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3 Stocks Driving Down Executive Pay

ESG's third arrow - governance - can help deliver better returns for shareholders. Hermes reveals three companies reducing executive renumeration

David Brenchley 23 February, 2018 | 9:11AM

Sir Martin Sorrell's pay has come under scrutiny ESG ethical investing WPP

There is more to responsible investing than investors shunning companies that have a detrimental impact on society or the environment.

The third string to the ESG bow – governance – promotes ethical corporate practises and can lead to greater profits for shareholders. Asset managers are increasingly putting emphasis on how they engage with their investee companies. This includes taking a pro-active approach at AGMs in the voting stakes.

One firm at the forefront of this is Hermes. Its Equity Ownership Services team does just that around the world. Current areas of focus include climate change, diversity and remuneration.

In the UK currently, the latter is a key priority. The team says it opposed a third of the FTSE 350 remuneration proposals it voted on in 2017. While it hopes it doesn’t have to do similar again this year, the team is taking an increasingly tough stance, so the likelihood is that percentage will be higher in 2018.

There’s been plenty of headlines around executive pay recently – most of it negative. But the Hermes EOS team says some are getting better. “We were particularly frustrated in 2016,” says Dr Hans-Christoph Hirt, executive director at Hermes EOS. “But in 2017 we saw some positive progress, particularly here in the UK.”

Here are a trio of FTSE 100 companies that are taking steps in the right direction.

Unilever (ULVR)

The Hermes team was “instrumental” in bringing in a “better” remuneration policy at consumer goods behemoth Unilever. The changes put forward by Hermes was supported by around 96% of shareholders at the firm’s previous AGM.

Chief executive Paul Polman is “really driving the sustainable living plan” in general, says Roland Bosch, who is responsible for corporate engagements in Europe and the US at Hermes. Metrics in Unilever’s sustainable living plan include improving health and hygiene, reducing its environmental impact and “enhancing livelihoods”.

On the remuneration of its executives front, two big changes have been made. The headline measure has been to encourage managers and executives to invest a proportion of their annual bonuses in Unilever shares. This will likely align them more with existing shareholders.

Second, there has been a “de-emphasising of total shareholder return as a metric”, says Bosch. Unilever “has done a really good job” on remuneration, he adds.

Royal Bank of Scotland (RBS)

Banks are well and truly back on the radars of investors – many of whom haven’t taken stakes in these types of firms for years. The key reason for this return to popularity is the rising interest rate environment we are currently in globally. Higher interest rates increase margins and, therefore, profits for banks.

Another reason is that they continue to get back into better shape. After being bad investments for years before and during the financial crisis, they are now in better financial health thanks to regulatory measures brought in.

With that popularity, will inevitably come talk of director pay and shareholdings. Bosch says RBS is another company that has raised the requirements for their executives to take meaningful stakes in the business.

It also significantly reduced the maximum long-term awards on offer for its CEO and chief financial officer. Despite some shareholder groups encouraging investors to reject the proposals, they were overwhelmingly accepted.

WPP (WPP)

Media conglomerate WPP hasn’t had the best of times in recent years, as some of its key clients continue to reduce advertising spend. Boss Martin Sorrell has faced resistance from shareholders over his pay packages for years now.

However, Hermes says there has been some good work done by the firm on this. Indeed, the vote against his pay – 21.3% - in 2017 was the lowest since 2010. The 32% reduction to £48 million helped, though Hirt still says Hermes is uncomfortable with this level.

Still, it’s a positive move – one Bosch describes as “quite a significant change”.

Another area of worry that was assuaged at the latest AGM was the question of Sorrell’s succession. The company’s founder has “created a great deal of value” since he took over in 1986, says Hirt. But he turned 73 last year and Hirt thinks it’s important the firm continues to focus on the management of succession risks.

“We do not question whether Sir Martin is the right person to lead WPP, but is about ensuring that the company’s success is appropriately safeguarded with an eventual succession proceeding smoothly.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
The Royal Bank of Scotland Group PLC222.70 GBX-0.98
Unilever PLC4,557.50 GBX-0.21
WPP PLC978.40 GBX0.37

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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