Controversies relating to excessive remuneration are not new. They culminated in 2012 in what was called the ‘shareholder spring’, with a number of listed companies in the UK seeing their remuneration report rejected. More recently, in 2015 the excessive remuneration of the CEOs of BP, Shire, Smith & Nephew, Reckitt Benckiser and WPP amongst others sparked the emotions of shareholders. The UK is one of a handful of markets with legislation imposing a binding say-on-pay.
In France, the introduction of an advisory say-on-pay in 2014 has allowed shareholders to express themselves, but has not put a stop to excessive pay. The example of Renault was revealing in that sense. Shareholders of the listed company rejected the remuneration of the CEO, but the board of directors stuck to its decision because it said the remuneration was linked to performance and in line with other European competitors.
This brings us to the question: to what extent are pay packages justified? Candriam’s position is clear and is based on three principles: transparency, moderation of pay and pay-for-performance. The first two are explicit conditions. The third implies that performance criteria attached to bonuses, performance shares and others must be precise and detailed . The structure of compensation must promote performance without excessive risk-taking. The company's performance should be gauged in terms of comparable companies. And any significant increases in remuneration must be justified and justifiable.
The idea that executive pay packages should also take into consideration other stakeholders and their expectations – in line with social and moral justice – is gaining ground. Executive remuneration cannot/should not be totally disconnected from pay levels elsewhere in the company, from substantial employee lay-offs or environmental incidents. Candriam has always welcomed the introduction of non-financial targets alongside financial objectives.
So is all this engagement bringing about a real change? In France the level of dissent clearly increased during the second say-on-pay season. This shows that investors are now clearly looking into remuneration matters and how important, in their view, this issue is. The new scrutiny is likely to make companies better disclose and explain their policies.
At Candriam we are extending our proxy voting scope. In 2015 we participated in 258 meetings, voting on more than 4,000 resolutions. The main concerns revolved around director elections, director remuneration and share capital issues. Candriam rejected almost 50% of the resolutions on executive remuneration because of the lack of disclosure or absence of challenging performance conditions. These results are not surprising as Candriam strongly encourages transparency and pay-for-performance.
Could things be improved? We think transparency would increase if wage reports and the rules for remuneration would become less complex. The importance of sectorial comparisons needs to be stressed even more. The CEO’s interests should be nearer those of the shareholders (by having a certain number of shares in the company, for example). And the remuneration committees should have their independence assured. It is our conviction however that board independence and director remuneration will remain high on shareholders’ agendas.