BG Under Fire as Pay Proposal Leaves Shareholders in a Bind

BG Group’s record pay proposal for new boss Helge Lund puts investors in a bind and may fuel arguments for caps on executive compensation, said the Institute of Directors, the U.K.’s oldest corporate-governance group.

Lund, 52, is set to receive a pay package of as much as 14 million pounds ($22 million) plus a 12 million-pound share award earned over five years, making him the best-paid oil executive in Europe. The package is subject to a shareholder vote Dec. 15 because it contravenes company policy set out in May that capped pay for chief executives at 9.1 million pounds.

Lund, the former Statoil ASA chief whose appointment last month ended a leadership crisis at the U.K.’s third-largest oil and gas producer, is free to walk away from the job if shareholders vote the package down.

“The board has shareholders over a barrel -- look at what happened to Thomas Cook’s share price this morning when the CEO announced she was resigning,” IOD Director General Simon Walker said in a telephone interview from London. “The implied threat to shareholders is dangerous.”

Exorbitant executive compensation has become a political issue in the lead up to the U.K. general election in May, with the opposition Labour Party calling for measures to encourage pay restraint. Business Secretary Vince Cable, a Liberal Democrat, last year introduced rules to give shareholders a binding vote on compensation for three years.

If approved, Lund’s pay package may make policy makers question whether existing legislation is tough enough, Walker said.

‘Exercise Responsibility’

“We have given shareholders the power to vote this kind of excessive pay down and they have got to use it,” Cable told London’s Evening Standard today. “This is a case where investors, who include you and me, have got to exercise responsibility.”

The vote “is in line with the letter and spirit of corporate governance legislation,” a BG spokesman said in an e-mail. Lund’s remuneration “is competitive in the international oil and gas industry.”

Yesterday the U.K. Investment Management Agency issued a “red-top” warning -- its most severe recommendation against a company’s plans -- over Lund’s pay. Legal and General Investment Management, which hold 3 percent in BG according to data compiled by Bloomberg, also criticized the deal for contravening company policy.

A shareholder vote in favor of the pay package would set a precedent for other businesses, the Institutional Shareholders Services, an international proxy voting agency, said in a report distributed to clients.

It may encourage incoming executives “to negotiate rewards which are outside the scope of the formal remuneration policy and make shareholder approval a condition of their employment,” the ISS said. This would be “on the assumption that shareholders are unlikely to vote down the proposal.”

While “they are undoubtedly obeying the strict letter of the law in calling an EGM,” Walker said, the proposed pay package will “fuel the enemies of business overall.”

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