Remuneration Committees Need to Build Back Trust
Investors must wonder if they are speaking loudly enough after the 2021 annual general meeting (AGM) season. Of the FTSE 350 companies that put forward a new remuneration policy, 23 of them received 20% or more votes against their remuneration policy. This is an increase in the number of votes against remuneration policies (compared to last year), with many of these companies choosing not to heed investors’ advice and continuing to implement remuneration changes—which in some cases included significant executive pay increases.
After a difficult 24 months for shareholders, it can be a struggle to justify these pay increases. An example of this is a UK-listed cinema company. Even though shareholders and investors expressed their concerns with the proposed executive pay changes, the company continued to implement a controversial share scheme that could award more than £200m in shares to executives if the companies’ shares bounce back to pre-pandemic level.
Have those investors’ opinions been ignored, as it could seem, or does the remuneration committee perhaps have strong reasons for moving ahead?
On the one hand, remuneration committees should be well placed to make these judgement calls. They understand that sometimes whilst results might not be what was hoped for, nevertheless it has taken an astronomical effort to achieve them. In turn, the remuneration committee is keen to reward that effort.
But to what extent do investors want remuneration committees to reward perceived effort compared to actual results? It’s understandable that many investors look twice at companies’ executive pay proposals that are pushing to pay out the CEO’s full package, even though it went against investor guidance.
One cannot therefore avoid asking: what is the value of investors’ feedback?
Some investors will have spent a significant portion of their year engaging on pay-related matters and providing advice to companies on proposed executive remuneration changes. A senior member of staff from an institutional investor stated “Companies write to us saying they’re going to increase the Chief Executive’s bonus from 150% of salary to 200% of salary. Our feedback is to say we cannot support that, but they do it anyway.”
The voting process is a significant and externally scrutinised matter that attracts widespread attention from the media and wider public. If recommendations are routinely set aside, will this undermine the process going forward? Will investors feel less inclined to engage or will they find other ways to be heard?
In the UK, one can sense that the trust between remuneration committees and investors is eroding, and it needs to be re-established. Investor opinions deserve to be heard, even when they are different from remuneration committee recommendations (particularly where certain remuneration committees are not, perhaps, as robust and diligent as they might be). However, remuneration committees feel their recommendations should be more readily accepted by investors given the rigorous processes they go through with companies to create these. This push and pull between the two is creating tension and breaking down any previous collaboration which has taken so long to build up.
Some investors are already suggesting that companies simply refer to their investor pay policy for an understanding of what they will or will not support, to avoid more nuanced (and as considered above, potentially fruitless) discussions. Only exceptional changes such as the use of discretion would elicit a tailored response.
This approach would draw a hard line in the sand for where investors sit on executive pay matters, which will undoubtedly have a mixed reaction. Companies that have previously had good relations and been able to deviate from the standard off-the-shelf programmes or award one-off above market increases, may no longer have the blessing of institutional investors. This could damage relations between the business and investor, whilst tying the hands of remuneration committees to make decisions. If investors are continuously frustrated and unengaged, this will ultimately be more damaging to executive pay policies in the long run.
While there is no perfect ‘one size fits all’ solution, public companies should be mindful of the value and impact of investor feedback when they consider changes to their executive pay and focus on open communication, ensuring rationale for deviations is clear, and building back the trust between their remuneration committees and investors.