AGMs (if you listen to my other half, who organises them) are impressively tedious. With many of the major institutional shareholders traditionally absent, the only fun to be had, apparently, is betting on which of the attending grannies can conceal the most sandwiches on their person.
However, this appears to be changing. Shareholders in a number of companies, including Aviva, Citigroup and Trinity Mirror, have rejected their CEOs’ pay deals, leading to the swift exit of the individuals in question. The phenomenon has been given the rather grand title “Shareholder Spring,” and will be a source of concern for all leaders of public companies.
So why is this happening? One factor is the inexorable rise of boardroom pay. It is widely felt that the recession has utterly passed this fortunate elite by, with senior executives’ at most of the UK’s largest publicly listed companies having risen 11% over 2012 to £3.65m. In an age of government spending cuts and worrying unemployment statistics, this can be a bit hard to stomach.
However, although these salaries have irked the public for years, until recently investors have stayed on the side-lines, offering relatively little opposition to bumper pay packets until the recent Shareholder Spring kicked-off. In fact the Aviva rebellion is only the fourth time a FTSE 100 company has seen a pay package rejected. So why now? Investors aren’t baulking at large compensation arrangements in and of themselves. In fact it’s unlikely that fund managers are going to lead an aggressive charge to push down leaders’ remuneration overall, especially as these individuals enjoy pretty decent pay levels themselves.
Instead, the issue is about paying for failure. Investors are dissatisfied with senior leaders taking these packages even when the company (and therefore, it could be argued, the CEO), have performed badly. As the FT’s Philip Stevens comments: “In this heads-I-win, tails-you-lose world a chief executive can pick up, say, £2m in a bad year and £5m or £6m in a slightly better one.” So if you look at the Aviva revolt, you can see that it came on the back of a 30% drop in the share price over the last year, and 40% of Xstrata’s shareholders rejected its pay report after shares fell 23% in the same period.
When facing accusations of underserved rewards, corporations and consultants alike tend to give an answer that is very familiar to anyone scrutinising on the banking sector – “These sums are necessary to keep, retain and incentivise the best talent.” But is this really true? If you pay your CFO more (whether in salary or bonuses), does this really lead to greater performance? This is a notoriously uncertain area, and some commentators do not see a link; for example, at a CorpComms event we attended recently, Anthony Hilton (The Evening Standard’s Financial Editor) gave his view that the culture of rising salaries does not inherently lead to better results.
So from a reputational point of view, what does this mean for listed companies? Well firstly, organisations approaching shareholder votes on boardroom salary should make sure their issues management plan is dusted off and ready-to-go, as it is clear that shareholder activism is going to continue to strike (especially as Vince Cable is looking to enable binding shareholder votes on boardroom pay). In the longer term, like so many communications challenges this one is all about demonstrating value. If the Shareholder Spring persists, organisations need to make sure they are clearly explaining not only the value of the company’s stock to its investors, but also how executive pay fits with company strategy, and what return on investment it delivers. Explaining these returns in a simple fashion isn’t helped by how complex and opaque some of these pay arrangements have become; John Plender from the Financial Times says that “executive pay has become absurdly over-complicated.” So wherever possible the packages should be re-designed so it is much easier to explain that an executive who does X will receive Y, in a way that both investors and indeed the wider public are able to understand. When demonstrating ROI on boardroom salaries, corporations need to also ensure they are effectively demonstrating that their executives are delivering sustained business performance as opposed to short-term results. It’s also important to note that demonstrating performance can sometimes be relative, rather than absolute. If every stock in a particular sector falls, an individual CEO can reasonably claim some brownie points for steadying the ship with a less severe fall than his peers.
A reasonable challenge to all this is “what if we can’t demonstrate any return on what we pay our CEO?” Well, not to sound unsympathetic, but if an organisation can’t find a clear rationale for what a leader is paid, it shouldn’t expect its shareholders to find one either.