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Say on Pay
Six Years On Lessons from the UK Experience
Deborah Gilshan Corporate Governance Counsel A Report by Railpen Investments Railpen Investments PIRC Limited and PIRC Limited
PIRC RAILPEN Investments® PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 3
2 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
Contents
Page 3 Executive summary
4 Introduction
7 The UK Say on Pay experience: the context and trends prior to the vote
12 What did the UK Say on Pay vote seek to achieve?
13 The UK Say on Pay vote in practice
16 What has been the impact on executive pay?
23 Results
25 Conclusions
27 A question for the UK: where do we go from here?
Appendix A: Top UK remuneration related oppose votes: 2002-2008
Appendix B: Reasons for opposing, abstaining, or voting for a remuneration report vote
Published by Railpen Investments and PIRC Limited September 2009 Copyright (c) Railpen Investments and PIRC Limited Contact: [email protected] PIRC Limited No 9 Prescot Street London E1 8AZ Tel: +44 (0)20 7247 2323
Railpen Investments and PIRC Limited gratefully acknowledge the sponsorship of The Co-operative Asset Management Limited and West Midlands Pension Fund in the production of this report. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 6
SAY ON PAY: SIX YEARS ON 3
Executive summary
If shareholders need a vote on one voting position. In addition, there In this paper, we discuss the issue, it is executive remuneration; is a responsibility on investors to impact the advisory vote on as Sir Adrian Cadbury, author of ensure that they inform remuneration has had in the UK in the 1992 Cadbury Report on UK companies of the reasons why terms of: Corporate Governance: they have voted a certain way “Financial Aspects of Corporate on the remuneration report a) remuneration levels; Governance”, observes: resolution. b) the relationship between shareholders and companies; “Say on pay promotes dialogue Essentially ‘Say on Pay’ is part of a between investors and boards larger corporate governance and and encourages investors to process, and not an end in itself. c) the importance of engage with boards on a readily It can provide a good insight into remuneration as an indicator of understandable issue, where the relationship of board members the governance structures that interests may conflict. It is also a with each other and how much underpin a company. litmus test of how far boards are ownership the remuneration in touch with the expectations of committee has over the Introductory Section considers the their investors.” compensation process. If a chief concept of ‘Say on Pay’ in the US executive answers questions from market, and considers the other Shareholders in UK companies shareholders on compensation markets where shareholders do have had a mandatory resolution matters, one must question have a vote on remuneration. to enable them to vote on a whether it is the remuneration company’s remuneration policy committee which owns that Section 1 looks at the events in since 2002. Shareholders in US process or whether it is the chief the UK in the lead up to the companies are beginning to have executive who is the ultimate remuneration vote being experience of the same resolution, decision maker. Such observations introduced in 2002. so-called ‘Say on Pay’, with the have wider implications for the Section 2 considers what the vote expectation of the introduction underlying governance structures sought to achieve in the UK. of legislation to require US of a company. companies to provide their Section 3 looks at the vote in owners with a vote on the The question of how shareholders practice in the UK and the reasons compensation of their executives. can engage more effectively with why shareholders vote against the the businesses that they own over remuneration resolution. The discipline of going through issues of remuneration is not a Section 4 evaluates the impact of the annual vote process, from the straightforward one. However, the vote on executive pay overall. perspective of both companies with over six years of experience and investors, is a valuable one. in dealing with a statutory Section 5 considers whether the It enriches the understanding that advisory vote on remuneration, vote in the UK has met its investors have of companies due shareholders in UK companies objectives. to the importance of remuneration can provide valuable lessons for within corporate governance risk the US market. Increasingly, with Section 6 concludes, and considers analysis. It has required investors the globalisation of investment the remuneration report vote in to develop expertise on pay mandates, investors in UK the context of: structures, and this enhances companies are also investing in i) Pay for performance; both the quality of corporate US companies, and will use the ii) Rewards for failure; governance evaluation analytical techniques and iii) Empowering remuneration undertaken, and the overall experience gained from the UK committees; and engagement with companies. when assessing Say on Pay iv) Shareholder activism. Without doubt, the pay vote proposals at US companies. has created a challenge for Furthermore, investors with no Section 7 poses considerations for investors, as it provides an extra experience of assessing Say on UK investors in terms of the resolution at each company on Pay proposals can learn valuable experience of the last six years, which they have to decide their lessons from the UK experience. and going forward. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 7
4 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
Introduction
President Barack Obama, 4 February 2009
“This is America. We don’t disparage wealth...But what gets people upset – and rightfully so – are executives being rewarded for failure. Especially when those rewards are subsidised by US taxpayers.”
1) The US debate includes a proposal to give vote itself acts as a deterrent to The expected implementation of shareholders of US companies an egregious pay practices. an advisory vote on compensation advisory vote on compensation. at US companies comes at an At the time of writing, the bill had On 6 April 2009, in her speech important juncture in the debate been referred to the Committee to the Council of Institutional about corporate governance in the on Banking, Housing and Urban Investors Spring Conference in USA, and globally. By extension, Affairs in the Senate. Washington, Mary Schapiro, the responsibilities and actions of Chair of the Securities and both shareholders, as principals, In February 2009, as part of Exchange Commission (SEC), and board directors, as their President Barack Obama’s identified the areas of governance agents, are under much scrutiny. initiatives to curb executive pay, it reform that would be the focus of The politicisation of the debate was announced that companies the SEC’s immediate agenda. around executive remuneration, participating in the capital access On compensation, Schapiro amidst the perception of a programs could waive the imposed commented that improved fundamentally flawed bonus compensation limit cap of disclosure “is letting a company's culture and public hostility to $500,000 “only by disclosure owners know how their managers banking executives, has only of their compensation and, if and directors ensure that strengthened the need for a requested, a non-binding ‘say on compensation does not drive shareholder vote on compensation pay’ shareholder resolution.”2 inappropriate risk-taking.” - a move that we believe will serve This is an interesting quid pro quo. She referred to a report from to enhance the rights of investors The message seems to be that the Financial Stability Forum3, in US companies. giving shareholders a vote on which stated three principles for remuneration is a sign that a "sound compensation practices" On 31 July 2009, the House of company will adopt responsible – (i) effective governance of Representatives voted 237 to remuneration policies and does compensation; (ii) effective 185 to approve the Corporate and not need the cap imposed. alignment of compensation Financial Institution Compensation Effectively, the waiver of the cap with prudent risk taking; and Fairness Act of 20091, which can be taken to imply that the (iii) effective supervisory oversight
1 Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269) http://www.govtrack.us/congress/billtext.xpd?bill=h111-3269. 2 ‘Remarks on the Economy and Executive Pay,’ 4 February 2009, Washington, D.C. 3 ‘Principles for Sound Compensation Practices’, Financial Stability Forum, 2 April 2009. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 10
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and engagement by stakeholders. • On 5 May 2009, California company awards a new golden It is within this “oversight” role for State Teachers Retirement parachute package whilst shareholders that having a vote on System (CalSTRS) launched simultaneously negotiating the pay comes to the fore. their ‘Principles for Executive purchase or sale of the company9. Compensation’ which set out On 20 April 2007, this legislation Commonly referred to as “Say on model guidelines that they was passed in the House of Pay”, we believe that the advisory considered their investee Representatives by a vote of vote on compensation is part of a companies should follow. 269-134. The very same day, larger corporate governance CalSTRS requested 300 of its then Senator Obama supported reform exercise that is needed in portfolio companies to develop enactment of Say on Pay through the USA. Together with proxy these comprehensive executive his introduction of a companion access and underpinned by compensation policies and to bill in the Senate, which required a majority voting, Say on Pay will allow shareholders an advisory shareholder advisory vote on be an important factor in vote on these policies6. executive compensation. In 2008, modernising the shareholder in addition to AFLAC, five other experience of investing in US • On 7 May 2009, Senator companies gave their shareholders companies. Given the scrutiny Charles Schumer announced a vote on remuneration and all within which compensation is plans to introduce a corporate resolutions received over 90% now regarded, the voices of governance based bill called support, except the vote at dissent on Say on Pay are the Shareholder Bill of Rights Jackson Hewitt Tax Services, which becoming increasingly diluted. Act 2009, which, amongst only received a slim majority of As investors with several years of other enhancements to their 53.6%. experience in the UK market, ownership rights, would give which introduced legislation on shareholders a vote on Say on Pay is becoming a reality; giving shareholders a vote on executive pay. The bill’s aim is and compensation has proved to 4 pay in 2002 , we believe that clear: “to prioritise the long- be the dominating feature of the these reservations are misplaced. term health of (their) firms and 2009 US proxy season, with Some opposition may stem from their shareholders”7. increasing numbers of proposals a misunderstanding of how the on ‘Say on Pay’ either filed by UK regime operates and we In fact, there have been investors or provided by hope that this paper provides a ruminations about Say on Pay in companies to their shareholders. comprehensive overview of the the USA for some time and when UK experience to inform the AFLAC announced, in February In addition, there are ramifications debate about Say on Pay in the 2007, their intention to give 8 from the US government’s US market. shareholders a vote on pay , this intervention in the financial sector. represented a watershed in terms 555 US financial institutions By the middle of this year’s US of US corporations’ general received capital infusions via the voting season, it was obvious the intransigence in providing their US Treasury's Capital Assistance extent to which Say on Pay is shareholders with a vote. The Program, a bank-share purchase now part of the US corporate inaugural vote took place at program intended to restore governance landscape: AFLAC’s 2008 annual general confidence in banks and get them meeting where 93.1% of the to lend10. This program is funded AFSCME reported that, as at • votes cast supported the with $250 billion of the $700 4 May 2009, of the 29 Say on resolution. billion Troubled Assets Relief Pay shareholder proposals that Program authorized by Congress had been voted on since the In March 2007, Congressman in October 2008 via the start of the 2009 proxy season, Barney Frank, Chairman of the Emergency Economic Stabilization which asked companies for a Financial Services Committee, Act. One of the conditions of vote on compensation, 10 introduced the “Shareholder Vote participation was restrictions on received a majority of the votes on Executive Compensation Act” the compensation paid including: cast, out of for and against in the House of Representatives. an annual advisory vote on votes, and the average vote This proposed giving shareholders compensation presented to across these ten proposals was of US public companies an shareholders; limits on 46%; and it was expected that annual non-binding advisory vote compensation; a provision for the around 80 Say on Pay on executive compensation recovery of bonuses and awards shareholder proposals would packages, as well as an additional for the top named executive be voted on in 2009.5 non-binding advisory vote if the officers (NEOs), and the next 20
