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Shareholders ‘don’t understand executive remuneration policies’

By Gavin Hinks

remuneration policies, executive pay

Shareholders may not understand executive remuneration policies when they are presented for approval, according to a new report.

The annual research from the High Pay Centre, a campaign group, and the CIPD, a chartered institute for HR professionals, concludes that voting patterns may indicate that remuneration policies are so complex that shareholders may not fully understand what they may lead to.

The report found that no remuneration policy for a FTSE 100 company has been defeated at an AGM since shareholder voting was introduced in 2013. The mean level of dissent for policies in the 2017–18 season was just 6%. The level for remuneration reports was 7%, though 11 companies did see votes against in excess of the 20% deemed to be a “shareholder revolt”.

“The weak relationship between pay and votes on the pay policy… suggests that shareholders may not entirely understand what the policies entail,” said the report.

“They are much more likely to vote (retrospectively) against a very high pay award than to oppose the policies that ultimately lead to those awards.”

In a comment included in the report the CIPD said “discrepancies” between high approval for remuneration policies and lower approval for reports may mean “not even shareholders in the company know what the policies will result in”.

This year’s report found that median pay for FTSE 100 CEOs has fallen by 13% from £3.97m in 2017 to £3.46m in 2018. Median CEO pay is 117 times bigger than median pay of a UK full-time worker earning £29,574.

A number of reasons are proposed to explain why pay has fallen, including the possibility of greater restraint on pay, lower awards through long-term incentive plans (LTIPs) or a dip in the business cycle.

The findings are in line with research released last week by Deloitte, which found that fewer companies faced shareholder revolts, indicating that companies were beginning to pay attention to complaints about pay during shareholder engagement.

Added responsibilities

The High Pay Centre and CIPD concluded that pay remains at “elevated levels” when compared with the wider workforce. Their report recommends disclosure of a single figure for CEO pay be extended to the pay of all executive directors. It also calls for remuneration committees to take on added responsibilities such as organisational culture and rewards for the wider workforce.

A previous report from the High Pay Centre, Reforming the RemCo, called on companies to create dedicated “people and culture” committee to replace remuneration committees.

The report also calls for greater emphasis on non-financial measures of CEO performance and the simplification of CEO pay packages.

According to Luke Hildyard, executive director of the High Pay Centre, there is good news in the report as pay falls, but it remains too early to call it a trend.

“Investor stewardship and board oversight of of pay is definitely better than it was a few years ago. Public pressure is probably the reason for that. High pay levels have been a source of public controversy and that has registered with boards and shareholders and that is because they want to be seen to be doing something.”

He added: “I wouldn’t want to overstate the quality of stewardship and governance of pay, but a small change in culture can be seen.

“From our perspective it is too early to see whether that will be sustained.”

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