Tuesday, 13 May 2008

Block voting and executive pay

I met a friend who works for a fund management company for breakast on the way into work this morning and we got talking about executive pay. Notably they said that their house seemed to be voting against or abstaining on more remuneration reports than last season. One of their principal gripes was incentive schemes that pay out for median performance. You heard - you get an extra slug for being nothing special, just bang in the middle. What's more, they said, in the bigger companies some of these schemes can pay out pretty serious multiples of salary at the median (up to 250%).

Personally I'm not shocked, because I know this bit of the world, but I'm surprised how few people realise this kind of thing goes on and that their savings are being used to support it. But more on that later.

We also talked about the impact of the shareholder vote on pay which the Government institued in 2003. Broadly we agreed that it had led to more engagement over pay, but had not dealt at all with the scale of rewards. They were also sceptical that, as some claim, there was now more linkage to performance. For one the example of big payouts for median performance suggests otherwise. In addition they said that since the vote has been in place we have had largely benign market conditions (2003 was the bottom of the post TMT bubble bear market). A rising tide not only floats all boats, it also inflates all pay packages. They said that we would need to see a prolonged period of poor returns across the market to see just how performance-related rewards were.

This then led on to a broader discussion of what the pay vote was intended to a achieve. Was it simply to provide accountability to shareholders (ultimately in practice this means fund managers) or was it also meant to rein awards in? If it was the latter I think we can conclude that it has failed. A more cynical argument I have heard is that it was a clever bit of policy intended to take the heat out of the executive pay issue by appearing to offer a market solution. Obviously it could be all three, as different groups involved in devising and delivering the policy had different objectives.

More broadly it did bring me back to my previously stated view that shareholder voting on executive pay - as it stands now at least - has the unhelpful effect of legitimising high rewards with unchallenging targets. It suggests that the problem is at the margin - those very few companies that lose the vote, or see a significant level of opposition. Why would a company that gets a 90% plus vote in favour of their policy conclude they need to change anything? And how do journalists with little knowledge of exec pay interpret such figures?

This is why I strongly believe that the delegation of voting by pension funds and others to fund managers is a serious mistake. It means that an important political issue is dealt with by block voting by the City. So next time you see directors get away with trousering millions where the company has been poorly run, ask yourself what you have actually done to address the problem. If you have a company pension, or an ISA, somewhere along the line your slug of shares are being voted on these pay policies. Do you know how they are being used and are you putting any pressure on your fund manager? If not do you really have any grounds to complain?

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