Shareholder Activism Changing Corporate Approach to Executive Remuneration

Increased shareholder activism and a desire for more corporate governance are driving changes in multinational executive remuneration, according to Mercer. The consultancy, which advises remuneration committees on executive pay issues, has identified it as the single biggest executive remuneration trend in 2012. 

Pressure from shareholders is creating a ‘domino effect’, said Mercer, pushing regulators and legislators into faster and deeper involvement in executive remuneration issues. The trends were highlighted in a recent webcast, ‘Executive Remuneration Trends’, hosted by Mercer consultants in Asia, Europe and the Americas.

Mark Hoble, partner in Mercer’s executive rewards team in the UK, said: “Today, the speed of public comment and reaction means that company pay policies, which were defined according to criteria which may have been valid a year – or even months – before, might now attract intense public scrutiny and criticism. Legislators and companies are being forced to improve their responsiveness.”

“As part of this response, performance remains a priority focus and is being tied ever closer to all elements of reward as part of this response,” he continued. “However, ‘context’ has also risen up the agenda. Companies are considering the appropriateness of their historic pay decisions through the lenses of current public perception and economic performance. We are seeing companies undertake scenario-modelling for their planned pay policies. This is an essential and sensible part of corporate risk and reputation management.”

North America

The 2011 introduction of the US say-on-pay rules have encouraged greater transparency and shareholder communication. They have also accelerated further long-term incentive (LTI) plan design with performance-based vesting conditions. There is increased scrutiny of LTIs conditions while compensation committees, noting current sentiment, are showing restraint on awards. In 2012/2013 the Dodd-Frank Act, containing rules on how to address pay for performance, remuneration and internal pay equity, will come into force.

“Various parts of the Act came into force in 2011 but the impact of the remaining areas is uncertain so many companies are hedging their bets and will respond in more detail once the SEC confirms the rules,” said Gregg Passin, partner Mercer’s executive rewards team in the US. “Meanwhile, investor groups continue to exert a strong influence on pay discussions but with around 98% of US companies having passed their say-on-pay votes in 2011 and 2012, it is fair to say that progress is being made.”

In Canada, most organisations are not considering making big changes to their executive compensation programmes since many have implemented such changes since the financial crisis of 2008.

“There are shifts occurring with companies making more use of performance-based LTI plans,” said Lisa Slipp, partner in Mercer’s executive rewards team in Canada. “Some companies are also using restricted share units and special retention grants but broadly, Legislators do not feel the need to dictate the rules because many companies have already implemented best practices themselves.”

Europe

Companies in the UK, Switzerland, Netherlands, Germany, Italy and Ireland have all been on the receiving end of votes against their executive compensation proposals. This is against a background, according to Mercer’s snapshot ‘Executive Remuneration Guide’ (MERG), of predictions of a 3% median increase in base pay in Europe in 2013.  Pay freezes remain common in countries such as Spain, Greece and Italy. Pay is being used as the mechanism for shareholders to convey their discontent over company performance a trait that is spread across all industry sectors. The UK’s ‘shareholder spring’ quickly lead to the EU announcing that they would be looking at the design of pay elements, not just providing guidance on pay philosophy. 

In the UK, specifically, the Department for Business, Innovation and Skills (BIS) is consulting on transparency, board diversity and shareholder influence. The consultation covers voting on pay policies by shareholders, disclosure of a company’s pay policy for the current, future and previous year and board diversity.

“There is a vocal shareholder revolution taking place and the UK government and the EU are using this to reform practices,” said Hoble. “Companies, and particularly the chairs of remuneration committees, are concerned about the public reception that their pay policies may receive. The speed at which these policies can become a public issue means that companies need to engage early and often with shareholders. Communication facilitates understanding and a lot more needs to be done to prevent another spring of discontent.”

Asia-Pacific

Governance and accountability have been the main trends effecting executive remuneration in the region where executive remuneration committees are less well developed.

“Regulatory changes are occurring,” said Hans Kothuis, principal in Mercer’s executive rewards team in Hong Kong, “not as a result of the financial crisis, but largely because of the wider recognition that a more supportive infrastructure and governance regime is required to support the ‘Asian century’. In Hong Kong, there are updated listing rules on corporate governance while in Singapore they have issued enhanced disclosure requirements. The Reserve Bank of India [RBI] has come out with new guidelines on remuneration in banks. In Australia, new rules mean that two negative votes in an annual general meeting [AGM] can result in a board spill, meaning that executives must resign and seek re-election.

Latin America

Currency appreciation in the region means that the relative cost of employees is growing in US dollars. Bonus payments are growing and are extending to lower employee levels. Salary increases are broadly outpacing inflation except in high inflation countries. LTI programmes are growing in prevalence, eligibility and award amounts and now include a mix of stock options, restricted stock and deferred cash.

“An insufficient number of qualified professionals has led to compensation inflation,” said Fernando Pedo, principal in Mercer’s executive rewards team in Brazil. “Companies in Brazil, Argentina and Mexico find it harder to fill the senior roles compared to companies elsewhere in the world. There is also a cultural factor at play. Local companies have a more aggressive remuneration philosophy and multinationals operating in the region copy these policies to ensure that they can compete in hiring and retaining talented employees.”

“Of course regional trends hide further individual country trends but broadly multi-nationals are looking for guidance,” said Hoble. “There is a sense that executive remuneration has become too complex and there is a demand for simpler, more transparent solutions.”

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