4 ‘The Directors Remuneration Report Regulations 2002’, Statutory Instrument 2002 No. 1986 5 ‘Say on Pay Shareholder Proposals Garner Record Support During Tumultuous Shareholder Season’, 4 May 2009. Note that AFSCME filed the first shareholder proposals on giving shareholders a vote on pay in the USA. 6 ‘CalSTRS Guidelines offer Substance on Executive Pay’, 5 May 2009 (www.calstrs.com) 7 ‘Support the Shareholder Bill of Rights Act 2009’, letter from Senator Charles Schumer, 7 May 2009. 8 ‘Aflac Adopts Non-Binding 'Say On Pay' Shareholder Vote’ 14 February 2007 9 http://financialservices.house.gov/ExecutiveCompensation.html 10 Participants in Government Investment Plan: http://online.wsj.com/public/resources/documents/st_BANKMONEY_20081027.html PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 11
6 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
most highly paid executives if (Denmark, Finland and Canada). principals. These principals are, the awards were based upon Shareholders in these markets are ultimately, the beneficiaries of inaccurate statements; and a rising to the challenge of Say on pension funds and other savings prohibition on 'golden parachutes' Pay. For example, in April 2009, and investment schemes managed severance awards for the NEOs the Canadian Coalition of Good by institutional investors. It seems and the next five most highly paid Governance (CCGG) announced unequivocal, then, that executives. the development of an shareholders should have an input “Engagement and Say on Pay” into the process. This takes us to 2) Learning from other markets policy 12 which encourages the crux of the matter; having a This paper will explain the shareholders to engage with vote is not about shareholders processes behind the remuneration companies on any concerns having control over the process; report regulations that exist in the around the remuneration policies. what it is about is shareholders UK, which can serve as a model In its statement, CCGG said that having input and influence over for the US and other countries it “regards ‘Say on Pay’ the process and for approving the considering the introduction of shareholder advisory resolutions compensation structures that are a vote on remuneration. Whilst as an important part of [this] in place. This is a subtle, but very the differences between the ongoing integrated engagement important, difference. institutional landscapes of the process between shareholders and US and the UK are well-known, boards”; clearly, an expected But why all this focus on this does not render the UK outcome of having the vote on compensation? experience as irrelevant when pay is envisaged as an considering the US model. enhancement to engagement It is fair to observe that the However, the vote on processes. corporate governance debate remuneration is not unique to sometimes appears dominated by the UK; in fact, it is becoming However, the UK provides the remuneration issues. After all, a feature of governance models largest sample of data and there are many other aspects of in many other countries. anecdotal evidence of the corporate governance (shareholder experience of having a ‘Say on rights, audit issues, board structure In Australia, shareholders have Pay’. This paper sets out the and independence), that make up had a vote on pay since 2005, background to the introduction the corporate governance risk introduced under the Corporations of the vote and we explain some profile of a company. However, Act 2001 (Section 250R). of the experiences of the given the current economic The Australian experience was UK in terms of having the vote. climate, the focus on remuneration recently reviewed by the Business We hope that this paper will dispel has only increased. Roundtable in Australia, and some of the myths around the Charles Macek, the chairman of UK experience that are being There are other reasons, apart the remuneration committee at used in the USA to downplay the from society’s general concern at Telstra, Australia’s major telecoms significance, and achievements, high levels of executive pay, why provider, observed: “I think that of having a vote on compensation remuneration is a fundamental what we are hearing is that issues. This paper should be read focus for corporate governance. communication with the as a contribution to what sort of Many shareholders take institutional shareholders has structures should be in place to remuneration as a proxy for the actually improved as a direct allow investors in US companies wider corporate governance consequence of the remuneration a proper voice in the debate on strengths and weaknesses of the report and I think that’s been executive compensation. company. If there is confidence without a doubt the major positive that compensation plans facilitate that’s come out of that”11. But first, it is always helpful to go true alignment between the back to basics so let us remind interests of directors and In Europe, Sweden and Holland ourselves what the purpose of shareholders, this may assure have a binding vote on executive compensation is, and why shareholders that other pay and further to their initiatives shareholders have an interest in governance structures are in in Switzerland, shareholder group it. One definition of the word place and are working effectively. Ethos (http://www.ethosfund.ch/) ‘compensate’ is as follows: For some fund managers, has had success in getting some remuneration is also often the major Swiss companies to enable “To make satisfactory payment one corporate governance issue their shareholders to have a or reparation to; recompense or that they will take a stance on. remuneration vote (UBS, Credit reimburse.”13 Whilst they might not necessarily Suisse, ABB and Nestle SA) and take a view on quantum, they legislation is currently under Compensation is money provided are very keen on alignment of consideration by the Swiss by the members of a company to directors’ interests with those of parliament. Other countries are remunerate the agents elected by shareholders and have used the also experiencing companies the owners of the company, to remuneration vote as a way to putting their pay to a shareholder provide safe and profitable raise concerns about any vote of their own volition stewardship over the assets of the perceived lack of such alignment.
11 Business Spectator/Mercer Roundtable, 3 February 2009 http://www.businessspectator.com.au/ 12 http://www.ccgg.ca/media/files/guidelines-and-policies/engagement-and-say-on-pay/CCGG%20SOPP%20Final.pdf 13 http://www.thefreedictionary.com PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 14
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1 The UK Say on Pay experience: the context and trends prior to the vote
The context PricewaterhouseCoopers (PwC) DTI, various investor groups took In the UK, the onus is very much to monitor compliance by listed matters into their own hands. In on investors to provide oversight companies with the best practice March 2001, PIRC wrote to all of companies in respect of framework on directors’ 800 companies within the corporate governance issues. remuneration set out in the All Share Index asking them to put The Directors’ Remuneration Greenbury Code of Best Practice forward a voluntary resolution Report Regulations 2002 are a and the Combined Code16. It is seeking endorsement for good example of how investors somewhat telling that only five per remuneration reports and have been encouraged by the UK cent of companies analysed during notifying them that PIRC would be Government to influence that period disclosed, even in advising clients to vote against corporate behaviour. Prior to the broad terms, how performance senior members of remuneration regulations being introduced in measures related to long-term committees where no such 2002, the first reference to a company objectives. Only seven resolution was forthcoming. A few shareholder vote on remuneration of the 270 companies monitored weeks later, a group of investment could be found in the 1948 by PwC chose to put forward the managers, co-ordinated by Companies Act, Table A, where it remuneration report for Hermes, wrote to companies is stated that: shareholder approval at the annual with a similar request, suggesting general meeting, as recommended also that they might propose a “The remuneration of the by the 1995 Greenbury Report17. shareholder resolution on the directors shall from time to time As a result of the PwC report, the matter at recalcitrant companies. be determined by the company in Government announced that it Approximately 10% of FTSE100 general meeting.”14 would be consulting on a number companies complied19. of possibilities for creating “an Looking back at the history of the effective and more focused way in Finally, the Directors remuneration question in the UK, which shareholders could influence Remuneration Report Regulations a report by PIRC in 199315 noted directors’ pay”.18 (DRRR) came into force on that appeals for pay restraint by 1 August 2002 and applied to directors had been made at that In 2000, much of the year was companies' financial years ending time by the Prime Minister, the spent waiting for the on or after 31 December 2002. CBI and the Archbishop of Government’s response to its The DRRR set out what was Canterbury. Issues included large consultation document issued in required of the remuneration golden handshakes, the structure July 1999. This floated various report within the reporting of executive share option schemes ideas for improving shareholder documents of a company, and also and underlying pay increases that oversight of the remuneration- introduced a mandatory annual were outstripping inflation, setting process along with vote for shareholders on the company performance and general proposals to improve reporting. remuneration report for listed wage levels. As frustration grew amongst companies, in advisory form. shareholders over the slowness Listed companies are required to In 1999, the Department of Trade of the Government to report the put their remuneration report to and Industry (DTI) - now the outcome of its July 1999 shareholders in general meeting as Department for Business, consultation exercise, in the a separate resolution. At the time Innovation and Skills - appointed absence of any initiative from the the regulations were introduced,
14 1948 Companies Act, First Schedule, Table A, Part 1:“Regulations for Management of a Company Limited by Shares, not being a Private Company” Section 76 (http://www.companieshouse.gov.uk/about/tableA/comm1July48CoAct1948_P1.pdf) 15 “Directors’ Remuneration”, PIRC Limited, London, 1993. 16 “Monitoring of Corporate Governance Aspects of Directors’ Remuneration” produced by PricewaterhouseCoopers for the DTI (1999) 17 “Directors’ Remuneration: Report of a Study Group chaired by Sir Richard Greenbury”, 17 July 1995. 18 Speech by Stephen Byers, then Secretary of State for Trade & Industry, to the ABI and NAPF Seminar on Institutional Investors and the Competitiveness of British Industry, 19 July 1999. 19 PIRC Proxy Voting Review 2002, p.21 PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 15
8 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
