What’s the Story?

Yesterday, the CEO of the London Stock Exchange, Julia Hoggett, called for debate on higher executive compensation for Britain’s leading companies.

Hoggett points out that the same global institutional investors who happily support much bigger packages elsewhere in the world, including the USA, vote against lower figures in a UK context. The LSE is looking to bring together chairs of listed companies, founders of private companies, asset managers, the FRC, the Investment Association and proxy agencies for talks.

The City minister, Andrew Griffith, commented that this will help “inform the work we are doing to boost the UK’s offer to companies looking to list in the UK.”

Also yesterday, the proposed pay package for the new CEO of Unilever received a 58% advisory vote against. That package included €1.85 million base salary and a maximum annual bonus of 225% of base salary (an unchanged percentage but much increased on the year before that). Combined, this represents a short-term earnings opportunity of €6 million a year.

Why Does it Matter?

The London Stock Exchange is concerned with its global competitive position. In recent years, London has attracted fewer IPOs than both Europe and the USA. One study suggested London attracted only 5% of global IPOs in the 2015-2020 period.

This issue has been highlighted recently by the decision of ARM, the global microprocessor to list in the USA, and CRH, the world’s largest building materials company, which has said that it will leave London for the USA. So the problem seems very real.

The FRC in recent months has been considering a regulatory overhaul to streamline the rule book. Consolidation of the current standard and premium segments, easing rules on two-tier share structures, and relaxing shareholder votes on major acquisitions are under consideration.

Newspoint view

Executive compensation is an extremely sensitive matter for major listed companies. It is about the high total pay, but it is also the pay mix and performance conditions too.

The absolute cost of executive compensation remains small for giant companies. Investor concerns relate to judgement, sensitivity to the wider scene, good governance and strong alignment of interest with shareholders through performance metrics and equity pay.

Three big themes are ever present. Variable pay is favoured over fixed pay, long-term pay is better than short-term pay, and shares are preferred over cash.

Unilever will no doubt hear these themes from their investors as they consult on the vote outcome in order to consider the best way forward. The rise in base pay for the new CEO, compared to the exiting CEO, is likely to be on the discussion agenda, particularly as this then drives both the annual bonus and other elements. Maybe too much pay is fixed and too much short term?

And yet Julia Hoggett is right to raise the question of why the same investors are happy to support bigger packages elsewhere in the world, but not the UK. Her comments attracted criticism from the high pay centre and the TUC. But you don’t fix the problem of low pay at the bottom of the pyramid by distorting the market mechanics at the top.

The market for top talent among big listed companies is global. For some companies this is an argument of convenience, but for many others it is a stark truth. Distinguishing real business needs from a convenient argument falls first to the remuneration committee and then to shareholders. The validity of the argument made, and the clarity of disclosures both require deep due diligence and judgement. A difficult but not impossible task.

Executives at the top of big companies earn big packages. They can therefore take both variable pay and share price risk in their pay. The convention that base pay should drive the rest of the package must surely be questioned once packages get large.

The total linkage to shares is another issue. Bonus deferral into shares, LTIPs awarded in shares, LTIP post vest blocking periods and shareholding guidelines extending two years post employment all do similar things. These strands must be pulled together to show a multi-year equity profile to demonstrate clear shareholder alignment.

Interesting times lie ahead.

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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