For all the claims to flexibility, adaptability and quick response to changing times, it is remarkable how obtuse the corporate world can be.
There is no more lamentable example than executive pay. But could the culture be changing at last? Investor revolts over excessive boardroom pay seem to have been with us forever. These gained momentum with the extraordinarily high pay awards to managers of the privatised utilities in the mid-1980s.
Colin McLean of SVM Asset Management has also noticed the change of mood among institutional investors
A succession of high-minded reports – Cadbury and Greenbury prominent among them - sought to curb the excesses. But the boardroom pay bonanza steamrollered on, due in large part to the complacency and inertia of institutional investors at the time. Few of the ‘big guns’ in the investment world were prepared to back the revolts of the small private investors at annual meetings. But over the past year there have been successful shareholder revolts resulting in a curbing or scrapping of proposed pay awards and bonus to top company executives.
Last week the travel agency Thomas Cook responded to shareholder pressure and reduced the maximum payout for its chief executive under a new long-term bonus plan, after a third of investors voted against it – the second year running that shareholders have raised objections.
Almost a third (32.7 per cent) of shareholders opposed its plan to pay Peter Fankhauser a long-term bonus of up to 225 per cent of his base salary of £703,000, worth about £1.6 million a year.
Scotland’s fund manager infant terrible, Colin McLean, managing director of Edinburgh-based, SVM Asset Management, has also noticed the change of mood among institutional investors. He said last week 2017 could finally be a year for change in executive pay, with both investors and politicians ready for as fight.
Some long-term incentives were put in place before the 2012 reforms, with binding shareholder votes only required every three years. This year, he notes, almost half the FTSE 100 face binding votes on pay “and we will see changes bite. The shareholder revolt seems less likely to fizzle out this time.”
As if on cue, leading City investors are planning the creation of a ‘sin bin’ for companies that overstep the mark on executive pay.
The proposals by the Investor Association are due to be submitted to the Prime Minister’s review of corporate governance on Friday.
While the FTSE 100 has changed little in 17 years, McLean points out, “executive pay has trebled. Average CEO total pay at the UK’s top 100 companies is 150 times higher than average worker income, and that ratio has doubled in the last decade.
UK CEOs are the most highly remunerated in Europe, earning 50 per cent more than the average counterpart in Germany, the next best-paying country. There is growing evidence to suggest there is no strong link between high CEO pay, and performance and some research has actually found a negative correlation between the two.
“Unsophisticated short term metrics like earnings per share growth are often used to assess performance, instead of more robust benchmarks such as return on invested capital.” Well said, Mr McLean. And it does appear that the anger felt by investors is now resulting in positive action.
Thomas Cook responded last week by reducing the maximum potential pay-out to 200 per cent under the “strategic share incentive plan (SSIP)”, but said it would not use it this year. Instead, Fankhauser has been awarded a long-term bonus of 165 per cent of his base salary, which would pay out in three years’ time if the company’s targets are achieved.
In another concession, the company said it would consult major shareholders before the SSIP is used. Companies have come under fresh pressure over executive pay in recent months. Last week, the Church of England, a major institutional investor, said it had written to the 350 biggest companies on the stock market, warning them it would block excessive boardroom pay deals.
Standard Life, the second-biggest shareholder in Thomas Cook, with 13 per cent of the shares, voted against several remuneration resolutions.
Said the fund manager giant, “We disagreed with the introduction of a potential payment to executives above the remuneration policy’s normal upper limit. In addition, we opposed the introduction of new elements to the remuneration plan as we strongly believe these should be dealt with in the existing policy.”
Arguably the most depressing thing is that, even after 30 years of investor rebellions, some top companies are still having to be brought to heel by shareholder action.