UK study backs US Say on Pay

The US should introduce a shareholder advisory vote on executive compensation, as experience in the UK has demonstrated that it has been an effective tool for investor engagement, according to a new study published by PIRC and Railpen.

The report, Say on Pay: Six Years On, reviews the UK’s experience of shareholders having an advisory vote on remuneration since its introduction in 2003. It is intended to inform the debate in the US over the introduction of a similar advisory vote.
The study argues that this extension of shareholder rights in the UK has encouraged greater investor engagement over pay, and has led to increased, and better quality, dialogue with companies over remuneration policy. It has also resulted in the performance-related elements of remuneration forming a much larger part of the total, as shareholders have sought to use pay policy to align directors’ interests with their own. But the report also highlights the need for investors to use the new right effectively once it has been granted.
Key findings include –
· Both investors and companies report that since the introduction of the vote there has been an increase in engagement over remuneration. Whilst this has led to some friction, it has also created an improved dialogue between companies and their owners over this important governance issue.
· There has been a sharp reduction in directors’ typical notice periods since the introduction of the shareholder vote. 75% of directors were on one year in 2001, compared to over 95% now. This has reduced the risk of payment for failure.
· Performance-related elements of remuneration now account for a much larger percentage of the total, with longterm incentive plans (LTIPs) becoming a more significant element.
· Between 2000 and 2008 there was a clear movement away from the use of option schemes towards LTIP share awards. And from 2003 onwards there was a small increase in the number of share matching (or bonus deferral schemes) being introduced, suggesting that following the introduction of the vote in 2003 companies were more innovative in considering their remuneration structure.
· But total remuneration has continued to grow even when markets have fallen, suggesting shareholders need to do more to achieve true performance linkage.
· Some shareholders do not appear to have used their voting rights effectively, with the average vote against a company’s remuneration report falling from a peak in the 2004 season. Therefore the report argues that shareholders must use their new ownership rights actively if it is to have a meaningful effect.
Based on these findings the report calls for the introduction of a shareholder advisory vote on remuneration in the US.