The UK has made it through its first season under new remuneration voting rules. UK shareholders now receive two votes – one forward-looking vote on the remuneration policy itself and a retrospective vote on the policy’s implementation.
Under the rules, if the policy vote fails to pass, the company has to fall back on the last Directors’ remuneration policy approved by shareholders or convene an extraordinary general meeting (EGM) to approve a new policy. Given the rule has only just become effective, there is no agreed shareholder policy to fall back on so companies must hold an EGM. The EU is considering implementing a similar rule region wide with one addition being a US-like CEO to worker ratio.
Although there were a number cases in the UK where the implementation of the remuneration policy was voted against, organisations had been careful not to incur a no vote against their remuneration policy, with only one company failing this vote.
One of the main points of contention was reportedly a clause allowing discretionary payments in “unforeseen and exceptional” circumstances without requiring shareholders’ approval.
Other red flags noted by UK-based remuneration consultants include a lack of claw back provisions for incentives, large payments for outperformance and too much short term pay.
Red flags for the implementation reports included significant increases on the prior year, high bonuses, termination payments that did not match the contract and insufficient disclosure.
UK Business Secretary Vince Cable has expressed concerns that organisations are obeying the letter of new voting and remuneration disclosure laws, but not the spirit – particularly in the banking sector where many organisations have circumvented the European bonus cap by paying role-based “allowances”. He has threatened that unless companies act to curb excess, more regulation will follow.
After a year of consultation on proposed SEC rules around the disclosure of a CEO to worker pay ratio in the US, it’s possible the rules may be tabled in a few months. If this occurs, companies will potentially have to start disclosure for the 2016 proxy season.
The rule requires each company to disclose the median annual total compensation of all employees, excluding the CEO; the annual total compensation of the CEO; and the ratio of the two figures. US companies have strongly protested against this measure going ahead, stating that the ratio would be too onerous to calculate with any accuracy. They have been provided with flexibility as to the methodology of how they calculate the total compensation of the median employee.
Commentators believe that the next step is a maximum ratio for executive pay, a measure that detractors say would unfairly disadvantage organisations with low-salaried workers such as retail organisations. Others suggest that any maximum ratio should be based on a nationwide median wage.
California has recently been considering its own take on a maximum wage, with a measure again on the cards that would see higher taxes levied on companies where the CEO is paid more than 100 times the company’s average worker. The normal tax rate of 8.84% would be increased to 9% for a 100:1 ratio, then increase on a sliding scale to 13% for a 400:1 ratio.
A Bill was introduced and knocked back in May on this issue, but the Senator who introduced it has now reworked it so that the proceeds of the additional taxation would flow into a program that offers tax credits to businesses who are considering relocating or expanding in California. It remains to be seen if the Bill is considered more palatable in this version.
Some critics of executive pay in the US believe that one way to tackle high levels of executive pay would be to change a controversial rule allowing organisations to deduct large amounts of executive remuneration from their tax bill. The elimination of tax deductions on the compensation of health insurance executives above $500,000 under 2013 healthcare reform has seen an additional $72 million flow into government coffers, according to the Institute for Policy Studies. The Institute extrapolated that if the deduction was eliminated across the board, the government would raise an additional $50 billion in tax revenue.
In June Japan’s Prime Minister Shinzo Abe decided to establish the nation’s first corporate governance code in an attempt to lure foreign investors to Japanese companies. The code, which is to be written over the next year with the Tokyo Stock Exchange, will be based on OECD principles, including proscriptions on the number of independent Board Directors. The hope is that this will force organisations to make better decisions on underperforming units.
China’s President Xi Jinping has warned that executives at state owned enterprises should brace themselves for pay cuts, with reports placing potential cuts at 50% to 70%. The “unreasonably high and excessive incomes” of executives at state owned enterprises has increasingly become a source of public discontent, according to President Xi Jinping. The reform was approved in mid September by the Politburo. The Vice Minister of Human Resources and Social Security, Qiu Xiaoping, revealed that most state appointed executives would have pay cuts, some of them substantial. Qiu said that under the pay reform the gap between State Enterprise executives and their junior colleagues would be broadly contained to 13 times the average salary of ordinary staff. We believe that the Government intends to introduce a further two step reform to overhaul executive salaries at State firms with pay cuts anticipated up to 50%. We understand that the Government in reviewing the pay structure intend to include gratuities and annual performance based bonus payments. Egan Associates will report further on these initiatives as implementation progresses.
The NZ Institute of Directors has released a summary of its 2014 Directors’ Fees Report, stating that after several stagnant years, Directors’ fees are on the rise again across the Tasman. The Institute’s Chief Executive William Whittaker said the increase could be attributed to an improved economy and greater awareness of the importance of Directors. An infographic of the results can be found here. Our 2013 data on the remuneration of the top 50 companies can be found here.