Early springtime protests about executive pay at companies in the UK, the US and elsewhere are becoming as perennial as snowdrops and daffodils.
Protests in the UK this year are louder than elsewhere. Investors are urging that companies reflect on the views of a government that has promised to address the wide gap between society’s elite and its ordinary workers. The debate is no longer just about whether the CEO’s bonus is a fair reflection of the value he or she generated for shareholders but whether the amount is morally defensible in any case.
In purely financial terms, it is an odd year to brace for rebellion. Corporate performance has been strong. The FTSE 100 index in the UK and the S&P 500 in the US are both up by nearly a quarter over the past 12 months. But after seven years of UK austerity policies and a Brexit vote that was blamed in part on anti-elitist populism, opposition to high pay has hardened.
Although income inequality data show a narrowing gap between rich and poor, the extremes remain politically unpalatable. The average blue-chip CEO in the UK earned £4.3m in 2015. The average national wage was £28,000. When Theresa May became prime minister, she signalled the gap would be an issue for her government. A green paper on corporate governance reform focused on pay. There is also a compelling macroeconomic argument for change, put forward by Andrew Smithers and others, which posits that poorly designed bonus schemes have held back investment and productivity growth.
All of this has led to a shift of attitudes. Companies, in the UK at least, seem keen to engage with shareholders on pay schemes. Big institutional shareholders report that they are conducting 50 per cent more pay meetings with companies than usual. If behind-the-scenes deals cannot be reached, this year’s shareholder meetings could be unusually fractious.
In 2012, there was a so-called “shareholder spring” when a long list of companies across the US and Europe - among them Citigroup, UBS, AstraZeneca, Barclays and Aviva - had pay plans shot down. Another may be looming.
UK shareholders are particularly focused on the shortcomings of “long-term incentive plans” - bonus schemes that have been the main driver of executive pay inflation for at least a decade. LTIPs pay out handsomely if certain targets are hit. But they have proved open to abuse. CEOs are suspected of prioritising share repurchases or debt-fuelled takeovers - with little regard for long-term value creation - to manipulate earnings per share, a common LTIP target. So vociferous is the antipathy to LTIPs that up to 10 companies in the FTSE 100 index are said to be considering ditching or overhauling them.
Another pay scheme is becoming more popular: restricted shares, so-called because they must be held for upwards of seven years. The drawback is that unless additional hurdles are applied (which is not generally envisaged) executives will be granted shares regardless of performance. The arguments in favour are powerful, though. LTIPs have in many cases become so complicated that the CEO and the board, to say nothing of investors, no longer understand them.
Restricted share schemes are not the final solution to this vexed issue. Properly used, though, they should be simpler and more long-term in nature than the system that currently prevails. They could lower total pay in return for greater certainty. Boardrooms, government and the public should welcome this shift in direction.
