Amid growing public and investor concern about major British companies potentially overpaying their top executives, the UK government has been kicking around the idea of instituting a pay ratio reporting rule since last year. The government hinted in April that it would propose the regulation soon, and now it is here. The proposal, which Business Secretary Greg Clark is presenting to Parliament today, will require all companies with more than 250 employees to disclose the ratio between the pay of their CEO and their average or median employee, as well as to explain this difference, the BBC reports:
The new rules, as well as introducing the publication of pay ratios, will also require listed companies to show what effect an increase in share prices will have on executive pay, in order to inform shareholders when voting on long-term incentive plans. … Mr Clark said: “Most of the UK’s largest companies get their business practices right, but we understand the anger of workers and shareholders when bosses’ pay is out of step with company performance.”
The plans were welcomed by the Investment Association – that represents UK investment managers – as well as business lobby group the CBI and think tank the High Pay Centre. Chris Cummings, chief executive of the Investment Association, said investors wanted greater director accountability and more transparency over executive remuneration.
That investors are leading the charge for transparency on executive compensation is unsurprising; activist investors were also key proponents of the pay ratio reporting rule that came into effect in the US earlier this year. Shareholders are voicing greater interest in exercising their “say on pay” prerogatives, particularly after recent scandals in the UK over executives receiving massive bonuses, in some cases without company performance justifying them.
Trillium Asset Management, an activist investment fund focused on social and environmental responsibility, has filed a shareholder proposal at Verizon that would tie executive compensation at the telecommunications giant to its performance against cybersecurity and data privacy goals:
Verizon shareholders request the appropriate board committee(s) publish a report (at reasonable expense, within a reasonable time, and omitting confidential or propriety information) assessing the feasibility of integrating cyber security and data privacy metrics into the performance measures of senior executives under the company’s compensation incentive plans. …
Currently, Verizon links senior executive compensation to diversity metrics and carbon intensity metrics. Cyber security and data privacy are vitally important issues for Verizon and should be integrated as appropriate into senior executive compensation as we believe it would incentivize leadership to reduce needless risk, enhance financial performance, and increase accountability.
The proposal points to several data breaches in the company’s recent history, including one that affected 1.5 million customers in 2016 and another affecting 6 million last year. It also expresses concern about the growing number of users whose data the company is now responsible for safeguarding following its acquisition of Yahoo and AOL, which will expand Verizon’s digital advertising reach to 2 billion people.
Bob Iger, the CEO of the Walt Disney Company, received a total compensation of $36.3 million in fiscal year 2017, if all goes well, could earn more than twice that figure this year. The company’s investors, however, have balked at the board’s plan to reward Iger so generously, voting 52–44 percent against a non-binding advisory resolution approving Disney’s executive compensation pan at its annual shareholder meeting, Bloomberg reports.
Three proxy advisors had urged investors to reject the plan, which they said was misaligned with performance, but the board insists that Iger’s compensation package is worth making sure he remains on board through the completion of Disney’s ongoing $52.4 billion deal to purchase 21st Century Fox:
“The board decided it was imperative that Bob Iger remain as chairman and CEO through 2021 to provide the vision and proven leadership required to successfully complete and integrate the largest, most complex acquisition in the company’s history,” Aylwin Lewis, head of the Disney board’s compensation committee, said Thursday.
Bloomberg notes that this is the first time Disney shareholders have pushed back on an executive compensation package since federal regulators began encouraging these “say on pay” votes in the 2010 Dodd-Frank Act. Indeed, such rejections are still a rare occurrence in corporate America generally. Just 1.2 percent of S&P 500 companies had their advisory pay resolutions opposed by a majority of investors in 2017, Reuters reports, citing data from ISS Analytics.
The 2010 Dodd-Frank Act requires publicly traded US corporations to hold advisory shareholder votes on pay packages for top-level executives every one, two, or three years, and to ask shareholders how often they would like to hold those votes every six years. Stephen Miller at SHRM highlights an analysis of 2017 proxy season voting showing that investors are increasingly requesting to hold these votes annually:
A switch to annual voting on compensation was supported by institutional investors that are part of a say-on-pay investor working group coordinated by Segal Marco Advisors. The investor group found that 319 Russell 3000 firms limited the say-on-pay vote to once every three years. Of the 319 firms with triennial voting contacted by the investor working group last October:
- 46 of them did not have a say-on-pay frequency vote this year because either they underwent a change in control or the vote will happen at a future meeting.
- Shareholders at the remaining 273 companies favored an annual vote.
The votes mandated by Dodd-Frank are non-binding, so companies are not obligated to abide by investors’ wishes about executive pay packages or how often to hold these votes, but they do put pressure on boards of directors to make changes. Of the 273 companies with triennial voting where shareholders favored an annual say-on-pay vote, 146 (53 percent) switched to an annual vote as a result, including some household names like Amazon, Comcast, and Lululemon.
As part of a suite of corporate governance reforms aimed at reining in excessive executive pay packages and giving employees a greater voice in corporate decision making, this week the UK government is expected to propose establishing a new public register that would list all companies where investors have opposed directors’ compensation plans, Sky News reports:
Sky News has learnt that Business Secretary Greg Clark will announce that the Investment Association – the fund managers’ trade body – is to oversee the creation of the new register, which will include any company which faces opposition from at least 20% of shareholders.
New laws will also pave the way for nearly 1,000 listed companies to publish and justify the ratio between the pay of their chief executive and their average UK-based worker, according to a Whitehall source briefed on the plans. It was unclear whether the figure for chief executives would comprise their total remuneration – which in the FTSE-100 averaged £4.5m last year – or only their base salary, which would produce a much lower ratio.
The government’s assertive approach to “naming and shaming” organizations that allegedly overpay their executives follows from the populist position Prime Minister Theresa May has staked out since taking up residence at 10 Downing Street last year, in the aftermath of the Brexit referendum.
Sydney's central business district (Olga Kashubin/Shutterstock)
The compensation of chief executives is a matter of constant controversy, with debates over how much CEOs should earn, what form their compensation should take, how their pay should be determined, and who should have a voice in setting it. One way critics of massive CEO pay packages seek to control them is by giving shareholders “say on pay”—i.e., more power to reject the executive compensation plans drawn up by boards of directors.
To that end, in 2001, Australia’s government enacted a law known as “two strikes”, which stipulates that if at least 25 percent of a company’s investors vote against approving its remuneration report at two consecutive annual shareholder meetings, that automatically triggers a vote on whether to force the entire board, except the managing director, to stand for re-election within 90 days. The idea behind the rule is to give shareholders more power over executive pay and boards a reason to act on controlling it. And so far, Graham Kenny observes at the Harvard Business Review, it seems to be working:
The country has witnessed numerous first strikes with boards quickly backtracking to save their skin. Among the crowd are some of the nation’s largest companies – CSL, Woodside Petroleum, AGL Energy, Boral, and Goodman Group. The mere threat of a first strike has had boards treading carefully. It’s clear that boards are starting to get the message from the national government, shareholders, the public, and the media that excessive executive packages are unacceptable.
More than that, smart businesses are stepping forward to proactively embrace the changing culture.