Today’s announcement by Cairn Energy that it will withdraw resolution 2 at its General Meeting next week, demonstrates that shareholders can act on egregious pay awards when they really want to.
Cairn had proposed the award of shares to Sir Bill Gammell with a value of £2.5m (based on average closing share price for the 3 days prior to 6 January 2012), to be released after three years. Vesting was not to be subject to performance conditions.Not only that, but on his promotion from CEO to Chairman, he had received £1.4m in compensation for loss of office (as CEO). Manifest raised serious concerns in our research report published for clients on 12 January.
The Herald newspaper ran a story on Manifest’s concerns on 18 January, followed later that day by the Guardian.com and the FT.com as other advisory firms also alerted clients to the proposed breach of best practice. Subsequent engagement by shareholders reinforced the message and today the company has backed down on its proposals.
One-off special awards generally provoke a reaction from shareholder and the company may have been poorly advised on this occasion.
But shareholders need to be willing to tackle more complex issues, in particular looking long and hard at the structure of long-term incentive plans, too many of which reward share price volatility not company performance. A willingness to vote against binding resolutions on share plans and not just against advisory votes on the remuneration report would help too. Otherwise the clamour for government intervention on executive pay will grow even louder.
Last Updated: 24 January 2012
I fear that endless tinkering with longterm incentive plans – the principle and the individual plans in each company – will never lead to a successful resolution. All it will do is put more money into the pockets of compensation consultants. This includes all discriminatory perks such as special pension schemes for ‘top’ management, share options, restricted stock and bonus schemes. At Pro-Gov we argue that a unified scheme for all employees in a company would be much simpler – and fairer. Top management should only get the company-wide bonus or any other ‘incentive’. This would automatically put a dampener on any special maneuvering by the board, consultants or large shareholders. All payments should be pegged to base salary and the need for dozens of pages explaining incentive schemes for the top execs would be superfluous. Of course, top management pay could be set at any level but it would be much more difficult to get through excessive pay deals as the fig leaf of ‘pay for performance’ is taken away. Discretionary bonus payments for staff lower down the pecking order would also be allowed – but they would only be applied where there really is a direct link to the individual’s performance – e.g. for salespeople. But all levels of compensation would be much more scrutinised as the top of the company is brought down to earth. If regulations to this end are put into company law there would be no possibility to evade these reforms. The argument that this is against ‘free markets’ is rejected – after all, only the intervention of the state by permitting limited liability companies has made this ‘free market’ possible in the first place.
Heinz Geyer, Campaign Director, Pro-gov.org