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An explosion in pay packages

06 June 2016

An explosion in pay packages - read more

What seemed reasonable at the time soon loses its sheen, says Simon Osborne

The AGM season is in full swing and shareholder revolts about executive pay are de rigueur once more. BP’s remuneration committee was hauled over the coals for a £14 million pay package for Bob Dudley on the same day that Smith & Nephew’s and Persimmon’s remuneration reports were defeated.

Anglo American just scraped a pass, and oil and gas services group Weir lost by quite some margin when ISS, the proxy advisor, encouraged investors to oppose its pay policy.

This policy would have seen plans for share options for top executives introduced that paid out regardless of the company’s performance. Yet this seems to be precisely the sort of individual approach to remuneration that a working group led by the Investment Association is suggesting.

All this paled into significance, however, when WPP Founder and CEO Martin Sorrell‘s pay package was announced. His eye-watering £70 million pay deal made Bob Dudley’s earnings look positively paltry. Cue a sharp intake of breath all-round and a flurry of outrage in the media about the disparity in pay between company executives and their lowest paid employees.

The funny, or rather not so funny, thing about all of this of course is that shareholders have had years to do something about remuneration, but have been supine in doing anything about it.

Only now when public feeling has been roused by the knowledge that what most employees earn in a year is what a FTSE 100 chief executive might earn in a few hours, are they seeing fit to act on the binding vote on remuneration policy which former business secretary Sir Vince Cable introduced for listed companies in 2013.

The Shareholder Spring focused on rewards for failure, but the rumblings this year seem primarily driven by public outrage at the ‘Let them eat cake’ attitude of some companies. At some levels this is not surprising. The financial crisis threw into sharp relief the gap between bankers’ earnings and their capabilities. As handsomely paid as some were, they led the world’s economies to the brink of collapse.

It is interesting that the green eyed monster does not seem to rear its head quite so much when executive pay is put in the context of a Premier League footballer’s pay. As The Guardian recently reported, John Timpson, of Timpson shoe repair fame, has described Sir Martin Sorrell as the business world’s equivalent of Lionel Messi and reckons that he is underpaid in comparison. It raises an interesting question as to what people find acceptable.

Lionel Messi being paid over £26 million in basic salary in 2014 to kick a ball goes unchallenged, but Bob Dudley’s lesser annual salary for running an international company that employs nearly 80,000 people causes consternation.

This is particularly interesting as Bob Dudley’s pay award was in line with the policy for which investors voted two years ago. Now that the figures have come through, however, they have voted against it. That is the problem with deferred payment. What seemed reasonable at the time soon loses its sheen when the share price moves somewhere unexpected.

The same investors who objected so violently to Mr Dudley’s pay then re-elected Professor Dame Ann Dowling, the Chair of the BP remuneration committee responsible for the decision on Dudley’s pay award, by something like a 98% majority.

Dame Ann is a distinguished engineer and a fantastic role model for women thinking of a career in engineering. However, if investors genuinely believe that Bob Dudley’s pay award was unreasonable, is it not time for a sacrificial scalp or two to encourage other NEDs to wake up?

One needs to question why it is only now, in the face of public debate about pay that shareholders are challenging pay policies and why there has been such a lack of collective action to combat excessive pay. Some investors would doubtless argue that it is not their job to look after the public interest but to look after the long-term interests of their clients and beneficiaries.

Others lay the blame at the door of fund managers who are routinely seen as supporting pay awards at the expense of those shareholders trying to stamp out excess. According to Proxy Insight, the most lenient investors on executive pay in the UK between July 2014 and June 2015 were TIAA, which backed UK companies on pay 100% of the time, and Northern Trust AM, Vanguard and T Rowe Price which all voted just shy of 100% in favour of UK pay packages.

Given that fund managers are extremely well paid and are arguably conflicted, perhaps they do not see (or do not want to see) numbers in the same way that the rest of us do. Is this down to inertia, bowing to peer pressure or just safeguarding their own remuneration packages? Whatever the reason, pay packages have exploded over the last decade or so to a point that is hardly sustainable.

Stefan Stern, Director of the High Pay Centre, commented in The Guardian on Martin Sorrell’s pay package, ‘Sometimes [sums] are just too big – this is an example of just too big.’ If a company has got to a point where it is paying someone £70 million to do a job, what on earth will they have to pay his successor?

Simon Osborne is CEO of ICSA: The Governance Institute

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ICSA: The Governance Institute
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