Increase in Payments for Shareholders - Essay Example

…………………………………………………………………………..xxxxx ……………………………………………………………………….xxxx …………………………………………………………………………..xxxx ………………………………………………………………………xxxx @2012 Shareholder springs Abstract Recently, there has been backlashes by shareholders against the remuneration of execute directors. This issue has stirred up anger on shareholder as the executive director’s award themselves high remunerations while their performance is poor (Ebrahimi, 2012). As a result, many bosses have been on exit from the pressure caused by shareholders and that is the reason why is being referred to as ‘shareholders silver spring.’ The presence of the current financial crises and political scrutiny has made investors more determined in handling excess remunerations. Introduction A vote against remuneration is significant if it receives less than 75 percent of the shareholders support. Thus, votes have been on the use recently in protesting against pay increases that are insufficiently linked to performance. For instance, Section D of the U.K corporate governance code sets out remuneration guidelines for both the executive and non-executive directors. According Tricker (2012) section D.1, “the remuneration should be sufficient enough to motivate and attract directors, but a company should avoid paying more than is necessary for this purpose. A significant proportion of the executive director’s remuneration should be structured so as to link rewards to corporate and individual performance.” Section D.1.4 of the U.K corporate governance states that it is the responsibility of the remuneration committee to consider compensation commitments of their directors in the event of early termination. MM & K report is recent and its release fueled investor’s activism in fighting against pay rise. The report revealed that the medium total pay rise for FTSE 100 CEOs is 10 percent and one quarter of the CEOs in this index had 41 percent increment on their pay. Research indicates that the size of pay that a FTSE director has increased unexpectedly. For instance, between years 1990 and 2000, the remuneration of a FTSE chief executive went up by 13.6 percent annually from ?1 million to ?4.2 million. In year 2011, FTSE remuneration rose by 11 percent. The current average pay rise in the market is 1.7 percent. In 2012, there have been 24 similar incidents in total all over Europe compared to 2011 which had 25 cases. The legislation has been carefully following these protests, and the pending U.K legislation shows that by year 2012, pay plans will have to pass the majority vote or shareholders will have the authority to reject management’s remuneration proposal. New disclosure rules are also in the process of contemplated purposely to help the shareholders in making a decision. For example, in France the new socialist government is contemplating to impose pay limits on executives in companies which own a majority stake. The pay will be 20 times that of the lowest paid employee in the company thus leading to substantial pay cuts. Also, the contemplated Legislations will exert pressure on companies where the government owns share but not a controlling share. CEO’s of companies such as AstraZeneca, Aviva, trinity Mirror is some of directors who had been forced to resign over pay and performance related problems even before news broke. WPP Group During the 2012 annual general meeting, approximately 59 percent of the WPP investors voted against the company’s remuneration report and the CEOs pay package of ?6.8 million. In the previous year, over 40 percent of the shareholders had a ‘no’ vote on pay and this prompted the remuneration committee to reach out the shareholder before the 2012 AGM. After the shareholders vote the chairman of the group said, “Our board exercised its best judgment in the context of the company’s record year, international competitors and executive performances.” Additionally, he said that the votes would be taken seriously and to the best interest of the shareholders. The CEOs total pay including basic salary and bonuses went up by 60% in 2011, to ?6.8 million from ?4.2 million in year 2010. This is shown below: WPP 2010 2011 Sir Martin Sorrell     Base salary ?1,009,000 ?1,306,000 Other benefits ?374,000 ?459,000 Annual bonus ?1,900,000 ?2,002,000 Value of vested LTIPs     Pension contributions ?400,000 ?585,000 LEAP awards ?3,629,000 ?5,575,000 Total realized comp ?8,348,000 ?11,621,000 Total summary compensation ?4,233,000 ?6,770,000       The increase had been driven by a rise in the Executive share Award, deferred bonus plan of approximately 60 percent which he was awarded due to the increased role since last salary review in 2007. In the year 2011, the share price of WPP decreased by 15 percent. On the contrary, the net income increased by 43 percent diluting the