Shareholder Activism Changes Corporate Approach to Executive Remuneration

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Home > Articles > Shareholder Activism Changes Corporate Approach to Executive Remuneration

 Shareholder Activism Changes Corporate Approach to Executive Remuneration

Mercer | General
December 18, 2012
​Increased shareholder activism and a desire for more corporate governance are driving changes in multinational executive remuneration. This has been identified as the single largest executive remuneration trend in 2012.

Pressure from shareholders is creating a domino effect—pushing regulators and legislators into faster and deeper involvement in executive remuneration issues. These trends were highlighted in a recent webcast and hosted by Mercer consultants in Asia, Europe, and the Americas. 

Mark Hoble, partner in Mercer’s executive rewards team in the United Kingdom, UK says: “Company pay policies were defined according to criteria which may have been valid a year or several months ago. Today, the speed of public comment and reaction means these policies might now attract intense public scrutiny and criticism. Legislators and companies are being forced to improve their responsiveness.”

“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,” he continues. “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. This is an essential and sensible part of corporate risk and reputation management.” 

North America
The 2011 introduction of the United States’, US’ say-on-pay rules has encouraged greater transparency and shareholder communication. They have also accelerated further long-term incentive, LTI, plan design with performance-based vesting conditions. There is increased scrutiny of LTI conditions while compensation committees, noting current sentiments, are showing restraint on awards. In 2012/2013, the Dodd-Frank Act which contains rules on how to address pay for performance, remuneration and internal pay equity, will come into force. 


Gregg Passin, partner of Mercer’s executive rewards team in the US says that various parts of the Act came into force in 2011 but the impact of the remaining areas is uncertain. “Many companies are hedging their bets and will respond in more detail once the Securities and Exchange Commission confirms the rules. Meanwhile, investor groups continue to exert a strong influence on pay discussions. But with 98 per cent of US companies having passed their say-on-pay votes in 2011 and 2012, it is fair to say that progress is being made,” says Passin.

In Canada, most organisations are not considering making big changes to their executive compensation programmes. Many have implemented such changes since the financial crisis of 2008. 

“There are shifts occurring with companies making more use of performance-based LTI plans,” says Lisa Slipp, partner in Mercer’s executive rewards team in Canada. “Some companies are also using restricted share units and special retention grants. But legislators do not feel the need to dictate the rules because many companies have already implemented best practices themselves.” 

Companies in the UK, Switzerland, Netherlands, Germany, Italy, and Ireland have all been on the receiving end of votes against their executive compensation proposals. According to Mercer’s snapshot Executive Remuneration Guide, MERG, this is against a background of predictions of a three per cent median increase in base pay in Europe in 2013. Pay freezes remain common in countries such as Spain, Greece, and Italy. Pay is being used as the mechanism for shareholders to convey their discontent over company performance—a trait that is spread across all industry sectors. The UK’s ‘shareholder spring’ quickly led to the European Union, EU, announcing that they would be looking at the design of pay elements, and not just providing guidance on pay philosophy.  

In the UK, the Department for Business, Innovation, and Skills is consulting on transparency, board diversity, and shareholder influence. The consultation covers voting on pay policies by shareholders; disclosure of a company’s pay policy for the current, future, and previous year; and board diversity.

“There is a vocal shareholder revolution taking place and the UK government and the EU are using this to reform practices,” says Hoble. “Companies, 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,” he added.

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 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. 

“Rules on corporate governance are updated in Hong Kong, while Singapore has 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 Annual General Meeting can result in a board spill—resulting in the resignation of executives and a re-election process. Listed companies in Asia are increasingly taking action towards more transparent communication with shareholders: they are explaining more clearly the rationale for their pay decisions and providing more information on incentive plans,” says Kothuis.

South America
Currency appreciation in the region means that the relative cost of employees is growing in USD. Bonus payments are growing and extending to lower employee levels. Salary increases are broadly outpacing inflation except in high inflation countries. LTI programmes are growing in prevalence, eligibility, and award amounts. They now include a mix of stock options, restricted stock, and deferred cash. 

Fernando Pedo, principal in Mercer’s executive rewards team in Brazil says that an insufficient number of qualified professionals has led to compensation inflation. “Companies in Brazil, Argentina, and Mexico find it harder to fill the senior roles compared to companies elsewhere in the world. There is also a cultural factor at play. Local companies have a more aggressive remuneration philosophy and multi-nationals operating in the region copy these policies to ensure that they can compete in hiring and retaining talented employees,” he said.

“Of course regional trends hide further individual country trends but multi-nationals are mostly looking for guidance,” says Hoble. “There is a sense that executive remuneration has become too complex and a demand for simpler, more transparent solutions is needed.”

Mercer, the human resource consultancy, works with clients to solve human capital issues by designing and helping manage health, retirement, and other benefits. It is a wholly-owned subsidiary of Marsh & McLennan Companies, a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital.
Copyright © 2013 Singapore Institute of Management

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