June 2012
Positioning paper on executive remuneration in the UK
Overview
Over the last decade, executive pay in the UK’s largest listed companies has quadrupled,
with little evidence that this is a result of improved performance or in any way connected to
shareholder returns1. We attribute this to poorly aligned, overly complicated, short-term
remuneration policies coupled with insufficient disclosure and challenge from remuneration
committees. We would rather encourage companies to design and implement remuneration
policies that adequately incentivise their senior executives and align the interests of
management with our interests as long-term owners in order to maximise long-term value.
Position
The Scheme endorses the UK Corporate Governance Code’s principles, provisions and
good practice suggestions on remuneration. We also encourage companies to refer to the
Principles and Guidelines on Executive Remuneration issued by the Association of British
Insurers (ABI)2, including the joint statement by the ABI and the National Association of
Pension Funds (NAPF) entitled Best Practice on Executive Contracts and Severance3.
The Scheme employs Hermes Equity Ownership Services (EOS) as its corporate
engagement and voting provider. The Hermes Ownership Principles4 outlines support for
executive remuneration structures which ensure “alignment of interests between executives
and shareholders by linking rewards to corporate performance over at least three years and
to the underlying returns earned by shareholders over the time period”.
While EOS takes a holistic view to company’s remuneration structures and policies to avoid
a box-ticking approach, there are certain practices which it is unlikely to able to support.
These include: policies which could encourage executives to take excessive risks in order to
generate short-term results, annual bonus and long-term schemes which lack performance
conditions, basic salary increases without rationale, share awards which have a vesting
tenor less than 3 years and “re-testing” of performance conditions.
Further to Fair Pensions investor briefing on executive pay5, we recognise our member’s
interest in our voting and engagement activities on this issue and have recently developed
our customised BTPS voting policy which can be found on the BTPS website along with
quarterly historical voting records since Q2 20106. Summary details on our pay-related
voting record for 2011 can be found at the end of this document.
With a view to shifting the terms of the debate, on 27th February 2012 EOS and NAPF
hosted a meeting with representatives from 44 FTSE 100 companies including BT plc’s
remuneration committee chair and 42 pension funds including a BTPS trustee to consider
solutions to the problems associated with executive pay. The discussion focused on how
long-term investors can best support companies in improving remuneration practices
through engagement and considered use of our voting powers. Further information on key
ideas for reforming executive remuneration can be found on the Hermes EOS website7.
1
http://www.bis.gov.uk/assets/biscore/business-law/docs/e/12-639-executive-pay-shareholder-voting-rights-consultation.pdf
http://www.ivis.co.uk/ExecutiveRemuneration.aspx
http://www.ivis.co.uk/ExecutiveContractsAndSeverance.aspx
4
Principle 12. http://www.hermes.co.uk/Portals/8/The_Hermes_Ownership_Principles_UK.pdf
5
http://www.fairpensions.org.uk/highpay/issue
6
http://www.btpensions.net/151/voting-disclosure
7
http://www.hermes.co.uk/Portals/8/Hermes_EOS_Pay_Position_Paper.pdf
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June 2012
With BTPS’ and EOS’ participation, the NAPF has set up a working group to move the
agenda forward. Such collaboration will enable pension funds of all sizes to develop and
refine their voting policies on executive pay.
The group will engage with remuneration committees and boards to ensure that executive
remuneration is better aligned with the long-term interests of pension funds and the
behaviours and culture that the board wishes to instil throughout the organisation.
We are actively engaging with the Department for Business Innovation and Skills (BIS) and
support the UK government’s commitment to reform executive pay. Announcements made
on the 20 June include the introduction of a three year binding vote on future executive
remuneration policy, including pay and exit pay. By making the binding vote on the
remuneration policy effective for three years, the government hopes to encourage greater
dialogue on executive remuneration between companies and shareholders. It should also
encourage companies to adopt a longer term and transparent approach to their executives'
pay8.
Summary of 2011 pay-related voting and engagement activity by EOS on the
scheme’s behalf:
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EOS voted at 777 UK company meetings
EOS voted against 65 remuneration-related resolutions on concerns over the lack of
link between pay and performance and/or poor remuneration structures and policies
– this is approximately 50% of all the votes cast against management in the UK
EOS engaged with 30 companies in the UK on the issue of executive remuneration
(140 companies globally)
References
BIS shareholder voting rights consultation, March 2012
http://www.bis.gov.uk/assets/biscore/business-law/docs/e/12-639-executive-payshareholder-voting-rights-consultation.pdf
Hermes EOS response to shareholder voting rights consultation (BIS)
http://www.hermes.co.uk/Portals/8/bisremuneration251111.pdf
8
http://www.bis.gov.uk/assets/biscore/business-law/docs/d/12-900-directors-pay-guide-to-reforms.pdf
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