Companies must get better at selling the reasons behind their remuneration strategies, executive pay expert Michael Robinson tells LeadingCompany.
Many are currently facing the wrath of shareholders under “second strike” rules – risking a potential board spill.
The problem is that shareholders are angry about low share prices, but there is a disagreement between them and company managers about how to improve share price performance.
According to newspaper reports, dozens of companies in the S&P/ASX 300 are busy overhauling executive salary packages after receiving a first strike, which is when at least 25% of the shareholders of a listed company vote against the remuneration report presented by the board. The two-strike rules came in on July 1, 2011.
If any of these companies receive a second “strike”, directors on boards who approved remuneration reports are at risk of being asked by investors to stand for re-election.
Companies such as BlueScope Steel, UGL and CabCharge have been communicating with institutional investors and shareholders to find out what they want, according to a report in The Australian Financial Review today.
The answers they get will be hard to accommodate, Robinson says.
Shareholders typically want executive bonuses to be based on long-term (three or more years) stock performance, preferably in the form of grants of stock or equity, Robinson says.
However, this can have the opposite of the desired effect, demotivating executives, because stock prices are often out of their control.
Directors are advised to use a pay structure that attracts and motivates talented people based on better business results, such as profits or sales, Robinson says, and then communicate why the remuneration polices have been implemented. “Perhaps this is where companies are falling down,” Robinson said.
Shareholders are increasingly rejecting the short-term bonuses based on annual performance indicators other than share price improvements, such as safety performance, positioning a company for future growth, and finalising acquisitions, among others.
Remuneration consultant John Egan told the Sydney Morning Herald that highlighted the conflict between what shareholders and executives perceive as fair.
“Shareholders believe [executives] should be rewarded for delivering enhanced share value and better dividends,” he said.
Management, rather, wanted to be rewarded for the job they did, Egan told the SMH. They generally are happy to be benchmarked against similar companies, but disagreed with performance hurdles they believe are driven by factors are outside their control – such as currency fluctuations and a volatile market driven by the euro crisis.
Robinson points out that the two types of performance can be at odds with each other. “The problem shareholders have with performance-based bonuses is that, while they have long-term gain, they often have short-term [downward] effects on share prices,” he says.
It’s a much harder, more complicated message to convey to shareholders than simply saying if the share price goes down, managers suffer too.
“If you effectively communicate to your shareholders what you are trying to achieve with performance based remuneration, then they will understand and – most likely – get on board,” he says.