Views on the integrity of global capital markets
29 May 2012

U.K. “Say on Pay” May Become Binding. Will Europe Follow Suit with Harsher Pay Rule?

Matt Orsagh, CFA, CIPM

As proxy season in the U.K. progresses, investor displeasure with executive pay practices continues — a common sentiment on both sides of the Atlantic that is likely to be a feature of proxy season for years to come.

It started this year at Barclays on 27 April, when over 25 percent of shareowners voted against the company’s pay plan at a raucous annual meeting. Shareholder discontent over pay also contributed to the exit of insurer Aviva’s CEO, who resigned five days after 54 percent of shareowners voted against pay at the company’s annual meeting. Just under half of shareowners at sports and online betting company William Hill voted against the company’s plan to give CEO Ralph Topping a large pay increase and retention bonus. More recently, shareowners at Cairn Energy set the bar high for discontent over executive pay, with 67 percent of shareowners voting against the CEO’s pay package at the company’s annual meeting in mid-May. The bloodletting has not stopped there as a number of companies saw “no” votes on remuneration of 30 percent or higher.

CEOs at Astra Zeneca and Trinity Mirror were shown the door due to poor performance, but are included in the “Say-on-Pay” debate because of generous exit packages which have been criticized by investors.

The next annual meeting to watch will be ad firm WPP’s on 13 June. Over 40 percent of WPP investors voted “no” on pay in 2011, prompting the company’s compensation committee chair to reach out to investors prior to the upcoming AGM to defend a 30 percent pay raise for WPP’s CEO.

The Financial Times has claimed naming rights for this shareowner insurrection, dubbing the revolt over pay as “shareholder’s spring.” A more forceful attitude towards pay that used to be hashed out behind the scenes is now boiling over into very public demonstrations of dissatisfaction with higher “no” votes on pay at a growing number of annual meetings.

The building discontent over pay in the U.K. has for, better or worse, drawn regulators into the conversation, with a long-threatened “binding” say-on-pay proposal from the U.K .Department for Business Innovation & Skills released earlier this year. The comment period for this proposal closed in late April, with a final rule expected in the coming months.

Business groups are not happy considering the proposed rule calls for a supermajority requirement of 75 percent for the pay package to pass, meaning minority shareowners would have increased power to spoil a pay vote. The vote is binding because it would give shareowners the power to vote on the compensation package in the coming year. If shareowners voted against a proposed pay package, the company would have to stick with the pay plan it currently has in place.

For an example of what they might be in for, British companies can gaze across the North Sea to the Netherlands, where such a binding vote has been in place since 2004. There have been few examples of “binding no” votes at Dutch companies (the first didn’t come until 2008), as many have chosen to withdraw pay plans if it looked as though they might lose the vote. However, the threshold needed for a pay vote to pass in the Netherlands is only 50 percent, not the supermajority of 75 percent in the proposed British say-on-pay rule.

It Gets Worse, but Only If You Happen to be a European Banker

Not to be outdone, Michel Barnier, European commissioner for Internal Market and Services, has proposed a binding vote on pay for EU-listed companies. The draft rule includes a right for shareowners to cap bonus levels that will have bankers from Madrid to Berlin looking for flats (that’s apartments to you Americans) in New York, Zurich, Hong Kong, or Singapore.

Under the Barnier plan, shareowners would vote to set the maximum ratio of bonus to salary and the pay ratio of the lowest and highest paid employees. Such a rule would place investor hands more directly on the levers of pay, something that most say-on-pay rules have avoided up until now (most votes simply approve or disapprove of the overall pay plan). It remains to be seen if such a pay plan will gain support over a summer in which the EU will face much bigger macro issues.

Opponents of shareowner insertion into executive pay decisions argue that it is the board, and more specifically the compensation committee, alone that should have oversight of compensation policies. Critics of the Barnier plan argue that shareowners may not adequately understand nuances of pay that align with not just yearly performance, but also long-term performance and company strategy.

The EU’s Capital Requirements Directive IV (CRD), which implements Basel III, is currently under negotiation in the European Parliament and has its own implications for banker pay. The CRD calls for a maximum 1:1 bonus-to-salary ratio as a way to curb banks’ excessive risk taking. Many European banks already have been increasing fixed salaries significantly as they adapt to the bonus restrictions already in place, and in the knowledge that future restrictions (like the Barnier plan) may be coming. Bank fixed costs are rising as a result of the current bonus rules, so it will be interesting to see what unintended consequences may result if a 1:1 ratio becomes the law of the land. Would such a prescribed ratio further impact the profitability of banks, and just how mobile are bankers who might look to opportunities in markets with fewer restrictions on pay?

If the Barnier plan becomes law in the EU, which will happen first: European bankers fleeing, or other jurisdictions with disgruntled investors seeking to copy the Barnier law?

The author is not British, but is married to a Brit — so depending on where you sit, he may or may not mispronounce the word “aluminum.”

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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