‘Shareholder Spring’ Sways Global Executive Pay Legislation

The level of furore from shareholders over senior executive pay and bonus packages over the last year has forced regulators to amend corporate remuneration frameworks in order to abate stockholder activism.

According to a report by consultancy group Mercer, pressure from shareholders is creating a 'domino effect' and is driving changes in multi-national executive remuneration across the US, Europe and the Asia-Pacific.

"The speed of public comment and reaction means that company pay policies, which were defined according to criteria which may have been valid a year - or even months - before, might now attract intense public scrutiny and criticism. Legislators and companies are being forced to improve their responsiveness," says Mark Hoble, Partner in the Executive Rewards team in the UK for Mercer.

"As part of this response, performance remains a priority focus and is being tied ever closer to all elements of reward as part of this response. However, 'context' has also risen up the agenda. Companies are considering the appropriateness of their historic pay decisions through the lenses of current public perception and economic performance. We are seeing companies undertake scenario-modelling for their planned pay policies," he adds.

In the report, Mercer revealed that how each continent has had heightened scrutiny from regulators when it comes to executive remuneration, after public and shareholder uproar over bank and company pay packages have cause boardroom revolts and negative coverage in the media.

For instance, companies in the UK, Switzerland, Netherlands, Germany, Italy and Ireland have all been on the receiving end of votes against their executive compensation proposals, including wider shareholder revolt against pay packages from Tescos, Shell, Aviva and WPP.

According to Mercer's snapshot Executive Remuneration Guide (MERG), it is predicted that there will be a 3 percent median increase in base pay in Europe in 2013, despite wider concerns over the economic backdrop.

In the UK, the 'shareholder spring' was widely blamed for the European Union (EU) announcing that it would be looking at restructuring company pay elements, as well as providing new guidance over pay.

Meanwhile, the UK's Department for Business, Innovation and Skills (BIS) is currently looking into installing further transparency, board diversity and shareholder influence, by conducting a consultation that will cover voting on pay policies by shareholders, disclosure of a company's pay policy for the current, future and previous year packages.

"There is a vocal shareholder revolution taking place and the UK government and the EU are using this to reform practices," says Hoble. "Companies - and particularly the Chairs of Remuneration Committees - are concerned about the public reception that their pay policies may receive. The speed at which these policies can become a public issue means that companies need to engage early and often with shareholders. Communication facilitates understanding and a lot more needs to be done to prevent another spring of discontent."

Global Changes

Within the Mercer report, there is also focus on how regulators are going one step further and are not only issuing guidelines but are also installing new pieces of legislation when it comes to companies rewarding and paying executives.

In 2011, the introduction of the US 'say-on-pay' rules is designed to encourage greater transparency and shareholder communication, while the Dodd-Frank Act will contain rules on how to address pay for performance, remuneration and internal pay equity, and come into force during the next year or so.

"Various parts of the Act came into force in 2011 but the impact of the remaining areas is uncertain so many companies are hedging their bets and will respond in more detail once the SEC confirms the rules," says Gregg Passin, Partner at Mercer's Executive Rewards team in the US. "Meanwhile, investor groups continue to exert a strong influence on pay discussions but with around 98 percent of US companies having passed their say-on-pay votes in 2011 and 2012, it is fair to say that progress is being made."

However, in the Asia Pacific region, Mercer says that governance and accountability have been the main trends effecting executive remuneration in the region where Executive Remuneration committees are less well developed.

"Regulatory changes are occurring, not as a result of the financial crisis, but largely because of the wider recognition that a more supportive infrastructure and governance regime is required to support the 'Asian century'," says Hans Kothuis, Principal in Mercer's Executive Rewards team in Hong Kong.

"In Hong Kong, there are updated listing rules on corporate governance while in Singapore they have issued enhanced disclosure requirements. The Reserve Bank of India has come out with new guidelines on remuneration in banks. In Australia, new rules mean that two negative votes in an AGM can result in a board spill, meaning that executives must resign and seek re-election," he adds.

However, in contrast to the number of changes being made across the continents, Canada was highlighted as one of the regions not making changes, because companies have already taken major steps towards executive compensation programmes since the financial crisis in 2008.

"Some companies are also using restricted share units and special retention grants but broadly, legislators do not feel the need to dictate the rules because many companies have already implemented best practices themselves," says Lisa Slipp, Partner in Mercer's Executive Rewards team in Canada.