Say on Pay

Chris Mallin is Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham. She is the author of Corporate Governance and she blogs with fellow OUP author Bob Tricker at Corporate Governance. The below post is an adapted version of one found on that blog, and is about the calls for wider adoption of a ‘say on pay’ in the US. Her previous OUP post can be found here.


Widespread concern at the high levels of executive director remuneration has led to calls for wider adoption of a ‘say on pay’ in the US. Investors in the UK and Australia have, for many years, had the right to vote on the remuneration committee report of the companies in which they invest. The vote on the remuneration committee report is an advisory one meaning that it is not binding on the company. However in practice institutional investors have tended not to vote against the remuneration committee reports and on the – until recently – relatively rare occasions on which the remuneration committee report was voted against, it was seen as a strong signal of disapproval about some aspect of executive remuneration and one which the directors would be unwise to ignore.

Royal Bank of Scotland
It was no surprise to anyone that the Royal Bank of Scotland shareholders overwhelmingly rejected the banks remuneration committee report at the companies Annual General Meeting on 3rd April. Jane Croft and Andrew Bolger in their article ‘Thumbs down for RBS pay report’ stated that some 90.42% of votes cast rejected the report. UK Financial Investments Ltd (UKFI) the Government owned company which manages the taxpayers’ shareholding in RBS, and controls 58% of the RBS shares, voted against the report. Manifest, the proxy voting agency, stated that ‘the resolution on the remuneration report at Royal Bank of Scotland Group plc represents the highest ever “Total Dissent” vote on the remuneration report since the introduction of the requirement for the report to be put forward to a non-binding vote’.

Remuneration (compensation) committees

Remuneration committees have previously been criticised for having a ratcheting effect on executive directors’ remuneration. The composition of such committees is usually independent non-executive (outside) directors but nonetheless this has not stopped the increasing levels of executive remuneration. This is probably in part attributable to the fact that remuneration committees would tend to recommend remuneration for executive directors in the upper quartile of their peer group hence the ratcheting effect over time. The Corporate Library points out that, in the US, chief executives pay rose 24 percent in 2007 giving a median remuneration of $8.8 million.

Trade Unions Involvement
An interesting development is for trade unions calling for more worker involvement in setting top executive pay. Brian Groom in his article ‘TUC leader urges staff input over chiefs’ pay’ highlights that Brendan Barber, General Secretary of the Trade Union Congress (TUC), stated ‘there was “massive anger” among workers at paying the price for a recession made in the boardroom, not on the shop floor’. The directors of FTSE 100 companies came in for criticism as well as the directors of banks, with Mr Barber arguing for ‘workforce representation involved in remuneration committees of major companies’. The idea of representation of the workforce on the board or board committees has traditionally not been given much consideration by UK boards but maybe that might change in the future.

Shareholder proposals/resolutions
Another are where we may see change is in relation to shareholder proposals or resolutions. Although it is possible in the UK for shareholders to put forward shareholder proposals or resolutions, it is not that easy to do and hence dialogue has been the most frequently used tool of corporate governance with shareholder proposals maybe numbering just five or six a year.

In the US it is much easier to put forward a shareholder proposal and so we can see 800 or 900 of these each year in US companies. It is likely that in the future more of these shareholder proposals will be relating to executive remuneration and that they will achieve strong support from institutional investors who are increasingly being criticised for not having taken more action to help limit executive remuneration. Francesco Guerrera and Deborah Brewster in their article ‘Mutual funds helped to drive up executive pay’ highlight that mutual funds have tended to vote in favour of companies compensation plans and this has effectively sanctioned these spiralling executive remuneration packages. Kristin Gribben in ‘Pay proposals to dominate proxy season’ puts forward the view that, in future, mutual funds in the US will be more likely to support remuneration (compensation) related resolutions filed by shareholders.

Back-door pay
There is concern that some companies may seek to remuneration executive directors via the ‘back-door’ if, for example, bonus schemes do not pay out. Pauline Skypala in ‘Warning over “back-door” pay’ highlights that this is a concern to some investors including Co-operative Asset Management whose corporate governance manager, Paul Wade, states ‘If a company fails to create value for its shareholders, it is totally inappropriate to grant rewards to management that are disproportionate to shareholder returns’.

Future developments
With the continuing focus on executive directors’ remuneration packages, the forthcoming AGMs promise to give rise to many interesting debates, much emotive discussion, more shareholder proposals, and many more instances where ‘say on pay’ will result in an emphatic ‘no’ to excessive remuneration or remuneration which does not have appropriately stretching performance links.

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