22nd November 2012
Campaign group Fair Pensions has just issued a big report in which it has criticised many of the UK’s fund managers for not being active enough on executive pay. But does it own chart slightly undermine its case?
The group says that despite several high profile votes against controversial remuneration packages for directors, it did not amount to a so-called ‘Shareholder Spring’.
It also wonders whether it is appropriate to compare shareholder votes on executive remuneration to the toppling of dictators in the Arab Spring. At Mindful Money we tend to agree with that point at least.
The report is available here on Fair Pensions’ website along with news of a host of other campaigning issues the group is involved with.
Yet we are not sure if Fair Pensions makes an entirely convincing case. It may be undermined by its own excellent graph accompanying this post. (If you click through to the Fair Pensions report, a bigger version is available to view in more detail).
Broadly, the group has looked at the voting record of twenty of the UK’s top fund and pension fund managers on ten controversial company pay and benefits packages and deemed them seriously lacking. It is red for ‘no’ votes, green for ‘yes', yellow for abstentions, grey for not disclosed, blue for a split vote within the firm and a rather fetching turquoise for those due to disclose (all for fund firm Schroders).
The four criteria Fair Pensions use to identify the controversial packages and place red flags on them are
1) single performance criteria in executives’ incentive plans
2) transaction-related bonuses or ‘golden hellos
3) moving the performance goal-posts on executives’ incentive plans
4) variable pay of more than 200% of executives’ base salaries
On this basis, the packages, many of which were defeated, do seem worthy of attracting a red flag.
Yet, a cursory glance at the graph also shows that a large number of fund managers voted against these packages. There is a large amount of red marking no votes, though we do think it would be better if all the managers had disclosed how they voted in all cases.
It also appears that managers are making up their own minds situation by situation, so for example the row for Kames Capital has a lot of green and red. State Street and F&C were very sceptical of the packages and even Aviva, hauled over the coals for its own remuneration package and on both the x and y axis, has voted against in five cases out of ten.
Mindful Money thinks if it isn’t quite a spring, then surely Fair Pensions has charted a bit of a thaw.
In addition, some firms have split votes because different fund managers in different funds may vote in different ways as is clearly the case with JP Morgan.
In fact, Mindful Money wonders if that doesn’t cut to the heart of the matter. Fund managers are not voting for or against remuneration packages because they seem too high but because of what it means for performance.
Fair Pensions also criticises the fact that the Government has accepted that shareholders should only get a binding vote on pay every three years, rather than every year. It believes this is because of the reluctance of institutional shareholders to get fully involved, shown by the very high number of firms which opposed binding votes when they answered the Government's consultation. At 72 per cent this is arguably the most powerful statistic in the report. But once again we have to ask isn’t the primary task of fund managers to deliver returns. So is three years an unreasonable compromise?
It is quite obvious that executive pay at top firms and even at some small ones has gotten completely out of kilter with everyone else’s salaries. More importantly, it has gotten out of kilter with the economy and in some cases with the performance of firms themselves.
Fair Pensions wants big institutional shareholders to act because they represent millions of small shareholders who have stakes in these firms through their mutual funds and their pensions.
We accept that there has been a disconnect between investors, institutions and companies and not enough information.
It is also clear that many small investors will be very concerned about directors’ pay. However a majority probably only really care about pay if it affects the performance of the companies concerned and thus the performance of their investments. The behaviour of some fund managers appears to reflect that view too. Fair Pensions has wider and often laudable goals. But we’re not sure it has quite proved its case, not even with its own chart. But it's welcome to tell us why we're wrong.