earnings per share by 33 percent. The graph in the annual report indicated that WPP had outperformed its two of its three main competitors, Omnicom and Interpublic as well as that of FTSE 100 over the past 5 years. The annual report for 2011 also shows the increased level of dissatisfaction over remuneration at length. Also, the remuneration committee deeply considered the feedback from shareholders with regard to the CEOs pay rise. Revisions for the pay of the CEO had to be made together with the compensation structures of other executive directors and senior management. The revisions are made through consultation with shareholders and their representatives. The new package has been shaped by WPP compensation guidelines and principles. The remuneration committee is of the view that revisions ensure that the CEO remuneration is linked to the group’s strategic objectives and its performance. Shareholders resented pay increase of the CEO despite the increase in profits. UBS In May 2012, 40% of the UBS shareholders voted against the compensation report. Their discontent was similar to that of the last two preceding years. 35% and 45% of the UBS shareholders voted against the compensation report in 2011 and 2010 respectively. Ethos, a Swiss pension funds foundation is the one which had led the opposition to a great extent. The Board did not even revise the remuneration system of UBS after receiving such an opposition. Therefore, Ethos prompts to oppose more in 2012 as it believes that Weber’s pay is not justifiable. However, some parts of the remuneration policies link pay to performance. For instance, when there is decline in profitability the bonuses are reduced by 40%. Also half of the two current bonus plans had been forfeited in 2012 as a result of the trading losses. This is highlighted in the annual report which states that, “At least 76% of a General executive board members bonus, including 60% in equity (under the performance equity plan), is at the risk of forfeiture for five years. In addition, these awards can only be given if specific performance conditions are fulfilled.” The current CEO package is as follows: UBS   Sergio P Ermott 2011 Current CEO   Base salary CHF 1,394,445 Other benefits CHF 195,450 Annual bonus CHF 2,397,200 Value of vested LTIPs CHF 0 Pension CHF 150,816 Grant date value of deferred shares and cash CHF 2,212,800 Total realized compensation CHF 4,137,911 Total summary compensation CHF 6,350,711 The other forms of non-performance criticisms that the company is practicing are: Replacement payments ,which compensate employees for deferred award forfeited as a result of joining UBS Guarantees’ which are fixed incentives, paid in cash or in equity plan, paid regardless of any future events and are limited to 1 year. Retention payments to key senior employees with the aim of inducing them to stay specifically when the firm is experiencing critical periods. Sign-on-payments made to top-level employees so as to increase chances of them accepting the offer. For example, in April 2012 retention awards were offered to senior employees though these are linked to performance. Sigh-on award was made to Weber during his election to the chairmanship at the AGM. The company explained that Mr. Weber was to receive one years total compensation or CHF 2 million and 200,000 UBS shares upon his election to the board at 2012 AGM. At the time of AGM, the shares were worth CHF2.3MM approximately giving a total of CHF4.3 million. In its home market, UBS is rated a ‘D’ by GMI analyst. Trinity mirror In 2012, the executive directors and senior managers at publisher Trinity Mirror experienced a pay freeze the fourth time. The shareholders went ahead and voted against the remuneration report with 54 percent. The performance of the company was not convincing to the shareholders after a series of losses and reduced sales. The shareholders wanted the pay to be reduced and As a result, the CEO Sly Baileys resigned in June 2012. Her base salary was still very high at ?750,000. In addition she received more than ?1.7 million in cash, shares, and pension payments in year 2010. In the year 2011, there was a 15 percent decline in operating profit, the company’s chief bonus metric, annual bonuses had potential still paid out at 30 percent of. This bonus award was an 80 percent reduction from 2010. But still Baileys total 2011 pay was about ?1.3 million. The company’s market capitalization fell significantly during Ms. Bailey’s CEO tenure, from ?1.1 billion in 2003 to around ?65.7 million in 2012. In her nine years as a CEO, she earned approximately ?14 million in remuneration. On the contrary, the company’s stock price declined by about 90 percent. The shareholders argument is that the pay of the director should be more less considering the decline in the performance of the company. During the