Pension Funds & Executive Pay (part 2)

John Griffin

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In an earlier posting (“Pension Funds and Executive Pay”), I expressed the hope that institutional investors such as pension funds would wield their collective muscle and not stand idly by while huge multinationals give their senior staff exorbitant pay awards.  For years, major institutions, including pension funds, have effectively boycotted annual shareholder meetings, where the most contentious issues might be the quality of pasties on offer – even before the “pasty tax”. 

With the AGM season almost upon us, we will soon see if the nationwide revulsion at boardroom excesses translates into action where it counts.

David Paterson, of the National Association of Pension Funds suspects there may be a backlash over skyrocketing boardroom pay.  “People are talking tough, but we shall have to wait and see if this is translated into a wave of shareholder activism”.  There are, sadly, only a few voices from within the corporate establishment who are prepared to speak out.  Sir Mike Darrington, former Greggs chief executive (pasties again) dismisses claims that top executives can only be retained by the promise of gigantic pay packages, suggesting that payments should be driven as low as possible until, he says, “If you don’t start to lose people you haven’t gone far enough”.

But will anything really change?  Will there be grumblings of discontent when a motion is moved at Barclays seeking approval for a £17m package for Bob Diamond (sorry Bob, it’s nothing personal)?  But even Bob appears a bit lightweight when compared with Bart Becht, who led Reckitt Benckiser (maker of, among other products, Nurofen).  In the last six years, Bart has been awarded more than £200m in cash and shares and, despite his departure more than six months ago, is in line for another £45m – he might need a jerry can to get that amount home.  I’m not suggesting Bart was anything less than a successful leader, but almost £250m in six years…?  Interestingly, there has been no noticeable change in the share price since Bart’s departure, which seems to confirm the old saying that the graveyard is full of indispensable people.

Vince Cable is suggesting some reforms that would be welcome: making a vote on a firm’s future pay policy binding; a requirement for 75% of shareholders to approve remuneration policies; even a mechanism for clawing back unjustified payments.  Only recently, pension funds, led by the influential Hermes Equity Ownership Services, made a radical call for the scrapping of long-term incentive plans, which usually span only three years.  Colin Melvin, chief executive of Hermes EOS which speaks for the huge BT pension fund and others, wants them replaced by cash bonuses and shares to be held for the longer term, between five and ten years.

The hope now is that investors show they are serious about punishing excessive payouts, as well as punishing rewards for failure.