U.K. Investors Fidelity, Hermes Push Banks to Change Bonus Plans

U.K. investors Fidelity Worldwide Investments and Hermes Equity Ownership Services say banks should award shares vesting over longer periods and make dividends a primary part of executives’ income.

Long-term incentive plans should stipulate that shares vest when an executive leaves the company, creating better alignment with shareholders’ interests, according to Dominic Rossi, chief investment officer of equities at Fidelity, the world’s second-biggest mutual fund manager.

“Career shares, which require an executive to retain equity that has vested until he or she leaves the company, should become a standard element of LTIPs,” Rossi said. “They align the executive to the long-term wealth creation of the company and they highlight to management the value of a dividend stream.”

Barclays Plc, Aviva Plc, Trinity Mirror Plc and Prudential Plc were among British firms to come under pressure in a surge of protest from investors against their pay reports in the past two months. Shareholders have criticized the pay, the complexity of share-based compensation plans and bonus payments for departing executives.

“This is not only a reward for failure but a failure of the reward system and is unacceptable,” Hermes, which advises clients with 89 billion pounds ($138 billion) of assets under management, said in a discussion paper advocating changes to executive pay. “Long-term incentives should be longer term. Three years is used as a proxy for long term but this is at best a medium-term measure, particularly in larger companies.”

HSBC, Barclays

HSBC Holdings Plc, Europe’s biggest bank, last year implemented a pay plan that allows shares to vest over five years rather than the three years more commonly used and could be withheld during that time frame. Rossi cited London-based HSBC’s compensation structure as a model for the rest of the industry in an interview with the Financial Times, which reported the story earlier.

Barclays, which paid Chief Executive Officer Robert Diamond 12 million pounds last year, had the biggest investor rebellion of any bank this year with 27 percent of shareholders voting against its pay plans. Diamond and Finance Director Chris Lucas earlier agreed to cut their deferred bonuses for 2011 until the London-based bank improves profitability.

The pay dispute at Aviva, the U.K.’s second-biggest insurer, cost CEO Andrew Moss his job. Moss stepped down five days after losing a pay vote at the London-based firm’s annual general meeting. The company had planned to raise his salary 5 percent to 1 million pounds even though he presided over a 60 percent fall in the share price during his five-year tenure.

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