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U.K. Executive Pay Faces Shareholder Revolt as Packages Swell

  • Compensation policies voted down at BP, Weir, Smith & Nephew
  • Investor ire shifts to Reckitt, Standard Chartered, WPP

Investors are rebelling against multimillion-pound pay deals for U.K. chief executive officers in what is shaping up as a potentially bigger revolt than the “shareholder spring” of 2012 that resulted in the departure of some high-profile company leaders.

Just weeks into the 2016 season for annual meetings, a growing number of investors are using their voting power to send a message to boards that they will not tolerate hefty pay increases amid lackluster stock performance, spotty financial results and rising income inequality. The confrontation is set to reach a high-point next month when shareholder ire will focus on WPP Plc CEO Martin Sorrell, whose £70.4 million package for 2015 makes him Britain’s highest-paid corporate leader.

“This will turn out to be bigger than 2012,” said Paul Lee, head of corporate governance at Aberdeen Asset Management, which manages £293 billion ($427.6 billion). “There was quite a lot of restraint on pay in the years following the financial crisis and some companies have let those restraints off.”

Four years ago, a widespread investor backlash over pay for senior executives contributed to the resignations of David Brennan, CEO of pharmaceutical giant AstraZeneca, and Andrew Moss, the leader of insurer Aviva Group.

Losing Votes

For the first time since 2012, FTSE 100 companies are losing votes on executive pay practices -- even though so far, less than halfway through the annual meeting season, there have been no resignations as a result. The backlash is another headache for boards already wrestling with the possible effects of the U.K.’s June 23 referendum on European Union membership.

Almost 60 percent of investors in April shot down payouts at BP Plc, which awarded CEO Bob Dudley compensation totaling $19.6 million in 2015 -- 20 percent more than the previous year -- even as the oil company’s shares tumbled 20 percent in the year through May 3. Though the vote was non-binding, the company said it would consider whether oil price changes should be taken into account when it reviews pay policies.

A majority of shareholders also rejected the remuneration report at medical-equipment group Smith & Nephew Plc and a new pay policy at engineering company Weir Group Plc.

“Remuneration committees need to work harder and raise their game,” said Hans-Christoph Hirt, Co-CEO of Hermes Equity Ownership Services Ltd., which represents 43 pension funds and advises on £154.7 billion of assets. “We have to explain to pensioners on the street, people saving for pensions: How can you vote for these big awards where executive pay is really out of line with the average employee salary and there’s a huge pay gap developing?”

The backlash against high earners extends beyond the U.K. In France, Renault SA shareholders in April voted against CEO Carlos Ghosn’s 7.25 million euro ($8.29 million) pay for last year. In the U.S., regulators have proposed restrictions on Wall Street pay, under which bankers would have to wait at least four years to collect their awards and firms could “claw back” bonuses later in certain cases.

‘More Anger’

In the U.K., according to corporate governance consultancy ISS Corporate Solutions, an average of 6.6 percent of votes at FTSE All-Share company shareholder meetings rejected reports from board remuneration committees so far this year, up from 4.6 percent last year.

“There’s more investor momentum this year with higher levels of dissent regarding pay packages,” said Stephan Costa, the London-based executive director for ISS. Some companies “are failing to secure majority support with others narrowly passing.”

At pharmaceutical company Shire Plc, 49.45 percent of investors last week voted down CEO Flemming Ornskov $21.6 million compensation, which included a 25 percent base pay increase.

At Anglo American Plc, 42 percent of votes were cast against CEO Mark Cutifani’s £3.4 million pay package. Investors said Cutifani’s compensation was too high after dividends had been cut and earnings were poor. Anglo was the worst performer in the FTSE 100 stock index last year, losing 75 percent of its value. At WPP, Sorrell has defended his pay, pointing to the stock performance of the advertising company under his stewardship.

Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management, said BP’s and Anglo’s pay policies demonstrated “a failure to use common sense and discretion.”

2013 Overhaul

After the shareholder spring of 2012, the government introduced changes in 2013 that gave shareholders a binding vote every three years on the pay policies of companies in addition to an advisory vote every year.

Despite the changes, some investors think the system is still broken. Executive pay has more than tripled in the past 18 years while the FTSE is trading roughly at the same levels, according to an April 21 report by Nigel Wilson, the CEO of Legal & General, for the Investment Association.

‘Not Fit’

“The current approach to executive pay in U.K. listed companies is not fit for purpose,” Wilson wrote. It “has resulted in poor alignment of interests between executives, shareholders and the company.”

Existing rules effectively give investors a warning system for remuneration committees to respond the following year. Many companies have three-year pay policies that expire this year, which means shareholders will get binding votes on pay policies at a large number of companies in spring 2017, setting them up for a summer of heated talks with board directors.

“This is about using a stick before the negotiations start,” said Sarah Wilson, CEO at shareholder advisory group Manifest.

As more investors speak out, momentum appears to be building. Norway’s $870 billion sovereign wealth fund signaled this week that it would begin examining more closely how executive pay deals are structured. “It’s an area we are beginning to look at in our dialog with companies,” Norway’s Central Bank Deputy Governor Egil Matsen, who oversees the fund, said in an interview Tuesday.

Investors say more clashes are to come. Royal London Asset Management has said it will vote against pay packages at Standard Chartered Plc on Wednesday and consumer goods company Reckitt Benckiser on Thursday. Rakesh Kapoor, Reckitt Benckiser’s CEO, received a £23.2 million pay deal for 2015, up 82 percent.

“I expect there will be a significant vote against the remuneration report,” Hermes’ Hirt said. “WPP is one of those companies that will look at remuneration policies in 2017, so it’s about investors signaling for next year.”

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