the Government made it clear that recommended opposing the For the first time in the UK, in whilst it did not currently intend to election of both chairmen of 2002, two companies were forced regulate in this area, it would do the respective remuneration to withdraw or amend their so if necessary. In its response to committees. proposed share option schemes the Trade and Industry Select due to the level of opposition. Committee’s 16th Report of In 2001, a £2.5m payout to The first of these was Prudential Session 2002-03, on “Rewards for directors at Royal Bank of which, despite a prior consultation Failure”, the Government stated Scotland, following the NatWest process, attracted 41% opposition that whilst it recognised best takeover, provoked a 17% vote for an overly complex scheme practice was the “preferred against the chairman of the which could have paid the chief option” and that “legislation was remuneration committee, executive, Jonathan Bloomer, an considered an inappropriate route Sir Angus Grossart. award of between £3m and £6m which would create unnecessary (estimates varied) and around complexity and uncertainty as well This was eclipsed by the level of 90% of his salary for median as significant regulatory burden”, shareholder protest at Schroders, performance. (PIRC’s proxy voting there are consequences should the where the board tabled a analysis had highlighted Prudential voluntary approach fail: ”the resolution seeking approval for a and advised opposition to Government will be monitoring payment of £5 million to the shareholders.) Given Prudential’s the position closely and, if need departing chairman and ex-chief role as an institutional investor be, will not hesitate to take the executive, Sir Win Bischoff. The of note, the scheme was also appropriate action”.20 group compensation committee portrayed as setting a benchmark deemed the award a reflection of of acceptability for other It is important to understand not his outstanding contribution companies. In the face of only the political and social during the group’s development opposition fromvarious fund context that led up to the and success over a 16-year period. managers and other insurance implementation of the However, shareholders questioned companies, Prudential backed remuneration report vote whether such a discretionary down the day before the AGM requirements but also the practice payment was justified given that and withdrew the share scheme. undertaken by companies which company growth under Sir Win’s fuelled the concern and the need guidance had been reflected in A week later, Selfridges amended for a vehicle to allow shareholders salary and previously established its share scheme proposals in a stronger voice on remuneration bonus and incentive schemes in response to a Local Authority issues. which he had participated and Pension Fund Forum campaign been incentivised by. Coming after against its weak performance Here are some key examples: the sale of its investment banking targets, a concern shared by other business, many shareholders were institutions. The amendment At the turn of the millennium, dismayed by another transaction clarified the maximum award limit British Airways angered bonus which 40% of the non- and introduced a 5% dilution limit, shareholders by paying their family shareholders voted against. although the target remained departing chief executive, Robert unchanged. The resolution was Ayling, compensation equating to Similar to prior shareholder protest passed but a substantial 25% approximately 400% of base at Smithkline Beecham, in 2001 vote was recorded against it. salary. Possibly in light of the Billiton’s merger with BHP was The company subsequently controversy, the remuneration overshadowed by concerns about committed itself to reviewing the policy was put to a shareholder the automatic vesting of share scheme. vote at the company’s next AGM. options, irrespective of whether In the same year, as the proposed performance targets had been A similar level of shares registered merger between Glaxo Wellcome met, on the completion of the opposition against the HBOS share and Smithkline Beecham gained merger. scheme brought to shareholders in momentum, both companies were 2002, which attracted attention subject to shareholder scrutiny During 2002, 30% of companies in part due a perceived lack of over the terms of the executive put their remuneration reports or appropriate challenging directors’ share plans, which policies for shareholder approval, performance targets. allowed accelerated vesting in the up from 8% in 2001 and 3% the event of a merger such that year before. These proposals were Whilst share schemes attracted awards that were not eligible for more prevalent among larger dissenting votes, major vesting on the merger date would companies with 44% of FTSE100 controversies also emanated from become so. As a result, at companies bringing forward a other remuneration issues such as Smithkline Beecham Group, an resolution, compared to 17% of substantial increases in basic pay award worth approximately 20 Small Cap companies. at BP, Barclays and Schroders. times salary was granted to the chief executive. PIRC therefore
20 House of Commons, Trade and Industry Select Committee – Third Special Report, 2 March 2004 (http://www.parliament.the-stationery-office.co.uk/pa/cm200304/cmselect/cmtrdind/415/41504.htm) PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 18
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The trends In the years running up to 2003, Average executive director salaries (adjusted for inflation): and despite a backdrop of 2000 - 2003 increasing regulatory pressure and general shareholder dismay, 125 companies continued to increase all aspects of cash remuneration. 120 Issues of concern were by no means limited to increases in 115 cash-based remuneration, but also included insufficient levels 110 of disclosure, the structure of remuneration packages, share-based incentive schemes 105 and directors’ contractual arrangements. 100 Growth against year 2000 base 2000 2001 2002 2003
Specific concerns at the time FTSE100 FTSE Mid-Cap FTSE Small Cap related to the lack of an upper limit under numerous cash bonus Figure 1 (Source: PIRC) arrangements; one-off share awards; inadequate disclosure of performance conditions whether i) Trends in salary Pay continued to rise in 2002, with under bonus arrangements or pre-remuneration vote salary increases in the FTSE350 share-based incentive schemes; As Figure 1 displays, average and a rise in the overall cash rolling retesting of performance executive directors salaries, when remuneration across all indices conditions; cliff vesting; and, most adjusted for inflation, increased in despite a decrease in annual cash of all, contract lengths and a rapid fashion for FTSE100 and bonuses and the value of exercised severance arrangements. Rolling Mid Cap companies in the years share option awards. Between retesting, a common practice of running up to the introduction of 2001 and 2002, the average the time, meant that if a company the remuneration advisory vote. executive director’s salary rose by failed to meet performance targets When rebased to 2000, FTSE100 7.8% for the FTSE100, 12.6% for in the set timeframe (usually companies increased average the Mid Cap and 4.6% for the three years), the board would executive salaries by 22.5% over Small Cap. extend the test for one or more three years. years while also adjusting the Salary rises in each index were well performance hurdle to maintain Between 1999 and 2000, the above inflation. Between 2002 the same average annual average executive director’s salary and 2003, the average executive performance target. For example, rose by 6.7% for the FTSE100, by director’s salary rose by 7.2% for if the old hurdle called for growth 5.6% for the Mid Cap and by the FTSE100, 7.4% for the in earnings per share of 9% over 8.0% for the Mid Cap. Mid Cap and 6.9% for the three years, the board would raise Small Cap. the new hurdle to 12% over four Between 2000 and 2001, the years. The consequence of such average executive director’s salary practices increased the likelihood rose by 12.8% for the FTSE100, that awards would become 3.4% for the Mid Cap and 5.4% available, thus undermining the for the Small Cap. concept of ‘pay for performance’. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 19
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-7.3% for the FTSE100, -17.0% Average executive director cash bonus: 2000 - 2003 for the Mid Cap and -13.9% for the Small Cap. On average, 150 annual bonuses were worth 66% 140 of salary for executive directors in the FTSE100, 39% of salary for 130 the Mid Cap and 26% of salary 120 for the Small Cap. Between 2002 110 and 2003, the average executive director’s annual cash bonus rose 100 in percentage terms by 14.5% 90 for the FTSE100, 16.8% for the 80 Mid Cap and 20.5% for the Small Cap. 70 Growth against year 2000 base 60 When each element of cash 2000 2001 2002 2003 remuneration is combined, ie, FTSE100 FTSE Mid Cap FTSE Small Cap factoring in base salary, bonuses, and benefits, the escalation over a four-year period is striking. Using Figure 2 (Source: PIRC) 2000 base data, Figure 3 exhibits the percentage increase in average ii) Trends in bonus Total annual bonuses (excluding combined cash remuneration pre-remuneration vote the value of share-based awards) running up to the first year of Whilst average salaries had increased by 34% for the having a vote on remuneration in increased in excess of inflation FTSE100, 26% for the Mid Cap 2003. In addition, it is worth through the same period, the but decreased by 12% for the noting that this cuts across a effect of the global market Small Cap during 2001. significant market downturn in downturn in 2001/2 manifested On average, annual bonuses were 2001. a relative drop in the level of worth 77% of salary for executive bonuses awarded to directors in directors in the FTSE100, 52% of In the three years running up to 2002, as Figure 2 demonstrates. salary for the Mid Cap, and 34% the remuneration vote, a 30% This resonated earlier for Small of salary for the Small Cap. drop in the FTSE AllShare Index Cap companies that saw bonuses was accompanied by an inversely drop consecutively from 2000 to In 2002, annual cash bonuses related 30-40% increase in 2002. Notwithstanding the relative (excluding share-based awards average executive total cash drop in 2002, average cash and gains) for the average director remuneration for FTSE100 and bonuses still increased through the decreased from 2001, reflecting Mid Cap companies. three year period by approxi- overall poor market conditions. mately 40% and 20% for FTSE100 and Mid Cap companies respectively. As disclosure of Average executive director total cash remuneration targets for directors’ bonuses (adjusted for inflation) against FTSE AllShare performance: was generally limited, it was not 2000 - 2003 possible to assess whether the 140 resumption of an upward trend reflected better performance by 130 the companies or changes in the 120 targets allowing them to be 110 achieved more readily. 100 The increase in salaries and benefits meant that in spite of the 90 drop in annual bonuses, overall 80 cash pay continued to rise. 70 60
50 Growth against year 2000 base 2000 2001 2002 2003
FTSE 100 FTSE Mid Cap FTSE Small Cap FTSE AllShare performance
Figure 3 (Source: PIRC) PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 22
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iii) Trends in contracts & In 2000, whilst contract lengths paid for more elements of a severance payment had been declining the cash value director’s emoluments package pre-remuneration vote of compensation paid to departing than simply salary. As the bonus PIRC first brought shareholders’ directors had increased for all element of packages was attention to the potential indices over the previous two increasing, this pushed up consequences of long notice years. Average compensation compensation relative to salary. periods as far back as 1994 when amounts stood at around 120% over 40% of executives in the of salary and 90% of total cash The trend towards reducing FTSE350 had contracts of three remuneration. Among FTSE100 executive contractual notice years or longer, compared to less companies, 40% disclosed periods to one year or less than 30% of one year or less. liquidated damage provisions in continued during 2002. In 1994 One-year rolling contracts did not 2000, up from 34% in 1999. notice periods in excess of one become the most common form of In the Mid Cap, 29% of year were the norm, held by 70% contract in the FTSE350 until 1998 companies had liquidated damage of FTSE350 directors. This reduced when just over 50% of directors provisions, up from 23% in 1999. to 43% by 2000 and in 2002, only had one-year notice periods For the Small Cap, the percentage 16% of executive directors still compared to approximately 45% had fallen to 11% from 15%. had a contract with a notice period on two-years’ notice. The major longer than one year. However, change took place in 2001 when In 2001, average compensation despite the general reduction in 75% of FTSE350 directors had amounts stood at around 130% contractual notice periods over one-year contracts, up from 56% of salary and 90% of total cash these periods, with inclusion of in 200021. Only 23% had a remuneration. The explanation for ‘unearned’ cash bonuses in two-year contract down from the increase in compensation at a compensation payments, many 42% in the previous year. time of shortening notice periods paid out by companies were still was that compensation was being considered excessive.
