10 June 2016 by Henry Ker
The latest survey of the Governance and Compliance/Core community
This AGM season has seen numerous shareholder revolts over executive remuneration. With such public antipathy to the pay deals of top executives – particularly when companies such as BP post their largest ever losses – we asked the Governance and Compliance/Core community whether the remuneration structure for top executives needs a rethink.
A majority (60%) agree that the structures need addressing. Only 14% disagree, and just over a quarter (26%) are unsure. Some of the respondents argue that executive remuneration structures ‘are way too complex’, with one suggesting ‘Performance-related pay has made executive remuneration packages more complex and less aligned with the interests of the company’.
Others highlight the endemic short-termism within big businesses: ‘The alignment to shareholders using LTIPs and similar do not tend to work − the underlying performance criteria relating to EPS and similar measures are easily manipulated to ensure the best outcome for executives in the short term’.
Another agrees with this, stating: ‘the annual reporting cycle often leads to performance measures and remuneration being designed to achieve short-term profits.’
We then asked whether the current Long-Term Incentive Plan (LTIP) model is fit for purpose. The results are evenly split – 34% say they are, 34% disagree and 32% are unsure.
There are a number of thoughts on this topic; although some argue ‘the principle of long term incentives makes sense’, there is criticism of the way it works in practice. For example: ‘The current LTIP model has allowed executive pay to outstrip growth in average wages without delivering the same improvement in company performance.’
The respondents have a range of suggestions for how to better align pay to company success. Some mention increasing the time period of bonuses, to ‘align with five to 10 year plans’, and ‘Incentive plans should perhaps be even longer term, or bonus targets should be more rigorous and demanding.’
Several suggest tying pay closer to the success of the company, with a ‘Tier performance bonus structure (the better the results the better the exec. bonus)’. Others agree, arguing that executives should ‘only get increases, bonuses or shares if companies make money’, and another: ‘There should be no contractual bonuses. A bonus should only be paid if the company does well’.
A third also agrees: ‘should it not also be aligned to lack of success – i.e. a reduction in salary in the event that the company doesn’t achieve its targets.’
Some believe that the issue lies with shareholders: ‘Shareholders [need] to permit arrangements that are appropriate to that company rather than the one-size-fits-all approach’.
Another respondent believes ‘Remuneration Committees need to be “bolder” in setting structures and performance conditions which are better aligned, rather than using “safer” [models] which shareholders and voting agencies are comfortable with. Shareholders and voting agencies also need to be more receptive to structures and performance conditions which are not the norm’.
A third says this is the key: ‘Good balance of short and long-term remuneration adapted to the company. [We need to] allow more unusual models.’
The general sentiment seems to be that there is a problem, but the solution is not obvious or appropriate for all. Work needs to be done to find a remuneration structure that suits the individual company and then it needs to be clearly articulated to the shareholders to make sure everyone is on board.
Conducted in association with The Core Partnership