News analysis: Is shareholders’ revolution justified?

Shareholders’ revolts against executive pay have rocked some big companies recently, but do they really understand the issues? Nicola Sullivan reports

Aviva, Barclays and Trinity Mirror are on a growing list of companies that are bowing to shareholder pressure on executive pay. But such high-profile examples of shareholder revolt have raised questions over shareholders’ understanding and perception of executive pay.

Brian Friedman, founder of the Forum for Expatriate Management and former adviser to numerous remuneration committees, said: “A simple acid test is that if you take the aggregate pay of every chief executive officer (CEO) in the top 100 [FTSE] and compare it with the aggregate pay of CEOs in the top 100 five or 10 years ago, it is very significantly higher. Those numbers cannot be justified in aggregate by any major change in how business has been performing. That is why shareholders are increasingly irritated.”

According to Richard Higginson, head of reward at Towry, problems arise when shareholders reject an executive remuneration package even if the performance measures it is based on have been fully met. “If [shareholders] are rejecting the CEO’s bonus because of a sense of injustice over how much he is paid, well so be it, but I don’t think that is fair, particularly if the remuneration design has been quite specific about the performance measures somebody is going to be paid for.”

But Katharine Turner, executive pay consultant at Towers Watson, said the performance measures that shareholders want to see met, vary. “Some institutional investors will say ‘we think relative shareholder return is probably the best sort of performance measure’. They will tend to say that about all organisations, irrespective of the sector or stage of development, and others will say ‘no, it is return on capital or it is earnings per share’.”

Shareholders will also have different levels of expertise in certain areas, said Turner. For example, fund managers are paid to understand the business and how it ticks, while some shareholders will be experts on corporate governance, but not on pay. “The danger is that the corporate governance experts are not experts in how the business in run and how real decisions are made in the commercial cut-and-thrust the board believes are in the interest of shareholders.”

The government is addressing the disconnect between directors’ pay and long-term company performance by giving shareholders of UK-quoted companies binding votes on directors’ remuneration. The measure, outlined in the Enterprise and Regulatory Reform Bill last month, has attracted a mixed response.

Higginson said a binding vote is a step in the right direction, but shareholders should have a greater say in the design of executive pay policies. “When a head of reward puts in a proposal to the remuneration committee that says ‘this is what we want the bonus plan to look like and this is how we want performance measured’, why not bring shareholders in at that point to say whether they accept it?”

But Andrew Ninian, head of corporate governance at the Association of British Insurers, said the binding vote would allow firms to demonstrate how remuneration is aligned with company strategy and shareholder value creation. “We believe the future policy should include full disclosure on contracts, including contractual terms on exit,” he said. “This is critical if the policy is to be comprehensive and tackle reward for failure. With these additional disclosures, a binding vote on exit payments is not required.”

Turner added: “The government is saying it is not its job to micro-manage companies and pay, but it is not shareholders’ job to micro-manage their investee companies. That is the whole point: companies need good people sitting on these boards who do not have to be micro-managed.”

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Speaking in London last month, Marks and Spencer board chairman Robert Swannell said that when it comes to executive pay, shareholders should ask to see the data. “In the end, it is shareholders who can really make a difference,” he said.

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