Are Remuneration Protests Just a Function of Performance?

Some industry commentators believe that the vote on the remuneration report becomes purely a vote on performance rather than a consensus on whether the remuneration framework is sound. Egan Associates investigated this claim, looking at Australia’s top 300 companies as of 31 December 2013.

Examining the growth in operating profit from 2012 to 2013 and comparing it to the proportion of votes cast against the remuneration report, it appears that stakeholders are not more likely to vote against the remuneration report given poor profit improvement.

Figure 1: Operating Profit Growth versus “No” vote on the Remuneration Report

Remuneration reports versus operating profit

Similar graphs resulted when observing revenue growth, EPS growth, return on equity and share price growth. The total shareholder return for 2013 (provided as an index rebased to 100 on 31/12/2012) was the only metric that hinted at a relationship between poorer performance and a higher protest vote as can be seen in Figure 2.

Figure 2: Total Shareholder Return Index versus “No” vote on the Remuneration Report

Remuneration report votes versus total shareholder return

Is this the result of stakeholders voting on performance? The coefficient of determination for a line of fit does not support this hypothesis.

In our opinion, although performance will weigh on the minds of stakeholders when considering remuneration – indeed it must in order to assess pay for performance – they will not be voting a company down or up solely based on financials. Rather votes will be based on governance and how remuneration frameworks respond to the financials. For example:

  • Are fixed remuneration increases in line with the market, performance and the company’s ability to pay?
  • Is exceptional performance rewarded by high payments and poor performance reflected in lower incentive payments?
  • Has the Board explained any discretionary payments/non-payments?
  • When executives exit, are the provisions appropriate for the performance and tenure of the executive?
  • Does the composition of the remuneration committee following best practice guidelines?

In conclusion, lacklustre results are not the primary foundation for a strike. Although there will always be some parties who will vote against remuneration reports due to poor results or because they have their own agenda, robust remuneration frameworks should protect against protest votes in good times and bad.