Wilson says pay not ‘fit for

purpose’
Remuneration in spotlight as FTSE companies face
pressure to change the way they reward their bosses

 The Daily Telegraph

 22 Apr 2016

 By Marion Dakers

BRITAIN’S boardrooms are struggling to judge how much they should pay their bosses using a
system that is “widely seen as broken”, according to research from some of the City’s largest
investors.

As numerous blue-chip companies brace themselves for combative shareholder meetings

focused on executive pay, a panel of senior financial figures for the Investment Association
warned that the complex remuneration rules have left some firms handing out oversized
bonuses that bear only a passing resemblance to the success or otherwise of the company.
“The current approach to executive pay in UK listed companies is not fit for purpose, and has
resulted in a poor alignment of interests between executives, shareholders and the company,”
said Nigel Wilson, the chief executive of Legal & General and chairman of the IA panel.
“Greater transparency, clearer alignment of shareholder, company and executive interests,
more accountability on the part of remuneration committees and greater engagement with and
control by shareholders, working through company boards, are vital to restore confidence in a
system widely seen as broken.”

Executive pay is back in the spotlight as investors agitate for changes to the way several FTSE
companies reward their bosses. The loss-making oil giant BP suffered a bloody nose last week
when nearly 60pc of shareholders voted against Bob Dudley’s £13m package, although the
result was not binding.

The defeat bore the hallmarks of the “shareholder spring” in 2012, when a series of
embarrassing rebellions over executive bonuses led to the Government introducing a binding
vote at least once every three years that enables investors to vote down future pay plans.
The IA panel wants boards to work harder on more transparent and flexible pay policies – for
example, by explaining exactly what their top staff must achieve to get their target-related
bonuses. Some companies have complained that publishing their financial targets, even
retrospectively, would give too much information to their competitors.
Investment managers should also be paying closer attention to what firms are doing with
remuneration, rather than outsourcing scrutiny to consultants, the IA group said.
The IA, whose members own about a third of the FTSE 100, also drew attention to
“remuneration creep”, where company boards stick doggedly to everincreasing industry average
pay rather than tailoring bonuses to the firm’s performance.
In particular, the panel found that the complexities of long-term incentive schemes, which dole
out share awards to be collected several years later, should only be used if the firm can justify
them. Meanwhile, the gulf between executive pay and wages for ordinary staff members “has
resulted in widespread scepticism
‘Greater transparency and clearer alignment of shareholder, company and executive interests
are vital’
and loss of public confidence”, they said.
“It is increasingly clear that there is a problem with executive pay at big listed companies. The
introduction of binding votes on pay policy has not had the kind of immediate and positive
impact regulators and government would have wanted,” said Simon Walker, director general of
the Institute of Directors business group.

The IA hopes to speak to more company directors before making final recommendations in the
summer. Sainsbury’s chairman David Tyler and investment veteran Helena Morrissey are
among the other City figures working on the report.
“There’s still the formidable challenge of getting widespread acceptance for the proposals from
investors and proxy voting agencies,” said Tom Gosling, head of pay, performance and reward
at PwC.

Three rules to put right the wrongs of executive pay

As the Shareholder Spring of 2016 intensifies, so the number of companies locking horns with
institutional shareholders only grows. First it was Bob Dudley of BP. Then it was Iain Conn of
Centrica. Next it was Michael Roney of Bunzl. And yesterday it was the turn of Mark Cutifani of
Anglo-American to join the ranks of FTSE 100 chief executives whose investors are less than
happy about the pay and shares packages they received for last year.

“The variety of share-based schemes that are used by companies to reward directors is
confusing and opaque”
To the external observer, the sums being paid to these men could be perceived to be
gargantuan. To those working in the top flight of these companies, and indeed the men
receiving these payments, they are likely to be perceived as richly deserved. The truth probably
lies somewhere in the middle. But putting to one side the debate of whether any one individual
is worth £70m – the sum Sir Martin Sorrell is expected to receive for 2015 – there are a number
of issues at work here leading to continued dislocations between the various participants
involved with executive compensation.

