Executive pay revolts could be on the rise

Protesters from World Development Movement outside the Barclays AGM at the Royal Festival Hall, London.
Protesters from World Development Movement outside the Barclays AGM at the Royal Festival Hall, London.
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YORKSHIRE’S major companies could face unrest next year, as shareholders gain more power to have their say over executive pay.

A survey released yesterday suggests there is some way to go before executive bonus payments are aligned with a company’s performance.

In early 2012, during the ‘shareholder spring’ many shareholders started to flex their muscles after they were angered by the sight of bosses taking home pay which seemed to bear no relation to their company’s performance.

The survey by professional services firm KPMG of trends in FTSE 350 Directors’ pay shows that the majority of companies paid their chief executive at least 60 per cent of the maximum possible bonus, despite a quarter of these companies suffering a fall in profits.

A KPMG spokesman said: “There is likely to be a major focus on this area in 2014 as new mandatory disclosure rules take effect.”

Just 10 per cent of FTSE 100 and seven per cent of FTSE 250 chief executives did not receive any bonus this year.

Chris Barnes, head of rewards at KPMG in Leeds, said yesterday: “From a shareholder perspective, and without further explanation, this may lead to a conclusion that some annual bonus payments were not justified.”

The KPMG report reveals that the level of annual bonus payments remains an area of continuing concern for shareholders, which it says is exacerbated by the lack of disclosure in this area.

Mr Barnes said: “Many companies only disclose performance measures at a very high level. This is one of the areas where we expect to see a particular focus in 2014, now that new disclosure requirements have come in.”

The new rules on disclosure and voting on directors’ remuneration came into force for the financial year ends, starting on or after October 1, 2013.

For the first time, shareholders will have a binding vote on a remuneration policy, as well as an advisory vote on how that policy has been implemented during the financial year.

This significantly increases the power of shareholders in relation to directors’ pay.

Mr Barnes added: “These new mandatory reporting requirements should be seen as an opportunity rather than a compliance obligation.

“Both the companies and the shareholders have a common interest in better aligning pay and performance so in theory this should be a win-win.

“The reality is that companies measure performance over a broad spectrum of measures, rather than focusing entirely on profit.

“Yet, there will be instances where boards have a long-term strategy, meaning they will need to set pay awards as each year end comes around.

“In those cases, ensuring that shareholders are aware of and in agreement with the long term objectives will be crucial, especially if the trust that has been lacking in recent years is to be restored.”

According to the report, the annual bonus remains a significant part of total earnings.

KPMG’s analysis shows that the annual bonus accounts for 31 per cent of total earnings at the median for FTSE 100 chief executives, and 33 per cent for FTSE 250 chief executives.

The disclosure ‘gap’ is exacerbated by the increasing complexity of annual bonus arrangements.

KPMG analysis shows that the number of performance measures being used in annual bonus plans has increased in recent years, with the majority of companies now using three or more.

The annual bonus policy and practice is one of the key areas for companies to consider as they prepare their remuneration reports under the new disclosure rules, according to KPMG.

If they don’t act, they could face a revolt.

Mr Barnes said: “2014 will be the year where companies will need to explain exactly what performance has been rewarded, and increase the level of transparency around annual bonus payments to avoid the adverse reputational consequences of a negative shareholder reaction.”