Should more institutional investors be making their voices heard and voting against 'excessive' bonus payments for top executives? The Church of England's Pensions Board, and its supporters, certainly think so 

A report published in The Financial Times in mid-April revealed that the Church of England's Pensions Board is leading a shareholders' charge against disproportionate remuneration for top executive in large FTSE-registered companies.

The board has been urged by its Ethical Investment Advisory Group (EIAG) to use its shareholder status to vote against any bonus packages which it judges to be beyond what is needed or equitable. The Church says that it has been concerned about 'excess in remuneration' for 'some years', and its stance on payment fits in with three core elements of its investment policy. These are: ensuring good corporate governance practice; upholding ethical investment; and keeping shareholders' interests in mind.

In a note to all the Church's investors under the EIAG's jurisdiction dated October 2010, the group urged them to 'exercise particular care in voting on executive remuneration'.

Pension Funds Insider received a statement from John Reynolds, chair of the EIAG, in which he explained that the group was "concerned by the issue of excess in remuneration, and believe that the remuneration packages offered to some senior executives go beyond what is required". He stressed the Church's support for competitive salaries for senior executives, which "genuinely rewards success and aligns the interests of executives, shareholders and wider society", but the EIAG's renewed focus suggests that it believes such payment packages are few and far between.

The EIAG's maintains that it is sufficient for bonus schemes (annual bonus and long-term incentives) to allow for performance awards of up to three times salary. When company management propose bonus schemes which grant performance awards of four or more times salary, then the pensions board is expected to vote against the motion. The only exception is when base salaries are lower than peer levels, making the benchmark redundant.

When a decision has been made to vote for or against a remuneration report, the group writes to the company in question, clearly explaining its views, which are shared by many groups and individuals involved in promoting socially responsible institutional investment policies.

One of these, Neville White, a senior SRI (Socially Responsible Investment) analyst at Ecclesiastical Investment Management, a specialist insurance and financial services company, used to work as head of ethical investment for the Church of England.

He says that the highlighting of the Church's pension board's policy and the ongoing row about remuneration shows how unsuccessful investors have been in holding remuneration committees to account. Institutional investors, he believes, should be getting more involved with their underlying investments to make sure that they are delivering value for shareholders and society in general.

Not following the Stewardship Code

The UK's Financial Reporting Council published a Stewardship Code in July of last year, which aims to 'enhance the quality of engagement between institutional investors and companies'. The regulator wants more engagement over financial accounting from investors, but this is currently not the case.

White says that part of the problem over the lack of engagement, is that two groups of investors in large companies – one made up of overseas shareholders and the other of passive managers, have no impetus or need to be engaged at all. This makes it harder for a diminishing but still significant group of long-term institutional investors such as pension funds to exert enough influence over issues such as remuneration. Nevertheless, pension funds could still be viewed as guilty of looking away.

"The fact that the average opposition to some of the more egregious packages have been voted against by only 4 or 5% of shareholders, suggests a lack of connection by institutional investors in looking at the detail," says White.

He points to payment packages issued by Rekket Benckiser, the household product producer, which even analysts have viewed as being out of line with current high market averages. The opposition to the firm's proposed bonuses has averaged out over the past few years at 4%, says White.

Such apparent apathy is not a good long-term attitude to adopt for those shareholders looking for value over a longer period of time.

"There's a lot of anecdotal evidence that well run companies, in a holistic sense, will deliver more value over time," he says. "A well run company is one that is attendant on all the risks that faces it, not just business ones but financial ones as well, and reputation is a strong (part of) that."

Paying for performance?

But is all the talk of 'excessive' bonuses missing the point? Many economic commentators have argued that you have to pay for top performers, particularly when attempting to attract talent from overseas.

Neville says the argument is not backed by any concrete evidence and may be "overdone".

"It is possible to over-reward," he says, recalling a comment made by the outgoing CEO of Shell, who a few years ago claimed that if he had been paid 25% less or 25% more, it would have made no difference to his motivation.

The current trend, he points out, is for remuneration committees to compare bonuses and salaries from a peer to peer point of view, rather than measuring pay, first and foremost, against a company's performance. This helps companies to continue to endlessly ratchet up pay, he argues, and the whole process becomes like an arms race, as Sir Paul Judge, a UK business leader has described it.

What investors should be doing, says White, is looking at what sorts of 'hurdles' executives are expected to overcome, and then demand higher ones if they do not believe they are stretching enough.

"If you look at the architecture of a lot of these schemes, you see a lot of value delivery for executives for performance that is average. So the argument doesn't seem to be working in terms of incentivising superior shareholder returns," he says.

mhandzel@wilmington.co.uk

First published 04.05.11