The wording of circulars seeking incentive share plan approval generally promises an increased alignment to the interests of shareholders. The thrust of that article, however, could not be more different – it seemed to prioritise higher levels of remuneration rather than an alignment of interests.
It could be that the strict usage in the UK of the ABI’s executive remuneration guidelines have had the unintended consequence of offering remuneration consultants and remuneration committees guidance on how best to sell the scheme as non-contentious, yet, at the same time, offer a significant upward ratcheting of remuneration levels. Further, the simultaneous use of multiple schemes by companies makes the use of total remuneration analysis by investors more important for keeping an eye on remuneration levels.
Indeed, the ability to offer greater number of shares under the individual participation limit after a share price fall, as currently in use in the UK, has been noted before. The dot.com crash proved this point as Manifest’s pay database shows. It is not entirely unreasonable to suggest that the current format of individual participation limits encourages a ‘boom and bust’ cycle. If awards can be made over a significant number of shares towards the bottom of the cycle, the potential gains on these awards will outweigh the potential gains from awards closer to the top of the cycle, and thus will be more favoured by participants.
If this is indeed the case, where is the alignment of interests between shareholders and executives? If any more evidence is needed then the stock-option backdating scandals in the US market should give us pause for thought.
Other markets do things slightly differently. In Australia, the institutional investor guidance on long-term incentives previously recommended that explanations be offered where individual participation exceeded 100% of salary. Revised guidelines in April 2007 took a somewhat different approach – suggesting that ‘Entitlements under an equity plan should be reasonable, taking into account the total remuneration package of an executive and reflect that executive’s position and level of responsibility. Although equity plan design will vary, the level of reward that an executive may be entitled to if they achieve their performance benchmarks should generally be consistent with equity plans for companies of similar size, industry and complexity’.
In light of Clifford Chance’s comments and the alternative approach now taken by Australian institutional investors, is it time to ask whether the current focus of UK institutional investor guidelines on individual limits (expressed as a percentage of salary taking a market value basis of valuation) should be diminished in favour of a total remuneration based approach? The more engaged companies already take this approach in many of their pre-AGM consultations for proposed amendments to share plans.
While the Australian approach to executive reward requires a little more work on the part of investors and proxy advisors, it does appear to offer the right ingredients for successful investor oversight. But, for as long as a single shareholder group promotes one view of “Best Practice”, and for as long as issuers feel the need, real or perceived, to meet that view, shareholders with progressive views will be excluded from the debate.
The UK is well regarded in world markets for its high standards of corporate governance; but that’s no cause for complacency. Maybe it’s time to question the assumption that one shareholder constituency has all the answers and whether a more representative approach to best practice could benefit us all. The coming weeks will see whether The Institutional Shareholders’ Committee and its constituent bodies can rise to that challenge or whether the Financial Reporting Ccouncil would be the proper home for inclusive shareholder representation. Reading through the Walker Responses it would seem the latter is the more acceptable way forward.