Mercer has welcomed the government consultation into executive pay but has cautioned that a binding vote will not necessarily have the outcome that is intended.
The Executive Pay Consultation on Enhanced Shareholder Voting Rights by the Department for Business Innovation and Skills (BIS) solicited, amongst other things, views on the cost and benefits of shareholders holding an annual binding vote on a company’s executive remuneration proposals. The consultation also asked for views on voting thresholds and other elements of the remuneration package. The consultation was conducted as part of the Government’s efforts to address perceived failings in the corporate governance framework for executive remuneration.
Mercer gives advice to the majority of FTSE100 companies on executive remuneration, investment, and retirement matters and works closely with remuneration committees, business managers and shareholders.
“We feel that we have a balanced view, taking into consideration the standpoint of each of these stakeholder groups. We are supportive of measures that encourage greater engagement between companies and shareholders on remuneration,” said Mark Hoble, Partner in Mercer’s Executive Remuneration team. “However, it is difficult to see how a binding vote on pay issues will address the limitations of the current advisory vote on pay.”
The consultancy believes that while the advisory vote has encouraged dialogue between companies and shareholders, it has had limited success in promoting active ownership by shareholders of the kind envisaged by the ISC Statement of Principles and it’s successor, the UK Stewardship Code.
“Shareholders have an important role to play in ensuring that executives and Board members are acting in their best interests across a wide range of issues. This oversight function includes the process by which executive pay is set and monitored by the non-executives of the companies they own. To date shareholders have not shown enough interest in the remuneration process which has clearly sent the wrong message to companies,” said Aled Jones, Senior Associate in Mercer’s Responsible Investment team.
“We are supportive of measures that seek to address this issue and encourage shareholders to act as owners, in line with the UK Stewardship Code. However, it is not clear that a binding vote will achieve this. Shareholders are not a homogenous group and don’t all look to the long-term – many just sell their shares and walk away. Another limitation is the extent to which investment managers – who conduct most of the voting activity in the UK on behalf of their clients – are adequately resourced and incentivised to give proper consideration to issues like remuneration.”
BIS have also proposed giving shareholders a binding vote on exit payments of more than one year’s base salary.
According to Mark Hoble, “If an executive’s remuneration arrangements have been approved by shareholders, then in theory, there should be no need for an additional vote as the proposals would be consistent with the company’s policy. Problems arise when, after periods of poor performance, companies allow their executives to depart as “good leavers”. Not addressing a failure to meet performance expectations through remuneration and leaving packages is what causes pay-for-failure”.
However, Mercer does believe that companies should be more transparent over the circumstances of a CEO’s departure and should explicitly disclose their policy on exit payments, for example, detailing how they deal with ‘good’ and ‘bad’ leavers. The consultancy also believes that, contrary to government intentions, BIS should look at the provision of generous pension provision if an executive’s contract is terminated early.
“Remuneration should be considered in the round,” said Dr Deborah Cooper in Mercer’s Retirement, Risk and Finance business. “In this respect it could be counter-productive to treat one aspect differently from others and incentivise perverse payment arrangements.”
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