International Round-up – US Votes, UK Pays, Xstrata Waits

It’s been an interesting month globally. We bring you some thoughts on the news.

US voters choose President Obama, Long Live Dodd Frank

Barack Obama has won the US presidential election, being returned for a second term in the White House, despite Wall Street reportedly firmly backing his opponent.  

His election means the Dodd-Frank Wall Street Reform will remain intact; Opponent Mitt Romney had threatened to repeal it. President Obama’s win will also likely see significant resources devoted to stimulate job creation, including infrastructure investment, cuts to payroll tax and providing funding for states to stem job losses at the state and local level. He also has indicated support for tax reform, targeting high earners with higher investment taxes, a minimum tax rate and tax break limits.

All eyes will be on President Obama to see how he deals with the approaching fiscal cliff – the convergence of a scheduled end to tax cuts and the start date of spending cuts. The concern is that any attempt to solve the issue will become gridlocked as Democrats retain power in the Senate and the Republicans in the House of Representatives. Wall Street is also concerned about the effect of higher capital gain and dividend taxes on stock sales.

Given the Dodd-Frank reform will continue, it will be interesting to watch its effect on Wall Street bonuses. They had declined sharply last year, but are now expected to see rises of between 0% and 5% to 10%, according to a Johnson Associates forecast. Yet despite the rise they will be lower than before the GFC, a greater percentage will be deferred and there will be more conditions to their award.

“We are as low as we have been in 10 or 15 years,” Alan Johnson, Managing Director of Johnson Associates told the Wall Street Journal. “It’s the new normal.”

Bond traders, who had seen severe pay cuts in 2011, could experience bonus rises of 10% to 20% in 2012, but on the other side of the scale, investment bankers and equity traders could receive up to 10% smaller bonuses than last year, reflecting low equity trading and merger and acquisition volumes, according to Johnson. He believed a 5% to 15% rise in 2013 was possible, but only given a “leaner and more focused” workforce.

 UK LTIs boom

Incomes Data Services (IDS) has completed research which shows that although base pay and bonuses for FTSE-100 Executive Directors have recorded median growth of 3.5% and -4.9% respectively year-on-year, their total realised pay including long term incentives has increased by 10% at the median, with some high payments pushing the average rise to 27%. The reason? The value of realised long term incentives rose by 81% from a median of £519,625 in 2011 to £938,888 this year.

The LTI grants had been made at the bottom of the cycle during the worst of the global financial crisis; those shares have since risen with the market. IDS also highlighted the use of relative performance measures, which allow vesting if a company has performed better than its peers but poorly in absolute terms.

Deloitte also released data, but for executive directors of the FTSE 250 companies. According to the firm, the median salary increases for executive directors in FTSE 250 companies has remained at 3%, the same as last year. Over half of finance and property companies gave no salary increases in 2012, Deloitte said, bringing the median increase for these companies to zero, compared to 3.5% for industrial and manufacturing and 2.5% in retail and service companies.

In terms of long term incentive, Deloitte stated that the median grant for the FTSE 250 companies is 125% of salary at award, unchanged since last year. It is significantly higher in finance and property companies (165% of salary) compared to industrial and manufacturing companies (100% of salary). For 40% of companies, none of their long term incentive award vested in the last year;  the median amount vesting was about half the maximum award – how this finding fits with IDS’ 81% increase in realised LTI pay for the FTSE 100 is not clear, although Deloitte did highlight that the FTSE 250 was not a homogenous group.

Xstrata Glencore merger – a melding of shareholder and executive interest

On 20 November, shareholders will vote on the future of Xstrata’s $90 billion merger with Glencore. The lead up to the vote has been a saga of shareholders demanding Xstrata negotiates a better deal, while critical over planned retention payments. A timeline of events is as follows:

  • 1 February – Xstrata says that it is in discussions with Glencore about an “all-share merger of equals”
  • 7 February – The parties reach agreement and recommend the deal.
  • 1 May – 40% of shareholders fail to support Xstrata’s remuneration report, similar levels to the year before. Concerns included the quantum of pay, an excessive focus on short-term incentives and automatic vesting of outstanding equity to executives if the Glencore deal progressed. 
  • 31 May – Xstrata and Glencore release merger documents, detailing £172 million worth of retention payments for 73 senior Xstrata managers (£28.8 million to be for CEO Mick Davis). The companies said the individuals were “critical” and their retention was “key to integrating the two businesses and maintaining and enhancing the value of its operations and growth projects”. The merger was not to go ahead if the retention awards weren’t approved.
  • 1 June – Shareholder disquiet over the retention awards begins. Shareholders call the retention pay “provocative”, “depressing” and “insensitive given the current climate”.
  • 27 June – Glencore and Xstrata change retention arrangements, saying they will be paid out entirely as shares, and placing performance hurdles on the payments. For their shares to vest, executives have to find cost savings on top of the US$50 million already expected, with maximum vesting to occur at US$300 million worth of savings found after two years.
  • 5 July – 12 July merger vote postponed to September: shareholders express concern about Glencore only offering 2.8 consolidated shares per Xstrata share and ask for 3.25.
  • 16 August – ISS advises shareholders not to vote for the merger mainly due to retention arrangements, arguing that they followed a “history of poor pay practices which have taxed shareholder patience”.
  • 30 August – 12% Xstrata shareholder Qatar Holdings announces that although it agrees with the deal in principle, it won’t support Glencore’s 2.8 share offer.
  • 7 September – The second proposed merger vote date. On the day, Xstrata receives a revised proposal from Glencore, raising its bid to 3.05 shares on the proviso that CEO Ivan Glasenberg heads up the new entity rather than Xstrata CEO Mick Davis. Davis would  leave the combined entity six months after the deal, waiving rights to retention awards. Xstrata decides to postpone the vote again.
  • 10 September – The details of the new offer are released and Xstrata’s board says it will decide by 24 September whether to accept it.
  • 11 September – Qatar Holdings announces that it hasn’t decided if Glencore’s increase will be enough to secure its vote. 75% of shareholders need to vote for the deal to go ahead.
  • 22 September – Britain’s takeover regulator gives Xstrata an extra week to decide whether to accept Glencore’s revised offer
  • 1 October – Xstrata announces that it is recommending the Glencore offer. It has also decided, because of continued shareholder concern about the retention awards, to allow shareholders to vote on the deal separate to the retention awards. It will ask shareholders:
    1. Whether they approve of the deal with the payout
    2. Whether they approve of the deal without the payout
    3. Whether they approve of the payout
  • 20 November – voting day
  • 22 November – EU set to rule on whether to allow the merger

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