Notice periods (FTSE350): 1994 - 2008
100 Three years or more 90 Two years
80 One year or less 70
60
50
40
30
20
10
0 1994 1996 1998 2000 2002 2004 2006 2008
Figure 4 (Source: PIRC)
21 The Greenbury Report first recommended the reduction of contract lengths to one year or less in 1995, Greenbury Recommendations, 1995, D2; B10. The Hampel Committee further emphasised that boards should set as their objective to reduce directors’ contracts to one year or less, Hampel Summary and Recommendations, 1998, 24 and see 4.9 of the Hampel Committee deliberations. The Combined Code (May 2000), opined that directors’ contracts should be one year or less and again reiterated that boards should set this as an objective, Combined Code (May 2000) B.1.7. In Schedule B, in the 2000 Combined Code, it is, in addition, specified that “Any service contracts which provide for, or imply, notice ain Language periods in excess of one year (or any provisions for predetermined compensation on termination which exceed one year’s salary and benefits) should be disclosed and the reasons for the longer notice periods explained.” Finally the Combined Code of 2003 established that service contracts should be set to one year or less and that “if it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period.” This is the same rule included in the successive Combined Codes. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 23
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2 What did the UK Say on Pay vote seek to achieve?
i) Improving the linkage between The word influence is key here; in As a consequence of this, having pay and performance this view the aim of the vote was a vote on remuneration would One of the key aims of the not that shareholders should provide shareholders with an remuneration vote was to improve micro-manage companies by alternative to voting against the linkage between pay and setting pay levels and structuring the remuneration committee performance. Many investors compensation plans. Then, as members and focus concern were not overtly worried about now, few shareholders had the in one area. quantum in and of itself, if large appetite to get involved in the rewards mirrored the creation of minutiae of executive pay As an extension of this, the Say on shareholder value. Such an structures; indeed this was very Pay resolution can be considered approach reflected the desire to much the role of the remuneration as a way to ‘contain’ the concerns provide alignment of interests committee and what shareholders which are remuneration based to between shareholders and delegate to committee members one resolution, which should be a directors as a way to overcome and entrust them to do. positive for companies. the separation of ownership and control (the principal/agent The aim of the vote was to allow iv) Engagement problem). One way in which this companies to demonstrate how A final concern was the overall would be achieved, it was argued, they could align the interests of lack of engagement by was calls for better standards in directors with those of the owners shareholders on remuneration reporting and transparency in by having transparent, effective policies in general. Previously, respect of remuneration pay policies that provide incentives engagement had been primarily arrangements. to act in shareholders’ interests driven through voting activity over the longer term. Whilst on individual share incentive plans. ii) Empowering shareholders and shareholders typically do not want This proved somewhat restrictive improving shareholder democracy to set the detail of remuneration for discussing remuneration A further aim was to empower policy, they should have the right generally, given that focus was shareholders such that they were to a say on how effective they on a specific scheme. Overall in a more informed position on think remuneration policy is in remuneration practices underpin remuneration. By providing achieving alignment of interests. these schemes but it was difficult shareholders with a way to Shareholders have the opportunity to take a more holistic view on influence pay structures the to influence pay policy towards remuneration, or object to broad remuneration report vote would best practice and away from poor remuneration policy. Addressing improve shareholder democracy practices, in order that such incentive schemes in isolation was at companies as a consequence. alignment is achieved. somewhat limiting and often Remember the UK Government’s necessitated taking a view on the key aim when considering the iii) Remuneration committees scheme and ignoring other introduction of a vote was to Although perhaps not an explicit contributory factors such as salary create “an effective and more aim, the introduction of the vote sizes (a multiple of which forms focused way in which shareholders was considered to create greater the basis of incentive scheme could influence directors’ pay”22. focus by remuneration awards). As an extension of this, committees and for them to it was difficult for investors not to have more ownership of the let other remuneration practices compensation process. It would influence their decision on the allow them the opportunity to schemes themselves. demonstrate how they are carrying out their duties as agents of their principals.
22 Speech by Stephen Byers, then Secretary of State for Trade & Industry, to the ABI and NAPF Seminar on Institutional Investors and the Competitiveness of British Industry, 19 July 1999. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 26
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3 The UK Say on Pay vote in practice
In this section of the report we review the evidence provided by Average oppose vote, remuneration issues PIRC’s annual proxy voting 10 reports to give a sense of how 9 shareholders responded to their newly won voting opportunity. 8 7 1) How have investors used the 6 vote? 5 i) Voting trends in remuneration 4
Until 2004 PIRC reported on % of total votes 3 increasing opposition votes on 2 remuneration report adoption at 1 FTSE350 company meetings 0 relative to the level of support 2002 2003 2004 2005 2006 2007 2008 for share-based executive share Remuneration report 4.5 6 6.3 5.1 4.3 3.9 3.54 option schemes (ESOSs) and LTIP 9 6.8 4 4 4.2 3.5 4.9 long-term incentive plans (LTIPs). ESOS 9.8 5 3 4.5 4.4 5.04 3.9 However, from 2005 to the present, the trend has been one Remuneration report LTIP ESOS of convergence on a stable level of opposition. Figure 5 shows Figure 5 (Source: PIRC) that the average level of 3.54%, whereas the average level opposition for remuneration of opposition for LTIPs has risen reports has fallen by 1.5% to by 1% to 4.9%.
ii) Top 5 remuneration issues year-on-year Figure 6 (Source: PIRC) 2002 2003 2004 2005 2006 2007 2008 1 Excessive Excessive Unchallenging One-off award Unchallenging Lack of Golden hello payout severance payout targets targets disclosure potential regarding performance targets. 2 Option Breach of US Lack of Excessive One-off cash Excessive Excessive scheme for dilution limits disclosure liquidation bonus severance severance non-executive regarding damages payout payout director performance targets 3 Breach of One-off option Excessive Lack of One-off award Unchallenging Unchallenging dilution limits award severance disclosure targets targets payout regarding performance targets 4 Breach of US Excessive Unchallenging Golden hello One-off award Unchallenging One-off award dilution limits severance payout targets targets 5 Breach of US Unchallenging Lack of Unchallenging Breach of Excessive Unchallenging dilution limits performance disclosure targets dilution limits liquidation targets conditions/excessive regarding damages severance payout performance targets
Excessiveness One-off award Disclosure ‘Challengingness’ Contracts Dilution d employment Medium-sized nning on or after Please see Annex for the companies involved and a brief description of the issues. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 27
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From Figure 6, the following 2) How have companies i) Consultation summary trends in shareholder responded? Consultation with shareholders has voting on remuneration can be Companies have, in some cases, been another positive outcome of seen: used the vote as an opportunity. the vote process. Companies have It is worth noting that most firms embraced consultation and, of • Protest votes regarding the do not have egregious pay course, used it to their advantage, breaching of dilution limits have practices and have a good story to though it should be clearly declined over time as a tell in terms of their remuneration understood that undertaking reflection of more compliant practices. consultation does not always practice. mean a ‘yes’ vote. Sometimes, an For these companies the vote has incentive plan which does not • There is an increasing focus become an opportunity to gain meet best practice criteria is on the disclosure and shareholder endorsement of their proposed as an opening gambit. “challenging” nature of targets pay practices. Such goodwill There will be features within it after 2004, most likely in light serves companies well when that companies must know of increased company changes are proposed, or there is investors will object to. Therefore, performance as economic an issue of concern raised, in shareholders have to be careful conditions improved and subsequent years. not to interpret a shift from this higher disclosure expectations opening position towards best following the introduction of Generally, anecdotal evidence practice as a ‘win’. The ‘revised‘ the remuneration vote in 2003. suggests that there has been a scheme could be what the more focused engagement company wanted all along, but it • There has also been a growing process for companies and an had put forward a less acceptable intolerance towards one-off increase in engagement activity version initially in order to awards, although this could also with their owners. The role of the ‘manage’ the consultation process. be exacerbated by the increased remuneration committee seems use of one-off awards to retain to have been enhanced as a result As suggested above, some and recruit talent during of the DRRR. From some companies apparently think that improving economic conditions. investor experiences, it has forced simply because they have members of such committees consulted, they are going to • Particularly from 2005, there to take ownership of the achieve shareholder endorsement has been a growing level of remuneration policy and for their remuneration policies opposition to both one-off structures, and it is obvious when and practices. In fact, some awards and the level of this is the case, and when it is not. companies become quite potential and actual severance Whilst remuneration consultants aggravated when they have payments. have their part to play in terms of consulted with shareholders and structuring remuneration plans, still face disagreement. But this is • In the wake of the financial it is the remuneration committees the shareholders’ prerogative. crisis, early indications from the who should make the decision There may always be issues that 2009 season suggest a about whether or not a plan is shareholders object to, and if significant upsurge in opposition acceptable. The remuneration those elements are in the final to remuneration reports in consultants advise the committees, plan arrangements, then we are general. but of course the committees do always going to vote against. not have to take their advice. A further point for consideration is that disclosing that a company has consulted with shareholders does not automatically infer that shareholders have given their consent to the proposals. An additional point is to consider the representative nature of the bodies who have been consulted. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 30
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ii) Defeat of the remuneration Subsequently, GSK overhauled its report vote: GlaxoSmithKline plc remuneration plan for 2004 after Whilst not the only company to extensive consultation with have its remuneration report shareholders and their pay resolution defeated – witness the consultants. The company number and level of defeats in the continues to make changes to its 2009 proxy season alone23 – the remuneration policies as its significance of the defeat of the business evolves and in 2009, remuneration report resolution at prior to their 2009 AGM, a further GlaxoSmithKline (GSK) in 2003 review was undertaken by the should not be underestimated. company in order to implement GSK was the first company to changes to the company’s have its remuneration report remuneration practices, with a defeated by its shareholders and shift towards UK style packages this served to raise the profile of for their new chief executive and the remuneration report resolution their chief financial officer. and, by extension, the debate about executive pay in general. As a consequence, the remuneration report resolution was firmly established as a key aspect of the UK governance landscape.
