CEO Pay Drops But Shareholders Must Remain Vigilant

Dr Hans-Christoph Hirt, head of EOS at Hermes Investment Management, believes it is vital that responsible investors continue scrutinise the appropriateness of pay policies

Hermes 4 August, 2017 | 11:03AM

Morningstar's "Perspectives" series features investment insights from third-party contributors. 

According to analysis from the CIPD, the professional body for HR and people development, and the independent think tank The High Pay Centre, there has been a 17% drop in remuneration to UK CEOs. The data represents progress in curbing excessive executive pay, but responsible investors must not give up their focus on one of the UK’s most important boardroom issues.

There is a significant gender pay gap at the top of UK companies

While this report indicates progress, it is vital that responsible investors continue scrutinise the appropriateness of pay policies and pay outcomes relative to performance achieved, even where remuneration policies were previously approved by investors. In general, we oppose pay proposals which appear excessive in the context of industry practices and where executive pay increases significantly exceed the inflation rate or that granted to the workforce without a convincing justification. The analysis also shows that there is a very significant gender pay gap at the top of UK companies, which we will seek to tackle through engagement.

We believe that boards should apply discretion where pay outcomes are not justifiable in the context of the company’s long-term performance. In the case of WPP (WPP), the legacy incentive plan introduced in 2009 once again resulted in what we regard an excessive level of CEO remuneration for 2016. We therefore opposed the remuneration report, while voting in favour of the revised policy which will reduce the size of future awards.

In 2017 we also opposed a number of proposals due to what we regard as excessive leverage of variable pay opportunity. While we were supportive of its remuneration report, we recommended voting against the remuneration policy of Imperial Brands (IMB) because of a significant increase in the maximum opportunity under the variable remuneration plan without accompanying higher performance targets.

Following consultations with shareholders, including ourselves, the company announced the withdrawal of the proposal to adopt a new remuneration policy. Furthermore, we recommended voting against overly complex remuneration arrangements, including at Inmarsat (ISAT), Shire (SHP), Thomas Cook (TCG) and Randgold Resources (RRS).

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Imperial Brands PLC2,711.00 GBX0.22
Inmarsat PLC551.40 GBX1.40-
Randgold Resources Ltd5,642.00 GBX-0.60-
Shire PLC4,101.50 GBX2.28
Thomas Cook Group PLC113.00 GBX-1.22-
WPP PLC1,222.00 GBX-0.08
About Author

Hermes  Hermes is a multi-asset fund manager offering global institutional and pension fund clients access to a broad range of specialist, high conviction investment teams.