July 27, 2021

In Britain, a Rising Outcry Over Lavish Executive Pay

LONDON —  As company boards prepare to vote on the annual compensation of their senior executives, investors and the government in Britain are pushing for ways to shrink what some have called excessive pay packages.

Over the last two months, two of the country’s biggest investors stepped forward to declare their general disapproval with the level of executive pay, and to call for investors to be given more say over the packages. Prime Minister David Cameron backed their calls on Thursday after saying that large pay packages, during times when many households have to tighten their belts, understandably “made people’s blood boil.”

On Tuesday, Vince Cable, the business secretary, is due to present proposals for a fairer compensation system, including giving shareholders veto power over pay packages and making them more transparent, said a senior government official who declined to be identified because the proposals were not yet public.

“Inappropriate levels of executive reward have destroyed public trust and led to a situation where all directors are perceived to be overpaid,” said Dominic Rossi of Fidelity Worldwide Investment, which joined with the Association of British Insurers in calling for the changes. “The simple truth is that remuneration schemes have become too complex and, in some cases, too generous and out of line with the interests of investors.”

Particularly irksome are cases where top managers continue to rake in large paychecks while their shareholders watch the value of their investments crumble. “There’s a pretty broad consensus that reform is required,” said Robert Talbut, the chairman of the investment committee of the Association of British Insurers. “There’s a strong view that significant payoffs to individuals who are seen to have failed is unsustainable, and we have to address this issue.”

 Total average pay of chief executives rose 33 percent in 2010 while average company market values grew by 24 percent, a report by the Institute for Public Policy Research showed. A separate study by the London School of Economics discovered that a 10 percent increase in a firm’s market value was generally followed by an increase of 3 percent in the chief executive’s pay but only a 0.2 percent increase in average workers’ pay.

 Public anger grew after newspapers reported plans for million-pound pay packages for senior executives at Barclays even though the bank’s share price slumped more than 30 percent last year. The Royal Bank of Scotland is to award its head of investment banking another large sum even though the bank announced thousands of job cuts. Cairn Energy, the oil explorer, attracted some criticism from investors last month for suggesting a £4.9 million, or $7.6 million, award for its chairman to incentivize him to sell some assets.

Mr. Cameron made it clear that he did not object to large bonuses for successful executives but was concerned about the disparity between pay and performance and the growing gap between the pay of executives and the average worker.

 Executive pay at Britain’s top 100 publicly listed companies for 2010 rose on average by 49 percent compared with 2.7 percent for the average employee, according to a report by the High Pay Commission, a pressure group. At the oil giant BP, for example, the former chief executive Tony Hayward earned 63 times the amount of the average employee in 2010, the year he left the firm. In 1979, the multiple was 16.5, according to the commission.

 Some lawmakers remain skeptical about how much change is possible. In the United States, where average executive compensation levels are higher than in Britain, recent efforts by the Dodd-Frank financial regulation act to rein in pay had limited success.

Under pressure from regulators, banks in the United States have shifted a bigger portion of pay into longer-term stock awards and established policies to claw back bonuses in the event of large losses. Dodd-Frank requires that public companies include “say on pay” votes for shareholders to express opinions about compensation, though the votes are not binding.

Britain has had nonbinding shareholder votes on executive pay for several years, but pay levels continued to climb.

Now the government is considering making the votes binding. Mr. Talbut and Mr. Rossi also argued in favor of lifting the threshold of shareholder approval for the pay packages from the current 50 percent and of making the decision binding. Companies are encouraged but not required to change their executive compensation if less than half of the shareholders approve it. Mr. Rossi argued for a minimum shareholder approval of 75 percent and said companies should explain to shareholders more clearly why they award an executive a certain pay package. “Tell us in simple terms what you propose and let shareholders decide,” he said.

But Sarah Wilson, managing director of Manifest, which advises shareholders, warned against relying too much on shareholders to fix the issue. Evidence showed that many large shareholders were reluctant to collect the relevant information to make decisions and vote on pay, she said.

The Office for National Statistics estimates that more than 40 percent of British company shares are now held overseas, many are short-term investors, and few want to spend time pondering executive pay if they own 1 percent or less of a company.

Deborah Hargreaves, the High Pay Commission’s chairwoman, said the government could also give other stakeholders, including employees, more say on executive pay or simplify remuneration by just publishing a total figure. Pension contributions, deferred bonuses and other long-term incentives made it more difficult for shareholders to determine the total annual compensation of a manager, she said.

 But Ms. Hargreaves also said she was hopeful that the current debate about executive pay would help improve the system. “If you can’t achieve any change now when there’s an economic downturn,” she said. “I don’t really see when.”

Article source: http://www.nytimes.com/2012/01/23/business/in-britain-a-rising-outcry-over-lavish-executive-pay.html?partner=rss&emc=rss

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