The concerns at GSK related to the golden parachute provision within the pay arrangements for then chief executive, JP Garnier, with respect to the two-year contract provisions that GSK had agreed with him, and the US pay characteristics of the pay structure, such as a lack of performance linkage.
There was 50.7% opposition to GSK’s remuneration report vote with another 10% of shareholders abstaining from voting. The total dissent of 61% made the GSK vote the highest opposition to a remuneration report at a UK company since the advisory pay vote was introduced.
In response to this vote result, and the concern expressed by a majority of the shareholders who voted, the company announced a fundamental review of all aspects of its remuneration policy and practices by Deloitte & Touche.
23 2009’s proxy season is proving unprecedented in the frequency with which companies are facing strong opposition to their remuneration practices (for example, on 3 April 2009, Royal Bank of Scotland was defeated by 90.4% of shareholders voting against the resolution; and on 19 May 2009 Royal Dutch Shell saw its remuneration report resolution defeated when nearly 60% of its shareholders did not support the remuneration resolution. Two other companies have had the remuneration resolution defeated (Bellway plc and Provident Financial plc). The remuneration resolution at Amec plc and Tomkins plc have passed on minority support, ie, if abstention votes are included, the votes in favour were under 50% of the total votes cast. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 31
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4 What has been the impact on executive pay?
i) Post vote: general pay trends Tracking levels of executive Average executive director salaries (adjusted for inflation): director salaries from 2000 to 2000 - 2008 2008, Figure 7 reflects a relatively sharp drop in fixed-base salaries 140 from 2006 onwards. This is likely 135 explained by an apparent 130 increase in variable performance 125 based bonus and share incentive remuneration (see Figures 8 - 12). 120 The move to a higher proportion 115 of performance dependant pay 110 can be seen as a corollary of increased shareholder engagement 105 100 since the introduction of the Growth against year 2000 base remuneration vote that had equipped shareholders with a 2000 2001 2002 2003 2004 2005 2006 2007 2008 portal to express concerns that FTSE100 FTSE Mid Cap FTSE Small Cap remuneration should have a higher proportion of pay linked specifically to the performance of Figure 7 (Source: PIRC) the company and its associated objectives. Average executive director cash bonus: 2000 - 2008 The effect of the global market downturn in 2001/2 manifested a 350 relative drop in the level of bonuses awarded to directors in 300 2002. This resonated earlier for Small Cap companies that saw 250 bonuses drop consecutively from 2000 to 2002. Figure 8 also 200 exhibits a sharp increase in bonus awards for Mid Cap companies 150 from 2006, which corresponds with an associated decrease in 100
base salaries from 2006. These Growth against year 2000 base caveats aside, over an eight-year 50 period, the general trend has been for cash bonuses to increase 2000 2001 2002 2003 2004 2005 2006 2007 2008 significantly, with Small Cap FTSE100 FTSE Mid Cap FTSE Small Cap awards increasing by 100%, Mid Cap companies a shade Figure 8 (Source: PIRC) under 250% and FTSE100 companies by approximately 200%. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 34
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With the exception of Small Cap Average executive director total cash remuneration (adjusted for companies, Figure 9 reveals that inflation): 2000 - 2008 total cash remuneration for the top 250 listed companies 190 continued to increase through 180 2000 – 2002 despite the global 170 market crash that had affected 160 the economy. This occurred 150 notwithstanding bonus payments dropping in the same period, 140 indicating that companies 130 increased the proportion of base 120 salary and cash benefit payments 110 in the same period. 100 Growth against year 2000 base
90 Growth against year 2000 base 2008 2000 2001 2002 2003 2004 2005 2006 2007 FTSE100 FTSE Mid Cap FTSE Small Cap Figure 10 (Source: PIRC) Figure 9 (Source: PIRC) FTSE100 - average executive director total remuneration Whilst a fractional drop in LTIP against FTSE100 Index performance: 2000 - 2008 gains occurred concurrent to the 450 nadir of the 2003 market crash, Figure 10 indicates that the preceding three years had seen salary, bonus and LTIP gains 400 gradually increase as the FTSE100 index performance depreciated at its sharpest rate. 350 More intriguing perhaps is that LTIP gains grew significantly in 2004 and 2005, when the retrospective preceding three-year 300 performance period would have included the downturn years of
Growth against year 2000 base 2002 and 2003. The relatively steady 40% appreciation in index performance from 2003 up to 250 2007 saw LTIP gains and bonus awards grow approximately 300% from 2003. 200 Growth against year 2000 base
150
100
50 2008 2000 2001 2002 2003 2004 2005 2006 2007
Cash bonus Salary LTIP gains FTSE 100 Index performance PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 35
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In a similar fashion to the FTSE100, FTSE Mid Cap – average executive director we can see from Figure 11 that total remuneration against FTSE250 Index performance: Mid Cap companies saw a drop in 2000 - 2008 LTIP gains concurrent to the nadir of the 2003 market crash, 500 although in the preceding year LTIP gains had spiked with a considerable 350% year growth. Mid Cap companies show some 450 evidence of being more responsive to the market during 2002, during which bonus awards dropped in line with trend of 400 index depreciation. The market turnaround from 2003 to 2007 which had seen the index 350 appreciate approximately 80% was met with a partially correlated rise in bonus awards and LTIP gains. However, in a similar vein to 300 FTSE100 companies, the 2005 spike in LTIP gains presents something of a misalignment between pay and performance, 250 given that the preceding three-year performance period included the downturn years 2002 and 2003. Although perhaps the Growth against year 2000 base 200 most striking performance pay misalignment occurred during 2008, in which LTIP gains rose approximately 150%, bonus 150 awards held at 2007 levels and base salaries increased, over a year in which the index returned full circle to year 2000 levels. 100
50 2008 2000 2001 2002 2003 2004 2005 2006 2007
Cash bonus Salary LTIP gains FTSE Mid Cap Index performance
Figure 11 (Source: PIRC) PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 36
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FTSE Small Cap – average executive director total remuneration against FTSE250 Small Cap performance: 2000 - 2008
400
350
300
250
200 Growth against year 2000 base
150
100
50 2008 2000 2001 2002 2003 2004 2005 2006 2007
Cash bonusFTSE Salary 100 total cash LTIP gains FTSE Small Cap Index performance
Figure 12 (Source: PIRC)
Relative declines in bonus awards However, the market turnaround and LTIP gains up to 2002 were was clearly recognised by the positively correlated with the growth in vesting of LTIP awards market crash of the time, which in 2007 and 2008. The only major bottomed out a year early for performance pay misalignment for Small Cap companies, per Figure Small Cap companies is recognised 12. The significant market by the growth in bonus payouts turnaround up to 2006, which during 2007 and 2008 over a had seen an approximate 60% period in which the respective appreciation in index performance, index fell approximately 80%. was matched with relatively modest growth in salary and bonus payouts. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 33
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ii) Post vote: general pay trends plotted against index performance Average executive director total cash remuneration Rebased to 2000, Figure 13 against FTSE AllShare performance reveals an inverse correlation 200 between the performances of the FTSE AllShare next to the level of 180 total executive cash remuneration 160 from 2000 – 2008. The disparity is particularly evident most recently 140 in 2008. Across the eight year 120 period, a 30% drop in the FTSE 100 AllShare Index was accompanied by an inversely related 80% 80 increase in average executive total 60
cash remuneration for FTSE100 Growth against year 2000 base 40 companies, 60% for Mid Cap 2008 companies and a 30% increase for 2000 2001 2002 2003 2004 2005 2006 2007 Small Cap companies. FTSE 100 total cash FTSE Mid Cap total cash When the respective index FTSE Small Cap total cash FTSE AllShare performance total cash performance is extrapolated and inserted next to each respective Figure 13 (Source: PIRC) market cap, we are able to compare the levels of total cash increases next to their specific Average FTSE100 executive director total cash remuneration index performance. against FTSE100 performance: 2000 - 2008
The divergence is most evident 190 for the FTSE100 (Figure 14), which 180 saw companies increase total cash 170 payments to executives by 160 approximately 80% next to a 150 corresponding 30% depreciation 140 of the FTSE100 in the same 130 120 eight-year period. 110 100 90 80 70
60 Growth against year 2000 base 50 40 2008 2000 2001 2002 2003 2004 2005 2006 2007
FTSE 100 total cash FTSE 100 Index performance
Figure 14 (Source: PIRC) PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 32
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For Mid Cap companies (Figure Average FTSE Mid Cap executive director total cash 15), a general upward trend in remuneration against FTSE Mid Cap performance: 2000 - 2008 total cash payments corresponded 180 with a stagnant slide in FTSE Mid Cap index performance up 170 until 2003, when the index 160 outperformed and surpassed total 150 cash increases for 2005 and 2006. This may explain the sharp 140 increase in bonus payments from 130 2006 to 2007 for Mid Cap 120 companies displayed in Figure 11. The depreciation of the Mid Cap 110 index from 2006-2008 back to 100 2000 levels, saw total cash payments drop by 10% from 90 Growth against year 2000 base 2007 to 2008. 80 A similar trend is exhibited by 2008 2000 2001 2002 2003 2004 2005 2006 2007 Small Cap companies (Figure 16), FTSE Mid Cap total cash FTSE Mid Cap Index performance with the exception that total cash payments dropped in hand Figure 15 (Source: PIRC) with the index from 2000, and increased just as the index turned in 2002. From 2002, significant Average FTSE Small Cap executive director total cash outperformance of the Small Cap remuneration against FTSE Small Cap performance: 2000 - 2008 index up until 2006 was matched with modest growth in total cash 140 payments. These caveats aside, 130 total cash payments finished up 120 30% whilst the respective index finished 40% down. 110 100 90 80 70 60 50 Growth against year 2000 base 40 2008 2000 2001 2002 2003 2004 2005 2006 2007
FTSE Small Cap total cash FTSE Small Cap index performance
Growth against year 2000 base Figure 16 (Source: PIRC) PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 29
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iii) Post vote: trend in the level of incentive share schemes Number of incentive share schemes introduced each year – introduced 2001 - 2008 From Figure 17, it appears that although there is a declining trend 160 between 2001 and 2003 in the number of schemes introduced, 140 there is a positive spike between 2004 and 2006, before it returns 120 to a steady rate of 65 schemes per year. The number of incentive 100 share schemes introduced during the year can be explained by 80 either the renewing of previous 60 schemes that had expired, or by updating the remuneration 40 structure to align further with best practice. Given that this sudden 20 increase follows the introduction of the remuneration vote in 2003, 0 this suggests that it was a result of 2001 2002 2003 2004 2005 2006 2007 2008 updating remuneration structures, in order to meet any resistance Figure 17 (Source: PIRC) that may have been expressed by shareholders in the previous year.
