused bonuses even where entitled. We may see more of this in the future.

Jeremy Mindell, senior reward and tax manager at Henderson Global Investors:

The answer appears to be no. Very few remuneration reports are actually voted down, so anyone looking for a tidal wave of shareholder disapproval to curb executive pay will be disappointed.

Nevertheless, shareholder activism does have an effect on remuneration committees (remcos). It provides a powerful incentive for remcos to review executive pay thoroughly and robustly, and make sure it does not hit the headlines. Remuneration is considerably more controversial when it is seen as a compensation for failure rather than an a reward for success.

Under the principle of comply or explain, you either comply with the codes and guidelines, or you explain why you are making exceptions. So far, there has been more emphasis on compliance than explanation. This may change if companies struggle to remain competitive as the regulations become more onerous. As long as remcos give a reasonable explanation for unusual aspects of their remuneration policy, there is rarely an issue with shareholders.

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For the next few years, there will be greater emphasis on executive remuneration in an atmosphere of anticipated pay freezes and tax rises. Companies will also need to factor in the more sceptical view of new business secretary Vince Cable to large remuneration packages.

To remain an open and successful economy, the UK needs to attract talent from around the world. Top-quality management remains difficult to recruit and a hair shirt policy would not be in the long-term interests of shareholders, companies and the country.