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Stewardship code gives shareholders a say over pay

In the wake of the world financial crisis, executive remuneration has become an explosive issue, not least for finance directors. After all, FDs are the custodians of the financial health of their business and when things go wrong, how they are remunerated naturally comes under the microscope.

Twelve months ago, the world was in the grip of the worst recession in memory, with the remuneration of senior executives subject to intense media scrutiny.

FTSE-100 FDs’ take-home pay fell for the second time in a row, and FTSE-250 FDs suffered a near-30 percent drop in bonus payouts.

The UK has officially come out of recession and, as confidence appears to be waiting in the wings, this has been reflected in the remuneration of FDs. According to Financial Director’s latest salary survey, FTSE-100 FDs have returned to all-time highs.

After the backward step of 2008, in 2009 the total pay of FTSE-100 FDs saw an 11.7 percent increase, helped by a 27.3 percent increase in bonus payments. FTSE-250 FDs experienced a slightly smaller 23.3 percent increase in bonus payments.

According to Deloitte’s latest report on executive director remuneration, awards are more likely to be at usual levels in 2010. Bonus payouts, which in 2009 were lower than previous years, also appear to be back at more typical levels in 2010.

Although this may prompt some commentators to suggest that remuneration for executives is very much business as usual, some elements have clearly changed.

“I don’t think remuneration structures have changed for good, but neither is it a case of reverting to business as usual,” says Colin Melvin, chief executive of Hermes Equity Ownership Services.

“What has changed is the quality of interaction between shareholder and company. That is good for FDs because they get proper support and challenge from their long-term shareholders.”

Executive remuneration continues to hit the headlines and in recent months there has been a great deal of noise about shareholder activism, with suggestions that shareholders would be flexing their muscles in the 2010 AGM season.

Shareholder revolt
This was the case with Cable & Wireless (C&W), which faced a shareholder revolt in March this year over a controversial incentive scheme that put three executives in line for millions of pounds if targets were met. Last year, C&W also suffered a shareholder rebellion when 38 percent of its investors failed to endorse its renumeration report after the Association of British Insurers objected to it.

 

But it seems C&W was an exception. According to Deloitte, votes in favour of remuneration reports have generally been higher than last year.

When there is a need for opposition, too often shareholders are not speaking out.

“Generally, shareholders are not as vocal as journalists,” quips Melvin.

But things are changing. Melvin says more discussions between shareholders and directors around remuneration are taking place before annual general meetings, heading off many disputes.

Melvin believes this is, in part, a result of the new stewardship code, which places greater emphasis on better dialogue and more engagement from shareholders.

“This is first time anywhere that we have a code for shareholders,” says Melvin. “A comply-or-explain corporate governance code has existed for some time, but we haven’t had anything to guide shareholders.”

As a result, he expects shareholders to take a more active interest in the companies they invest in and remuneration committees need to be ever mindful of shareholder expectations.

Greater engagement from shareholders is having a positive effect. Many companies have taken on board the views of shareholders that long-term awards should not pay out the maximum amount where company performance has been weak and, in 2009, a significant number of companies made lower than usual awards, the Deloitte report found.

Also, a large number of companies are now including a wider range of perfor­mance measures in long-term plans that support the strategic aims of the company.

Shareholders will also be pleased to learn that there has been a further increase this year in the number of companies requiring at least part of any bonus paid to be deferred for a number of years. This is welcomed by Guillaume Prache, managing director of Euroinvestors and Euroshareholders at the European Investors’ Working Group.

“Bonuses and remunerations need to be better aligned to the interests of management and shareholders,” says Prache. “FDs are very much involved in the strategy of the company. The key principle is that incentives should not be made in one shot, but paid over three years.”

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