iii) Post vote: structure of Incentive share schemes introduced during by year, by type remuneration: movement from executive share option schemes 100% options to long-term incentive plans As Figure 18 illustrates, between 80% 2000 and 2008 there was a clear movement away from the use of 60% option schemes towards LTIP share awards (or nil-cost options) and share matching schemes. This is 40% partly explained by the growing unpopularity of share option awards following most company 20% share prices becoming underwater after the slump in 2002, making 0% options ineffective at incentivising 2001 2002 2003 2004 2005 2006 2007 2008 directors. From 2003, more than ESOS 72 43 26 27 15 18 10 12 half of all schemes introduced Matching shares 11 10 10 22 29 26 4 6 during the year were LTIPs as they LTIPs 30 38 36 75 56 107 52 47 became normal market practice. 2003 onwards also saw a small increase in the number of share ESOS Matching shares LTIPs matching (or bonus deferral schemes) that were introduced, Figure 18 (Source: PIRC) which reversed by 2007, implying that following the introduction of the vote in 2003, companies were more innovative in considering their remuneration structure. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 28
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5 Results
1) Has the introduction of the • The vote has provided a report at Bellway plc, in January vote met its broad objectives? common platform to engage 2009, where bonuses were paid The current economic situation with companies. It has out to executives despite has heightened concerns about improved shareholder performance criteria not being egregious pay practices. It is democracy in terms of taking met; 59% of shareholders voted important to note that the a view on remuneration. against the remuneration report, structures of investment banking a resounding defeat of the pay, where bonuses play a very • It can be seen to have resolution24. significant role, are different from de-personalised the issue of the pay policies applied to remuneration, drawing the The quantum question is a difficult executive directors of other focus away from remuneration one; it has many facets to it, the companies. Nonetheless, it is committee members generally, first being that it is quite difficult certainly true at the time of and votes against directors as to determine that a specific writing that the question of members of the remuneration amount is too much money. For all executive pay in general is once committee are now used in the remuneration benchmarks in again attracting much scrutiny. extremis. existence, few commonly-utilised metrics say simply: “this amount is This debate is an important one • Having a vote has focused more too much.” As an extension of and has led to renewed focus on attention on remuneration, and, this, an amount is ‘too much’ pay at different levels within as a consequence, executive relative to what? Through companies, and a more general compensation can be taken as experience, shareholders develop discussion about what are fair and a proxy for good governance a sense of when an annual bonus equitable pay policies. One area of generally. If the compensation of six or seven times salary on an growing concern is the differential policies and practices annual basis is probably too between pay of the CEO demonstrate a strong alignment generous. Companies, hopefully, compared to pay for the average of the interests between appreciate that as well. Most employee. Evidence demonstrates shareholders and directors, shareholders do not have any that this disparity has increased it can be generally inferred that issues with high levels of pay if significantly in recent years. other corporate governance those high levels have been Therefore, a realistic appraisal is structures support this generated through exceptional required of the successes and alignment and facilitate the performance and shareholders failures of shareholder engagement protection of the long-term have experienced high levels of over pay spurred by the interests of shareholders. It is value creation. Exceptional introduction of the advisory vote. also important to observe that performance can justify there is now more focus on exceptional pay, but the real There have certainly been many remuneration by financial question is whether performance positive outcomes from the analysts. is truly exceptional. Therefore, introduction of an advisory, the focus has been on seeking non-binding vote on 2) But pay continues to go up performance linkage. remuneration: However, we cannot ignore that overall pay levels continue to Quantum cannot be considered • Having a vote has been increase. Furthermore, in the without a discussion on the valuable in terms of increasing current economic environment, sources of pressure on pay levels. and enriching the dialogue even more emphasis is being One observation is that a key between investors and the placed on fair pay practices, the pressure on executive salaries is company. There is now a more alignment of interests and other executives’ salaries; this sophisticated debate taking performance linkage. Investors will goes back to one of the place. expect awards to only become unintended consequences of payable for performance that has remuneration reporting in that • Disclosure has improved such created value and will not take pay levels are now much more that shareholders now have kindly to rules being pushed to transparent, together with the more transparent information accommodate the different structures that underpin and than before the regulations economic environment. Witness generate those pay levels. were introduced. the defeat of the remuneration
24 http://www.bellwaycorporate.com/pdf/RNS_AGM_results.pdf PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 25
24 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
If there is a well-functioning • In 2008, companies argued that under review, as well as market, this determines the ‘going’ they needed to pay one-off proposals for the future, so it is rate for an executive director. retention payments to executive all-encompassing in terms of directors because none of the compensation practices. Another feature is how long-term performance schemes remuneration at executive level is have paid out. It was recognised The remuneration vote is an linked to pay in other parts of the that such propositions effective vehicle to demonstrate organisation. There have been fundamentally undermined two general support for some changes to the Companies of the key purposes of effective compensation policy whilst Act provisions in the UK, which remuneration systems: the concerns about the actual now require remuneration concept of pay for performance mechanics of incentive plans committees to state ‘how’ they and the alignment of interests can be voiced through the vote take into account other pay within of shareholders and directors. on the actual plan itself. the organisation when setting the As many incentive plans in the pay levels for executives25. Investors have a duty to work US do not have performance Certainly, when you have a pay through the myths and realities of targets applied, shareholders freeze for most of the workforce, executive pay whilst being may decide to vote against the but the executive salaries continue cognisant of the need to reward plans because of the absence of to increase, that seems quite a entrepreneurial talent and risk performance linkage. Therefore, disconnected way to provide taking, and foster a culture of a vote on pay would allow incentivisation for executive long-term wealth generation. It is shareholders in US companies directors. a fine line, and there are certainly to demonstrate to the company legitimate pressures on executive whether it is the overall pay There are also outside pressures, pay. However, in terms of policy they have concerns with, but UK shareholders have, by and retention payments in 2009, this or whether the overall policy is large, managed to dismiss most of seems quite a perverse argument generally good (and a vote in these arguments: now. It exacerbates the concern support is registered) whilst that companies are willing to voting against pay plans • A few years ago there was a overlook the most basic principle themselves, and thus confining perceived risk of UK executives of performance-related rewards – concerns to one area. This going to work in the USA if if the performance criteria complementary approach also they did not get US-style pay. attached to awards has not been works vice versa. The reality is that there are satisfied, then awards should not other reasons why people work become payable, except in the • Not all companies demonstrate in the UK apart from the fact truly exceptional circumstances. poor pay practices; and not all that they do not get US-style investors will have exposure to pay packages. 3) Shareholders getting too all companies in the USA. So it involved will not be necessary for • Subsequently, it was argued A final criticism of introducing a investors to undertake detailed that UK public companies shareholder vote on remuneration analysis of every single needed to offer private equity is that investors will then be compensation plan, and style pay packages, to provide expected to get involved in the certainly in the UK, we do not enough incentive for directors minutiae of executive spend extended periods on to keep companies on the compensation. However, this is every single FTSE company public market. Often, there was misconception for two principal because for the majority of little acknowledgement of the reasons: cases, there are no issues of major downside risks faced by concern. The egregious executives in private equity- • The advisory vote on pay covers practices are what take up the owned businesses, which can a range of compensation issues time and effort, and this is lead to personal bankruptcy if above and beyond the structure merited. the business fails. In addition, of incentive plans, such as employment prospects in the salary, pensions, and overall private equity world look policy on compensation slightly less attractive since the matters. For example, it is credit crunch. helpful to be able to take a view on the level of disclosure on all these matters Furthermore, the vote covers practices that have been undertaken in the year
25 The new requirement for quoted companies to report in their directors’ remuneration report on how they have taken pay and employment conditions elsewhere in the group into account when setting directors’ pay (in paragraph 4 of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008) will have to be included in reports for financial years beginning on or after 6 April 2009. See Schedule 8: Quoted Companies: Directors’ Remuneration Report - Part 2, Section (http://www.opsi.gov.uk/SI/si2008/draft/ukdsi_9780110806303_en_26#sch8) PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 24
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6 Conclusions
