How much is too much?

Esmé van Herwijnen

Excessive executive pay has been common currency for some time. Hardly a day goes by without headlines referring to ‘fat cat’ pay causing public anger.

Since the early investor revolts at British Gas in 1995 and GSK in 2003, there has been ongoing debate about excessive pay, its structure, links to performance and rewards for failure. But for investors, how much is too much? In 2015, the UK median gross annual salary was £27,600; but this obscures great disparities between the lowest and highest paid. Research shows FTSE 100 CEOs are paid, on average, 183x a UK worker. A FTSE 100 CEO package, which typically includes base salary, benefits, short term bonus, long-term incentives and pension, is now £5m a year. So how much is too much?

Quantifying ‘excess’ has proved elusive. In the 1920s, celebrated banker JP Morgan insisted the differential between the bank's highest and lowest paid should be no more than 20x. The John Lewis Partnership model applies a multiplier of no more than 75x. In 2015, the US SEC adopted a rule requiring a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees, which hopefully will provide greater transparency. In the UK, 66% support the idea of a maximum pay ‘gap’, so bosses cannot earn more than a fixed level over an average employee.

Compensation is on the whole lower in Continental Europe, and lower still in Asia. In Europe, the UK and Germany have higher levels of executive pay, the former perhaps reflecting the importance of financial services to the UK economy and where a ‘bonus culture’ is well entrenched.

We pay careful attention when it comes to voting on executive pay. We apply an ‘excess test’ in cases where annual and longterm awards in aggregate exceed 300% of salary per year. We look for three things in assessing whether remuneration policy is fair and designed to incentivise superior outperformance: first, the quality of disclosure to allow shareholders an informed view; second, whether performance hurdles are genuinely stretching and aligned to shareholders; and finally any potential for excess.

The latter is, of course, subjective, but we understand clients will not want us to support rewards for failure or incentivising undue risk. Shareholders sometimes approve high rewards for superior performance, but we subscribe to the view excessive pay should always be avoided. Factors we look for in choosing whether to oppose include undemanding performance criteria; hurdles linked to share price increase; factors generally outside of a director’s control; and longterm incentives tiered towards rewarding average performance.

In 2015, 59% of all resolutions we opposed or abstained related to remuneration and long-term incentive plans, opposing 75 remuneration reports and 23 incentive plans. From 2011 to 2015, 68.2% of the actions we took against company proposals were based on remuneration.