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GUARDIAN |
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Special report: Executive pay |
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Pay - and display
Excessive remuneration packages for executives can be corrosive. Such schemes should be put to a vote
Chris Hurst
Thursday August 30, 2001
While it is not true to say that all directors' remuneration is excessive, it is striking that it has risen by 28% at the same time as the total shareholder return of the FTSE-100 has fallen by 11.5%. There can be no objection to good pay for good performance, but the justification for generous pay schemes is not always apparent, particularly where profits are falling or staff are being made redundant.
So why is executive pay important? Like other corporate expenditure, it is a transfer of assets away from shareholders and, unless merited by good performance, reduces shareholder value. Uncontrolled excessive pay can be socially corrosive and undermine morale in the company, particularly when jobs are under threat.
It can also reduce shareholder confidence in management and undermine the company's reputation. Transactional bonuses are a case in point. These are often made to reward a deal such as a takeover, regardless of whether it has been demonstrated that the deal will lead to better performance in the long term. An example is the £10m bonus paid to Vodafone's chief executive for the Mannesmann takeover, following which the share price has fallen by more than a half.
The initial responsibility for setting boardroom pay lies, of course, with the board itself. To avoid conflicts of interest, pay is set by a remuneration committee which, under the Combined Code of the London Stock Exchange, should consist entirely of independent, non-executive directors; however, our research indicates that 60% of FTSE-100 companies have remuneration committees with some members who are not independent of management.
An increasingly contentious part of executive remuneration is demand for stock options. Often, companies require shareholders to approve a share option plan without disclosing performance criteria, maximum levels of award, or the expected value of the options.
The performance criteria governing the exercise of options can often be retested after a number of years, but there is no corresponding revaluation of other stakeholders' interests.
Controversial remuneration schemes at companies such as Schroders, Royal Bank of Scotland and Marconi have ensured that the issue of executive pay has received high profile media attention. However, behind these newsworthy examples, a trend has emerged of companies finding increasingly creative ways of paying executives substantially more, whether they have earned the rewards or not.
A factor commonly regarded as causing UK remu neration to spiral upwards is the increasing comparison to global pay scales. We would challenge this as a norm for UK executives, since we do not see a huge demand for UK management from overseas companies. Nor do we see why "global" in this context always seems to mean "United States" - comparison with some European countries leads to a different conclusion.
Listed companies should put their remuneration pol icy to an annual vote. This would lead to a greater degree of transparency for such schemes and would allow directors to be held more accountable for the rewards they receive.
This is one way in which institutional investors feel they can curb excessive remuneration policies and register their displeasure. Equally, it is important to encourage a climate which legitimises high rewards for exceptional performance under well structured schemes.
If companies take the initiative on putting executive remuneration schemes to a vote, it will reduce the likelihood for compulsory legislation on the issue, and may go some way to addressing the shareholder concerns that have been witnessed in the 2001 AGM season.
If companies are to maximise their performance in the long term, it is essential that they adopt the best corporate governance practices.
Of course, the people driving a company's success need to be appropriately rewarded for their achievements, but until companies have the proper checks and balances at the heart of their management, there is a danger that shareholders - and the millions of ordinary people who rely on such investments – could see money due to them diverted to unjustified schemes.
• Chris Hurst is the chief investment manager of the Co-operative Insurance Society.
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