* 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
By Tom Bergin
LONDON, May 22 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
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
"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
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.
DO THE INCENTIVES WORK?
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
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
As Prof. Robert Daines of Stanford University noted: "There
is reason for investors to be cautious about increased
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
"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".