The UK’s experience of having a Pay for Performance on pension provisions for resolution to enable shareholders One of the main benefits of the executive directors as a source of to vote on remuneration provides vote is that it has strengthened the potential ‘payment for failure’27. many valuable lessons for the pay for performance culture; this Focus will now turn on the US market. Since the introduction was one of the major drivers of disclosure of pension benefits of the vote, engagement has been the vote’s implementation. and the practices endorsed by based on a more rounded Previously, performance and pay companies in terms of the pension understanding of remuneration. had not been as closely related. provision for executive directors. This enriches both the company Sir Christopher Hogg, Chairman of Proposed UK tax changes on and the investor experience. the Financial Reporting Council pension contributions for high It allows an informed debate to and Chairman of GlaxoSmithKline earners may well have a further take place about the nature of at the time of the defeat of their effect. compensation plans, their remuneration report resolution in structure, the degree of alignment 2003, observes: Empowering Remuneration garnered through the plans and Committees importantly, how it supports the “The vote forced a focus on pay Anecdotal evidence suggests that company’s strategy. It moves the for performance. It was definitely the vote can be used as a way for engagement discussion from a step in the right direction. Even non-executives and remuneration simply a vote on plan details to though the vote is only advisory, committee members to refuse a more relevant debate about it does have an impact – boards unreasonable or unrealistic remuneration practices in the are not insensitive to the demands from executives on round. However, there is an consequences of a defeat or a remuneration matters. The vote important point to make here: high vote against and are very has made the consequences of the remuneration vote has aware of the message that is pay decisions more acute for facilitated better engagement being sent by shareholders.”26 companies, and the responsibilities with companies but the vote and accountability of the and engagement should not be Rewards for Failure remuneration committee have seen as mutually exclusive. The reduction in service contract become more visible. Ishbel The vote is the first tool in the lengths for executive directors has Macpherson, Chair of the process. However, engagement significantly reduced the risk of Remuneration Committee of without voting is engagement so-called ‘rewards for failure’. Speedy Hire plc, a UK Small Cap without teeth and cannot be It was somewhat galling for company, observes: taken as an alternative to voting. shareholders to witness executives They must go hand in hand. being paid a contractual amount “As Chair of a remuneration equivalent to their notice period committee, I value the fact that in order that they no longer serve there is an annual advisory vote on the board of a company with on the remuneration report at the immediate effect, when the annual general meeting. It has stewardship of the company made companies more disciplined under that director’s tenure had in their approach to the reward destroyed long-term shareholder structure of senior executives. value. However, the furore over In certain companies it can the pension paid to Sir Fred provide a brake on demands from Goodwin, previously the chief a domineering executive team executive of Royal Bank of and leads to greater engagement Scotland, has reinvigorated this with shareholders.”28 concern and turned the spotlight
26 Interview with the authors of this report, 2009. 27 In early 2009, there was much public concern and debate over the arrangements for an annual pension amount of £703,000 a year to be paid to Sir Fred Goodwin upon his early retirement as chief executive of Royal Bank of Scotland at the age of 50. Royal Bank of Scotland is now owned predominantly by the UK Government after it was bailed out by taxpayers’ money. Subsequently, on 18 June 2009, the company announced that Sir Fred Goodwin had agreed to a reduced amount of £342,500 per annum (http://www.investors.rbs.com/news/releasedetail.cfm? rs and the ReleaseID=397764). 28 Ibid. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 21
26 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
Aligning interest: the significance As Sir Adrian Cadbury observes: of remuneration We see Say on Pay as an “Say on Pay promotes dialogue opportunity for companies to between investors and boards and demonstrate how they are using encourages investors to engage compensation structures to with boards on a readily achieve alignment of the interests understandable issue, where of directors with shareholders. interests may conflict. It is also We expect that a further a litmus test of how far boards are outcome of the introduction of a in touch with the expectations of shareholder vote at US companies their investors.”30 will be improved, and more transparent, disclosure within the Shareholder activism: how active? Compensation Disclosure and Given the low level of votes Analysis section of annual reports against remuneration reports prior and the Securities and Exchange to the current spike in opposition, Commission has already pressed we would query whether for the use of plain English29. shareholders in UK companies This would put shareholders in a have used the rights granted to more informed position to make them effectively. As discussed effective and meaningful voting earlier, the vote is a core element decisions. There are positive of shareholders’ engagement with benefits for companies in such companies. In our view, Say on developments. Most firms do Pay will only have an impact if not have egregious pay practices shareholders are prepared to vote and have a good story to tell. against companies; furthermore, A vote on remuneration would the right to vote on remuneration provide US companies with the is accompanied by obligations to opportunity to gain shareholder engage with companies. As Ralph endorsement of their pay Barber, group company secretary practices. The value of the at HSBC observes: goodwill created in such cases “Having a vote on the should not be underestimated remuneration report each year and often serves the company underpins institutional well, especially when they are shareholders' rights and proposing changes, or there is obligations to engage an issue of concern on constructively on remuneration compensation, in subsequent issues in the interests of the years. ultimate investors they and the 31 Many investors see remuneration directors serve.” as a proxy for good governance Enshrining a right to vote on pay generally. If there are well- for investors in US companies will structured remuneration practices not end the debate about in place which facilitate the executive pay, and it will not end alignment of interests between examples of egregious practice. shareholders and directors, this can be an indication of a company However, we firmly believe it will that pursues good governance enhance shareholder oversight structures in the long-term where it is currently weak, interests of shareholders. improve the dialogue between companies and their investors on remuneration, and help address the worst practices for the benefit of all concerned. There is nothing for companies to fear, and much for them, and their shareholders, to gain.
29 Speech by then SEC chairman Christopher Cox: 'Plain Language And Good Business' Keynote Address To The Center For Plain Language Symposium, 15 October 2007. 30 Ibid. 31 Ibid. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 20
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7 A question for the UK: where do we go from here?
“Shareholders have had an advisory vote on companies' remuneration reports since 2002. However, our evidence suggests that this advisory vote has largely failed to promote enhanced scrutiny of, or provided an effective check on, remuneration policies within the sector. We believe the time is now ripe for a review of how institutional investors with holdings in the financial services sector have exercised these rights. We expect the Walker Review on corporate governance in the banking sector to examine this issue as part of its work.” ? Banking Crisis: reforming remuneration for directors of should it have some mandatory corporate governance and pay in the UK’s largest companies element?”33 the City, House of Commons has continued to rise rapidly. These are important considerations; Treasury Committee, Ninth Report Enhanced disclosure runs the for if the purpose of the of Session 2008-09, 12 May 2009 risk of the so-called ‘ratcheting’ effect but increased remuneration report in the UK is transparency is nevertheless to remain relevant and current, preferable to continuing opacity. debate must consider these The banking crisis has forced a matters. A key focus should be debate about the role of corporate • The difference between pay at how the powers entrusted to governance within the financial the top of a company and pay shareholders and directors through sector, and specifically the impact for others employed in the the remuneration report vote of remuneration systems which lower echelons of an translate into remuneration systems may have perversely incentivised organisation has generally not that provide true alignment of the excessive risk-taking by banking been debated. This is becoming long-term, and sustainable, executives. This leads, in turn, to a a more pressing concern for interests, of these two parties. wider debate about how the vote some investors now, and a Real progress has been made in on remuneration has been utilised requirement for such the UK since the vote on pay was since it was introduced in 2002, consideration by companies introduced in 2002. However, and the efficacy of the powers it was introduced in the recent events have indicated that has given shareholders. In this Companies Act 2006 32. the remuneration report vote context, three notable must be underpinned by a more observations are: • The format of the advisory vote robust system of dialogue and on pay is being questioned; in a engagement between shareholders • The vote has not addressed the recent speech, Lord Myners, UK and directors, where both are appropriate levels of pay for Financial Services Secretary, accountable for the actions they performance achieved, and we asked whether the vote should take. have shown that the total “continue to be advisory, or
32 Ibid. Schedule 8: Quoted Companies: Directors’ Remuneration Report - Part 2, Section 4 33 Lord Myners, Association of Investment Companies Annual Conference, 21 April 2009. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 17
28 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
Appendix A: Top UK remuneration-related oppose votes: 2002-2008 a) Top 5 UK remuneration-related oppose votes by company during 2002
Company Proposal Opposition Explanation 1 Prudential Adopt Prudential 41% The scheme came in for considerable criticism in terms of executive share its total potential payout, variously estimated at between plan £3 million and £6 million per annum for chief executive Jonathan Bloomer, for achieving top performance. PIRC regarded the scheme as overly complex, with a reward at median performance equivalent to 90% of the chief executive’s salary. In the face of opposition the proposal was withdrawn. 2 TR European Approve the 40% Shareholders raised concern over the remuneration Growth Trust share scheme arrangement of Stephen Peak, a non-executive director for Stephen Peak at TR European Growth Trust, who was remunerated by the fund managers. The maximum award under the scheme was limited to 100,000 options each year with an overall maximum of 500,000. The options were subject to undisclosed performance conditions and were to be issued at a premium of 20% to the share price. 3 Anite Group plc Approve the 41% PIRC corporate governance analysis highlighted that a amendments to number of aspects of the schemes did not reflect best the LTIP practice, notably a lack of information on performance performance targets and the breach of agreed institutional dilution targets. limits. 4 BAE Systems plc Approve BAE 33% Most investors support the operation of SAYE schemes Systems SAYE that are within the accepted dilution limits of 10% in ten share option years because, in principle, they allow all employees to scheme 2002 benefit from business success. However, the high oppose vote was largely due to US shareholders’ opposition to the ‘dilutive’ nature of the proposals. 5 BAE Systems plc Approve BAE 32% As above. Systems SAYE share incentive plan PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 16
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b) Top 5 UK remuneration-related oppose votes by company during 2003