most recent AGM the investors highly criticized the CEO compensations, as a result, Bailey left with ?1 million for loss of office, a basic salary of ?688,000 in base salary and ?228,000 in pension payments. According to the GMI analyst, in the home market Trinity Mirror is rated a “D” for. Cairn Energy Cairn energy is one of the largest oil and gas exploration companies in Europe. In 2012, it also experienced the effect of shareholder spring as only 30 percent of votes cast were in support of the executive director’s remuneration package. This means that 70 percent of the shareholders were against the remuneration package. As a result, Cairn Energy became the fifth FTSE 100 company to experience a ‘no’ vote from shareholders and the second in 2012 following the negative vote at Aviva. The shareholders concern was the pay to Sir Bill Gammell, the company’s founder, to compensate his move from CEO to the non-executive chairman. Previously, the Company had already cancelled a proposed discretionary ?2.5 million share award in January after consultation with institutional shareholders. The company described this payment of shares as a reward for the completion of the sale of Cairn’s Indian business which led to a special dividend for shareholders. Sir Bill also received a severance, or a compensation for office loss, payment which was about ?1.4 million, a basic salary of ?770,000 including benefits and ?625,000 bonus in cash. Apart from the basic salary and benefits the director also received ?106,500 as directors fees paid to him as the company’s new chairman starting in July 2011. Since then, the fee has increased from its original annual chairman’s fees of ?213,000 set in July 2011 was increased to ?230,000 per year starting March 2012. In addition, more than 10 percent of the investors voted against the re-election of Sir Bill into the board as the new chairman of Cairn Energy. In 2011, the company’s share price fell from 420 pence at the beginning of the year to around 265 pence at the end of the year. The share has recovered a little at the beginning of august at 294 pence but it is far below the value in 2010.. The level pay has therefore received opposition. For instance, The Association of British Insurers, an extremely influential representative of multiple institutional investors, sent a notice to members highlighting concerns it had with regard to the company’s remuneration report. Much influence was being drawn from Pirc and manifest, a group that advises shareholders. The group made a lot of criticism on the remuneration report prior to the day votes were done. Abigail Herron the group’s co-op asset manager justified that the remuneration report backing Sir Bill’s bonus award of ?1.4 million bonus award for moving from the role of chief executive to chairman was against the UK corporate governance code. Therefore, Sir Bill had to step down as the chairman. This is contrary to USA where one can step down as the CEO and still be the chairman. GMI analyst rates Cairn an “F” for pay in its home market rating. Aviva In the 2012 annual general meeting (AGM), 58.6 percent of the shareholders voted against the company’s remuneration report (Armitstead 2012). The non-binding vote made Aviva only the fourth FTSE 100 Company since in the year 2002 shareholders were given the right to vote on pay to have its remuneration rejected. As a result, Aviva’s CEO Andrew Moss resigned from the company on 8th may 2012. Before the annual meeting, the CEO had attempted a 4.8 percent basic salary increase which would have exceeded his salary to ?1M. However, this move was unsuccessful as the votes were against it. Looking at the company’s performance, the group’s share price went down by 21 percent during 2011, a decline from a high of around 475 pence in at the beginning of the year to 300 pence at year end. It decreased further to 261 pence at the end of May 2012, but has since recovered slightly, rising to the 2011 year end price. Despite the fall in share price, Aviva’s 2012 annual report reflects a good performance against the group’s key performance indicators (KPIs). According to the annual report indicated that the chief executive received 80.27% bonus for good financial outcome along with performances relating to customers, employees and personal objectives (Armitstead 2012). Comparing with 2011 the bonuses rose significantly as in 2010 the bonuses were at 74.3%. As a result, two thirds of the annual bonuses were deferred into shares for a period of three years plus the value of the bonus shall be influenced by the performance of future prices on shares. Therefore, the deferred bonuses matched the ratio of 1: 1 that had been set by the strategic reward review conducted in 2010. The potential LTIP for a CEO increased to 275 percent from 175 percent of the salary. The award will be based