The debate over how executive pay policies should be presented to shareholders has gathered pace after a leading investor argued that organisations should issue forward-looking reports on remuneration.
Robert Talbut, chief investment officer at Royal London Asset Management, said that such a report would outline the planned value of an executive’s remuneration in the forthcoming year, based on achieving target performance. He also said it should state the maximum and minimum that could be earned under the terms of the executive’s employment contract.
A distribution schedule could be adopted to show how payments to various constituencies have changed over the last three years, putting into context the debate around remuneration outcomes, said Talbut. He added shareholders also need to be able to see the total value of executive remuneration rather than just the value of cash payments.
In addition, Talbut said it is necessary to fundamentally reassess the overly complex share-based incentive structures of plans advocated by remuneration consultants. It was almost impossible for shareholders to determine the ultimate value of these awards when they vest in three or more years’ time. A better approach would be to replace all existing share incentive plans (Sips) with a more prescriptive and simpler annual award of shares, the value of which can be assessed easily, said Talbut.
He said: “Currently, shareholders are in the invidious position of being unable to express their unhappiness except by voting against the remuneration report at the annual general meeting, which is a largely symbolic action with no practical impact whatsoever.
“This is because approval of the remuneration report is an advisory vote only, and is backward-looking as it relates to the rewards paid in the last financial year.”
Gillian Chapman, head of employment and incentives at Linklaters, added: “I think it is quite an interesting idea but if there is no change in investor behaviour I am not sure that it achieves anything more.
“It is true at the moment. The remuneration report is divided into two halves. The first part is the forward-looking policy statement that covers the relevant years and future years, and then it reports historically on what organisations paid in the previous year, so this is really an extension of that idea.
“I think the way this problem is going to be solved is by more and better engagement between organisations and shareholders. There is stuff that can be done around the edges but that is the key relationship for making this stuff work. It may be that there need to be greater simplicity and greater transparency in the remuneration reporting.”
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