Manifest Research Manager Alan Brett highlights some of the key issues raised in a recent Manifest report “Say on Pay a Global Perspective”.

With the volatility and uncertainty surrounding equities as an asset class worldwide, there has been an increased focus on executive pay, particularly where it has been apparent that the remuneration paid to CEOs has not been commensurate with performance.

Top executives at leading global companies are paid significant sums to deliver maximum returns to shareholders; however it has become increasingly apparent that in some cases the “Pay for Performance” link has been broken. From Manifest’s research on executive pay we found that CEO pay in the FTSE100 had quadrupled over the past 12 years while share prices had remained effectively flat.

Recent years have seen significant changes in regulations on pay disclosure and have offered shareholders more of a say on executive pay at their companies. While the media and shareholders talk of ‘Say on Pay’ to capture their influence on director pay, it is a highly complex topic and not consistent from market to market, indeed there isn’t even global agreement about whether we talk about executive pay, executive remuneration or executive compensation. But whatever it’s called, it’s never far from the headlines.

It may be too early to determine whether these changes have been for the better; some concerns have been expressed that the increased disclosure has helped ratchet up overall pay levels. Few executives want to be paid below median and few issuers want to be perceived as undervaluing executive talent – this creates a dynamic whereby remuneration levels are driven perpetually upward.

Although as an industry we collectively use the handy catch-phrase “say on pay”, it means dramatically different things in different markets. Investors therefore need to be aware of the various approaches taken across the markets in their portfolios and the different range of voting tools available to them. While the advisory say-on-pay vote has been introduced by some leading markets, the approaches taken by some other markets give shareholders more of a direct say.

In a recent report Manifest looked at the varying and contrasting approaches to executive pay control mechanisms currently in place across some of the key global markets and examined the outcome of pay-related voting results at meetings in the last two years.

There are broadly four types of say on pay:

• Binding Remuneration Policy Resolution
• Advisory Remuneration Policy Resolution 
• Approval of Incentive Plans
• Other approvals*

Perhaps the most impactful development in 2011 for investors worldwide was the rollout of say-on-pay in the US. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, was fully implemented in 2011. The legislation requires US-listed companies to provide for a remuneration vote at least once every three years, with shareholders voting on the preferred frequency of the vote (annual, biannual or triennial) at least every six years. All companies listed in the US (regardless of jurisdiction of incorporation) with more than $75m in market capitalisation were required to include say-on-pay votes at meetings held on or after 21 January 2011. Smaller companies have until January 2013 to comply.

Companies were also required to hold a vote to determine the frequency of the remuneration report resolution. Investors demonstrated an overwhelming preference for annual votes, however there was a significant percentage of investors willing to support the management recommendation, regardless of the content of that recommendation.

A recent survey of US-listed companies conducted by remuneration consultancy firm Towers Watson found that many companies ‘recognize that it’s unrealistic to expect very high levels of support’ and that 80% shareholder support may become the target in the US: ‘It remains to be seen whether the 80% level becomes the minimal acceptable level of shareholder support, as some observers have suggested. However, our survey findings appear to support the notion that attaining an 80% shareholder approval level may be viewed by many companies as the standard for a successful vote.’ It is worth noting that a 20% against vote would be considered cause for alarm in markets where say-on-pay is more established, such as the UK or Australia.

In those markets which were early adopters of the remuneration report or remuneration policy votes, it is now apparent that the dissent levels in the first year were higher than the long-term average. Switzerland and the United States have shown the highest dissent levels of the surveyed markets in 2010-11 with the remuneration votes debuting in these markets.

Dissent in the UK’s FTSE 100 for 2010-11 (9.6%) only slightly exceeded the ten year average for the index (9.4%). The number of companies experiencing significant dissent (20%+) has not varied notably from year to year, although a number of companies have persistently received high levels of dissenting votes. Companies have historically responded to defeated resolutions or close calls with an increased level of engagement with investors on the issue, although 2010-11 has shown a small number of companies now willing to tough it out and refusing to engage or change. Shareholders have historically been more willing to dissent on the non-binding remuneration report vote than on binding resolutions to approve share based incentive arrangements. However there is some evidence to suggest that some of the more active investors are escalating their concerns on remuneration to director re-elections to those who sit on the remuneration committee – an option more readily available when binding annual re-elections for all directors is available.

The US has seen unintended consequences of the say-on-pay vote becoming “sue on pay”. So far eight companies who lost the vote this year are faced with law suits. This is a rather unfortunate and likely an intended consequence as the ex-US experience has shown that the shareholder engagement and dialogue or “Stewardship Approach” provides a healthier and less antagonistic approach.

For Australia, the coming season will prove interesting with the advent of the spill vote requirement. Could, in another unintended consequence, the remuneration report vote see higher-than-expected dissent due to tactical voting aimed at forcing a mandatory spill vote?

Shareholder voice on executive incentive arrangements is proving to be one of the most challenging governance reforms of recent years. Having now acquired such a significant and potentially far-reaching influence tool, the question for both shareholders and companies is how to put it to best use. Merely voting once a year without subsequent engagement and dialogue between owners (as opposed to their advisors) could mean that the fight for say on pay has been a pyrrhic victory which undermines future governance reforms.

Say on pay requires a nuanced and integrated approach to governance oversight which should the governance and investment professionals together to work on an integrated strategy for aligning shareholder and management interests. That is probably the greatest challenge of all in the say on pay debate and it remains to be seen whether investors and issuers can rise to that challenge.

If you would like to receive a free copy of the Manifest report “Say on Pay A Global Perspective please email: info@manifest.co.uk

 

 

Last Updated: 8 October 2011