The issue is one that Nigel Wilson, chief executive of Legal & General, has studied in great
detail to produce his interim report on executive pay for the Investment Association, which we
detail the findings of today.

Sir Martin Sorrell, founder andc chief executive of advertising giant WPP CREDIT: GETTY
IMAGES
Wilson, working with others including Newton chief Helena Morrissey and J Sainsbury chairman
David Tyler, found that despite the FTSE trading at roughly the same level it was 18 years ago,
executive pay has more than trebled over that time. His group found that the current approach is
“not fit for purpose” despite “several attempts at reform”. Many of Wilson’s points are laudable,
and the work he is doing in this area should be commended, in the hope of ensuring such fracas
do not recur in future years. But for that to happen, to my mind, three things need to take place.

1. Stop using consultants

One, companies need to stop using so-called executive compensation “experts” to work out how
much to pay their executives. The role of such individuals is to look at how a chief executive is
being rewarded, and assess whether they are being fairly compensated. In doing so, they look
to rival executives carrying out similar roles in comparable companies.

But this process of so-called “benchmarking” simply acts to inflate the levels of pay and reward
offered to executives, by creating ever increasing levels of remuneration. Such experts sell
themselves to a company’s remuneration committee by intimating that without them, executives
will feel under-valued and may be easy pickings for rivals willing to pay more.

Bob Dudley of BP
Arguments like this only go so far, however, given chief executives are driven by much more
than money alone. Wilson and Co rightly point out in their 13-page dossier that pay consultants
reduce accountability and create outcomes that are not wanted. I couldn’t agree more. They
prey on remuneration committee chairman, who often have no experience in this role, by
scaring them into submission. What is more, the number of such consultants is relatively small
compared with the number of companies they service, meaning the same practices are
repeated over and over.

2. The role of corporate governance

Two, the disconnect between fund managers who actually buy into companies and manage
their stakes for most of the year and their corporate governance colleagues who tend to only get
involved around AGM season has to end. The chairman of one of the UK’s largest fund
managers told me recently he has little time for what he called such “box tickers” who abide by
rules rather than looking at underlying performance. Corporate governance clearly has a role to
play in the stewardship of large firms. But it should not be at the expense of the understanding
of the underlying company.

Fund managers often have wildly different views from their governance colleagues, yet at many
investment houses are not consulted when it comes to votes on pay or succession.

As a result, when issues of contention arise, they can be exacerbated because the original
investor is not consulted, and the governance “expert” takes a decision in splendid isolation.

“There needs to be simplification in the way chief and other executives are paid”
It is not just on pay where this becomes a problem; so it is with an ongoing succession issue
currently in the spotlight. While there have been reports that many investors are unhappy at
Schroders chief executive Michael Dobson moving up to become chairman, in contravention of
governance rules, looking at his progression in that way is quite basic.

Dobson has delivered significant shareholder value in his 14 years running  the fund manager,
and his elevation – the decision of the board , not his – has been discussed with what are
believed to be a great number of external investors, as well as the Schroders family who control
47.5pc of the shares. Yet still the governance tsars point the finger.

3. Simplify executive pay

The third change needs to be simplification in the way chief and other executives are paid. From
long-term incentive plans to leadership equity acquisition plans to bonus deferral plans, the
variety of share-based schemes that are used by companies to reward directors is confusing
and opaque. Many institutional shareholders struggle to understand them, let alone other
stakeholders such as employees or the media.

On top of the confusion such schemes result in, they are designed to lock executives into
delivering long-term performance, matching that with long-term rewards.

But there is a clear irony then, in situations where share performance over the three or five-year
period is significant, that what might have been a more modest amount at the outset has
ballooned into a sizeable share award come the vesting date, leading to outrage.

The conundrum of executive pay is an issue that will not be solved overnight, but were these
steps to be taken, there might be fewer remuneration rebellions come the 2017 AGM season.