on the shareholders returns and return on capital employed which is a 50:50 basis. This move will enhance efficiency in future as it ties awards to performance that is why it was approved by shareholders at the AGM in 2011 when it was first proposed. On the contrary, the year that the value of the firm declined significantly, it was also the time when Mr. Moss got his LTIP award increased. Earlier in 2008, he had an LTIP award valuing ?1,136,208. Also in 2010 the award was worth ?274,172. The key performance indicators during the year were mostly exceeded as the pay growth level which is against the stock price decline background and this was quite difficult for shareholders to both accept and understand. The remuneration committee did not defend the remuneration report looking from the report. The GMI analyst rates Aviva a “D” for pay in its home market. Other recent incidents are as follows: 12-Apr Approximately 30 percent of shareholders at Smith & Nephew refuse to vote for company's remuneration report. There were a number of reasons as to why the advisory body Pirc had recommended voting against the pay plans. One of them was the €1.4m "golden hello" for the CEO Olivier Bohuon. Initially, 8 percent voted against but as time went on 30 percent votes were approved. 17-Apr Citigroup investors planned to vote down after the share prices fell by 44 percent. 25-Apr Capital Shopping Centre shareholders vote against directors pay policies.     25-Apr People outside GE protest against the company after reports were published saying that the company was not paying corporate tax. 26-Apr The CEO of Astrazeneca Davis Brennan resigns after receiving pressure from shareholders for six years. 27-Apr Shareholders at Barclays vote against the bank’s remuneration policies by 33pc including the ?17m package for chief executive Bob Diamond. They also rebuke Alison Carnwath, the non-executive director the chairman of the committee on remuneration and sanctioned the pay deals. More than one-in-five investors voted against her re-election 1-May Ms Carnwath who has a number of seats in major companies becomes a focus of investor’s discontent after suffering from en embarrassing at hedge fund Man. Some 40pc of Xstrata shareholders failed to support the mining group's annual pay report 3-May Trinity Mirror CEO Bailey steps down after close to 10 years work in the company and this after a growing shareholder revolt which was over her ?1.7m pay package 3-May Inmarsat – (Andrew Sukaiaty) – 40pc vote against 3-May 37 percent of UBS investors fail to back the pay policies and blocks a resolution which would have otherwise allowed the bank to issues shares to be used for paying bonuses. 3-May Also revolts at Reckitt Benckiser, Carillion and Premier Foods 8-May Andrew Moss, the Chief executive of Aviva leaves after shareholders got angry of the company’s performance. His terminal payout was ?1.5 million on exit. 59% of the shareholder were failed to back up the chief executive. 8-May William Hill the CEO of Ralph Topping gets a pay rise and a rention bonus of ?1.2 million 9-May At Unilever. Concerns over a generous new long-term incentive scheme spur up. 11-May Centrica almost faced problems over chief executive Sam Laidlaw's ?4.3m pay 31-May Deutsche Bank almost got an investor group protest vote which was led by a Hermes Equity Ownership Services over the supervisory board's performance over the past year. 13-Jun The annual meeting for WPP will be dominated by a row of over the ?13m package which was awarded for 2011 to boss Sir Martin Sorrell Conclusion Fall in share prices followed by increases in remuneration in shareholders view would be the reason behind most of the protests. Most of the protests led to CEOs tender their resignations. For example, at Aviva and Trinity Mirror. Also, the pattern of voting by shareholders seems to be highly influenced by concerns about the CEO remuneration increase. References Armitstead, Louise, 2012. Shareholder Spring: waging war on boardroom pay http://www.telegraph.co.uk/finance/jobs/9253324/Shareholder-Spring-waging-war-on-boardroom-pay.html Ebrahimi, Helia, 2012. When shareholders fight back: a timeline http://www.telegraph.co.uk/finance/jobs/9252910/When-shareholders-fight-back-a-timeline.html Tricker, Bob, 2012. Corporate Governance: principles, policies and practices. Oxford university press Jean Jacques du Plessis, Anil Hargovan, Mirko Bagaric, 2010.Principles of Contemporary Corporate Governance. Cambridge university press. Solomon, Jill, 2011. Corporate governance and accountability. Wiley publishers. Eisenhofer,Jay W. and Barry, Michael, 2005. Shareholder Activism Handbook. Aspen publishers. Goo S.H, 1994. Minority shareholders protection. Routeledge publishers Philips, Roberts, 2011. Stakeholders Theory. 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