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CFO Corner: UK Shareholder Spring was Barely a Fling

Stickman UK Shareholder Spring

Dan Walter, Performensation

In recent presentations I have heard several compensation professionals from the UK refer to their “Shareholder Spring” of 2012. The reference is to the raising of voices from shareholders. While we all love a little hyperbole, I believe that their Shareholder Spring was barely a fling. The UK’s Shareholder Spring led to a lot of posturing, but as of yet, the player and rules of the game are still familiar.

Yes, investors want more from Say on Pay results, but they are not asking for perfection. The problem is not you. It’s that other company who continues to target the 75th percentile of pay, while achieving 25th percentile performance. It’s the company who uses Total Shareholder Return (TSR) as a metric, but creates goals that allow it to pay handsomely even if the return is mediocre. It’s not the company that pays their CEO a ton of money.  It’s the company who pays their CEO a ton of money without significant evidence that it is deserved.

Here’s the rub. Say on Pay has existed in the UK for a decade. This vote is currently only advisory, like the U.S. For the first eight or nine years, the votes against executive pay were low (you could usually count them on your fingers.) After the global economic crisis of 2008, there was a bit of a grace period. In hindsight, investors were probably reeling and focused on recovery just as much as companies. But, during this period, companies did little to curtail poor practices (yes, TSR has been a popular metric since the inception of Say on Pay in the UK) and compensation packages seldom reflected the entirety of the drop in corporate performance.

If there was truly a Shareholder Spring event in the UK it would have resulted in one of two things happening. 1) Shareholders would have divested themselves of shares of every company with poor executive compensation practices or, 2) they would be demanding that the executives be removed and replaced by “better” executives. In an approach that can be seen as a bit more reasonable, they chose instead to push for more regulations and power over the process. This is a trend we can quickly expect to see in the US if investors (many of whom are the same on both sides of the Atlantic) feel ignored.

Just a quick overview of some of the recent changes proposed in the UK. 

  • Make the Say on Pay vote binding. A world where companies could no longer disregard the feelings of the shareholders.
  • Even more disclosure requirements. Remuneration disclosure in the UK is already at least as extensive as the US. More disclosure means more time, effort and questions (probably without increasing the compensation staff.)
  • Are advisory votes on how the prior year’s compensation policies actually being implemented? In other words, did you do what you said you would do?

So far, every UK compensation rule has had a close cousin implemented in the US. If we cannot find a reasonable balance between our compensation practices and the voice of our investors, an unbalanced solution will be created for us. Currently, we are masters of our own destiny in the world of executive compensation. That could change dramatically if we don’t work to create a distinct line between good and bad pay practices.

When someone threatens an important relationship, the prudent person sits down and asks what they can do to salvage it. The smart person actually does as many of those things as possible. If we are smart  (and I think we are) we can do the critical things that must be done to restore balance and satisfaction. While shareholders are certainly more active, vocal and with more power than they have been in a very long time, they are not looking get rid of most C-suite executives. In other words, I don’t think we are breaking up anytime soon.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay

 

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