* Votes against pay plans running at around 2x last year
* Long-term incentive plans seen as over-generous
* Targets often set too low and unlimited payouts on offer
* Increased disclosure makes easier for execs to argue underpaid
By Tom Bergin
LONDON, May 22 (Reuters) - To the directors of London-listed oil services group Petrofac Ltd, a proposed "value creation plan" seemed an appropriate way to reward executives for success. Nearly a third of non-management shareholders didn't agree.
Put forward at the group's annual shareholders' meeting earlier this month, the company's plan could lead to top brass, excluding the CEO, earning additional bonuses which could be worth up to 10 times their base salaries.
To many shareholders it was a payout too far, earning Petrofac membership of the growing list of British companies whose investors have baulked at the scale of the lucre being doled out to executives.
The Petrofac vote, which came in spite of the company's stellar growth in recent years, is the latest sign that investor tolerance has reached its limit, potentially pointing to a rethink on how executive pay packages are constructed. The days of shareholder acquiescence to reward schemes that make it too easy to earn big bucks may be over.
Votes against pay plans at UK companies are running at around twice last year's level, Sarah Wilson, chief executive of shareholder advisory group Manifest, said. "There is too much vesting of share schemes for mediocre performance."
Recent months have seen strong votes against pay proposals at banking group Barclays Plc, auto retailer Pendragon Plc, media group UBM Plc, bookmaker William Hill Plc and oil company Cairn Energy Plc.
More dramatically, CEOs at insurer Aviva and newspaper group Trinity Mirror Plc have stepped down after shareholder opposition to their awards.
Until about two decades ago, CEOs were primarily rewarded through a high base salary, usually complimented by a generous pension and an annual bonus, sometimes in the form of shares or share options, that was linked to year-on-year performance.
Many investors thought this structure meant managers didn't feel their pain when times were tough and pushed for compensation to be tied to performance.
"Most shareholders you speak to prefer for senior executives to have performance-based pay, that they have a higher proportion of their package based on the variable element rather than the fixed element," said Peter Smith, remuneration consultant with Kepler Associates.
Some are arguing the pendulum has swung too far.
"Too much of the package has been put into so-called bonus schemes that can't operate effectively (in motivating managers)", said Tom Gosling, head of reward at PricewaterhouseCoopers (PwC).
"Complex long-term incentive schemes have been a disaster. They really haven't done anything for shareholders or for the public perception of executive pay ... We are seeing some moves toward simplification," Gosling said.
In 2009/10, the last full year for which figures are available, the variable element accounted for 4.4 times the average base salary paid to CEOs of Britain's 100 biggest listed companies, compared with 1.8 times 10 years earlier, according to data from IDS Executive Compensation Review.
The basic structure for top executives now involves four main elements: salary, pension, annual bonus and - often the most lucrative element - a long term incentive plan (LTIP) or performance share plan (PSP).
For example, in 2011 BP CEO Bob Dudley was paid a salary of $1.7 million, a cash bonus of $850,000 and long-term share awards worth $4.2 million.
Shareholder advisory group Pirc opposed BP's remuneration report on the basis it had "the potential to pay excessive variable remuneration."
One of the simplest reasons executive pay has risen is that performance-related pay plans have been bolted on top of base salaries that continued to rise at above-inflation rates.
More important is the selection of performance targets.
At its simplest, the annual bonus tends to track financial indicators such as a company's earnings before tax. Longer-term incentives are usually tied to total shareholder returns - share price rise or fall plus dividend payouts - over a period of around three years.
Performance relative to peers is frequently given more weight in the calculations than absolute levels, partly to ensure an executive is only rewarded for delivering above and beyond the market or sector as a whole.
For example, investors in an oil company would probably be happy to reward a CEO who boosts profits by lifting production, but less keen to give big bonuses to a CEO who oversaw a rise in profits due to roaring oil prices while output fell.
There is nothing wrong with such targets in principle, but in practice, investor advisory groups argue they are often set too low while offering unlimited payouts.
Some directors and remuneration consultants agree the upside for executives is bigger than it needs to be to retain them.
"We've started to pay bureaucrats like entrepreneurs," said Gosling at PwC, noting that since most managers at big companies are by nature risk adverse, they discount uncertain payouts. "It's a very inefficient way of paying people."
Yet, in a relative sense, pay can be motivational.
"For the executives it's a way of keeping score," Paul Anderson, who has been CEO of three publicly-quoted groups - miner BHP Billiton, utility Duke Energy and pipeline operator PanEnergy Corp.
Other directors agreed that ego can often send a senior executive pleading to the board for a raise, if he sees a rival being paid much more.
That's part of the reason most consultants admit that, for all the pseudoscientific talk about incentive trigger points, the pay-setting process starts with benchmarking industry averages.
The increasing requirement for companies across Europe to publish executive pay levels has made it easier to do this.
But it has also made it easier for executives to argue they are underpaid.
As Prof. Robert Daines of Stanford University noted: "There is reason for investors to be cautious about increased disclosure."
But if the underlying objective is to boost company performance, is financial reward the best, or only, way to achieve this? Some current and former CEOs agree that money is not the motivator most economists seem to think.
Anderson said he was asked once at a shareholder meeting how many hours less he would work if he was paid a million dollars less.
"I wouldn't work one minute less, I'm doing the job because I'm passionate about it, not because of the money," he replied.
Speaking on the sidelines of the AGM of BP, where he now sits as a non-executive director and helps set pay, Anderson said: "I was paid way more than I thought I deserved or needed (for me) to be motivated".