Company Proposal Opposition Explanation 1 GlaxoSmithKline Receive the 51% This was the first time a company’s remuneration report plc remuneration had been voted down as a resolute of investor sentiment report towards a policy which included a potential severance payment of up to $20m for the chief executive, Dr Garnier. 2 BAE Systems plc Approve the 49% The bulk of the opposition came from shareholders remuneration following a US proxy agency’s recommendation to report oppose. The recommendation was followed despite BAE’s employee plans being within UK institutional guidelines on dilution. 3 Emblaze plc Approve the 41% The Israeli-based but UK-listed group put forward a directors’ resolution authorising the issuing of options to its chief remuneration executive of up to 2.9% of the issued share capital. Although not required to seek authorisation under UK rules, Israeli law requires one-off grants to be approved by shareholders. 4 Shire Receive the 40% Contracts provided for a payment on termination of Pharmaceutical remuneration 12 months’ salary, bonus, benefits’ cash value and Group plc report pension contributions. £4.3m pension compensation payment was made to Mr Stahel. Change of control provisions provided for 24 months’ salary, bonus and full benefits (and a mitigation statement was not disclosed). 5 BSkyB plc Approve the 38% Performance criteria for LTIP and the ESOS were deemed remuneration insufficiently challenging and Mr Ball had a two-year report contract which included liquidated damage provisions as well as salary, bonus and benefits. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 13
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c) Top 5 UK remuneration-related oppose votes by company during 2004
Company Proposal Opposition Explanation 1 The Maiden Receive the 63.3% Disclosure was considered poor as the maximum awards Group plc remuneration for the executive share option scheme and the report discretionary bonus had not been disclosed. The executive share option scheme only had one performance criterion at a single vesting point, an EPS target of 6% real growth over three years, which was judged insufficiently stretching in light of brokers’ consensus forecast. 2 The Maiden Approve the 61.1% Proposed performance targets were not specified, other Group plc restricted share than being based on the company’s operating margin. incentive plan There was an automatic vesting of awards on a takeover. 2004 3 Aegis Group plc Approve the 49.2% Shareholder concerns centred around the contractual directors’ termination provisions for the chief executive which remuneration would grant an annual salary and an additional amount of unearned bonus equal to prior years’ annual bonus. Two other directors were also entitled to two years’ pay upon change of control. 4 TT Electronics plc Approve the TT 40.8% The new scheme introduced a performance hurdle of 4% Electronics plc EPS growth per annum against brokers’ consensus 2004 Inland forecast of over 70% EPS growth per annum. Revenue The scheme also allowed full vesting at a single point. unapproved In addition, for each grant the target could be met in any company share consecutive three years in a six-year period. option plan 5 Heywood Approve the 40.2% Performance criteria for LTIP and the ESOS were deemed Williams Group remuneration insufficiently challenging and Mr Ball had a two-year plc report contract which included liquidated damage provisions as well as salary, bonus and benefits. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 12
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d) Top 5 UK remuneration-related oppose votes by company during 2005
Company Proposal Opposition Explanation 1 United Business Approve the 77.11% The opposition vote was a reflection of sentiment Media plc directors’ towards Lord Hollick’s £2.5m bonus for handing over to remuneration the new CEO. Despite earlier protestations that he had “earned it” Lord Hollick offered to waive the payment following the vote. 2 MFI Furniture Approve the 60.47% The points of contention in the committee’s report, as Group plc directors’ acknowledged by the Chairman at the AGM, included remuneration the liquidated damages on a change in control provided for in executive contracts and the extension of the executive co-investment plan. 3 Goshawk Approve the 55.40% At the AGM Phoenix Asset Management, holding over Insurance directors’ 28% of the company’s stock, voted against three Holdings plc remuneration resolutions: the remuneration report and the re-election of the two non-executive directors standing from the remuneration committee. At the meeting, the remuneration report was passed on a show of hands even though a clear majority of proxy votes were cast in opposition. 4 Lonmin plc Approve 54.05% The remuneration committee paid compensation for the the 2004 loss of incentive awards from a previous employer, to a remuneration director who joined the board during the year. report In addition, an ex-gratia payment was made to a director who left the board during the year, in recognition of his work for the company. 5 George Wimpey Approve the 44.20% Performance targets attached to the George Wimpey plc remuneration LTIP were not considered sufficiently challenging by PIRC report and the combined awards during the year under review were deemed excessive. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 9
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e) Top 5 UK remuneration-related oppose votes by company during 2006
Company Proposal Opposition Explanation 1 Croda Approve the 51.51% The proposal met with heavy opposition due to concerns International plc directors’ over the performance targets attached to a long-term remuneration incentive plan. The chairman failed to call a poll and the resolution was passed on a show of hands. 2 Amvescap plc Approve the 48.41% Shareholders opposed the controversial US$9m bonus remuneration payment to Charles Brady, the outgoing chairman, who report was awarded for ‘exceptional leadership during a particularly difficult period in the history of the company, including managing an opportunistic hostile approach and the recruitment and transfer of succession to a new CEO’. 3 Abbot Group plc Approve the 46.10% PIRC pointed out serious concerns over the large awards remuneration of free shares granted under a new executive share report ownership plan, which did not have any performance conditions attached to it. Furthermore, the company provided directors with funds to cover their income tax and national insurance liability arising on acquisition of the beneficial interest in these shares. 4 Morgan Sindall Approve 41.19% PIRC was concerned over the award of the discretionary plc remuneration bonus of 20,000 performance shares to chief executive, report Paul Smith. 5 Psion plc Approve the 39.84% Specific concerns related to targets attached to the long-term share scheme, which were considered insufficiently challenging, plan and the 5% and 10% dilution limits for schemes were not adhered to. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 8
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f) Top 5 UK remuneration-related oppose votes by company during 2007
Company Proposal Opposition Explanation 1 Computacenter Approve share 26.72% The degree of opposition reflected shareholder concerns plc option plan over the fact that the specific performance targets operated under the scheme were not disclosed. 2 Hays plc Approve the 24.93% The proposal met with relatively high opposition due to remuneration strong concerns over the guaranteed bonus, one-off report restricted share award and bonus replacement award that the new chief executive, Mr Cox was entitled to. 3 Computacenter Approve the 23.48% The focal point of concern related to the EPS targets plc remuneration attached to the PSP which were not considered report challenging given the brokers' forecasts. 4 Rank Group plc Approve 14.68% For Rank Group the same concern, as for remuneration Computacenter’s remuneration report, arose in relation report to the EPS targets attached to the PSP which were not considered challenging given the brokers' forecasts. 5 Compass Group Approve the 12.40% Severance payments include, in addition to pay and plc remuneration benefits, an amount in lieu of the pension salary report supplement and a notional bonus of 75% of salary. PIRC considered this to create an unacceptable possibility of substantial reward for failure.
xt.xpd?bill=h111-3269. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 5
34 SAY ON PAY: SIX YEARS ON - LESSONS FROM THE UK EXPERIENCE
g) Top 5 UK remuneration-related oppose votes by company during 2008
Company Proposal Opposition Explanation 1 Hays plc Approve the 45.99% The proposal met with high opposition for the second remuneration year running. This reflected shareholder concerns with report the ‘golden hello’ arrangements for Mr Cox and the compensation provisions for the departing chief executive Mr Waxman, which included a notional unearned bonus. 2 Chrysalis plc Approve the 43.25% The proposal met with high opposition due to strong remuneration concerns over potential and actual compensation report payments. Mr Riley who resigned in August 2007 received compensation payments amounting to approximately 355% of base salary during the year. 3 Paragon Group Approve the 35.87% The principal concern related to the performance targets of Companies remuneration under the performance share and matching share plans plc report which were considered insufficiently challenging. 4 BP plc Approve the 27.06% The focal point of concern related to the special retention remuneration awards granted to Mr Inglis and Mr Conn. In addition, report PIRC had significant concerns over the remuneration committee's decision to allow Lord Browne and Mr Manzoni, who left the board during the year, to participate fully in the 2005-2007 and 2006-2008 Executive Directors’ Incentive Plan despite their departure. 5 Catlin Group Approve the 19.25% Shareholder opposition related primarily to concerns over plc remuneration the operation of performance conditions, under the report company’s LTIP, which were not considered challenging. Additional concerns related to the disclosure of the performance conditions themselves, which precluded a definitive analysis. PAS 214 Say on Pay:Layout 1 21/9/09 08:47 Page 4
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Appendix B: Reasons for opposing, abstaining, or voting for a remuneration report vote
The points below indicate the typical factors that are taken into account when deciding how to vote on remuneration reports. Voting against: Voting to abstain: Voting in support: A variety of different issues that • No evidence of excess and a • Clear disclosure of the main cause concern: good level of disclosure; but aspects of remuneration salaries have been increased (ie, performance criteria, • Performance conditions have year on year and there is no maximum awards, any been changed which causes justifiable reason as to why; departures from normal them to be easier to meet; practices/scheme details); • Overall, there are no structural • High levels of pay and there is issues but there is a general lack • No evidence of excess; no real link to the performance of disclosure and there is scope achieved, or to be achieved; for more information to be • Clear link between pay levels disclosed and for the company and performance; • Annual bonuses continue to to be more transparent. rise and salaries continue to • Clear alignment of the interests increase, perhaps double digit of shareholders and directors salary increases become a through robust remuneration pattern; practices;
• Structural issues and overall lack • Remuneration committee of performance linkage; demonstrates behaviours that protect the interests of • Performance targets do not shareholders whilst offering align with the long-term pay packages and remuneration strategy of the company. policies which allow incentivisation and retention;
• Performance targets for the long-term incentive plans do support the long-term strategic plan of the company. PAS 214SayonPay:Layout121/9/0908:46Page RAILPEN rpmi a whollyownedsubsidiaryof Financial ServicesAuthorityandis authorised andregulatedbythe trading asRailpenInvestmentsis Railway PensionInvestmentsLimited PIRC isregulatedbytheFSA. Limited. Investments ® PIRC
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