The Remuneration Committee process

Transcription

1 The Remuneration Committee process Brian Main School of Management and Economics University of Edinburgh 12 October The Remuneration Committee process Summary: What is expected of the Remuneration Committees has changed. Some of the ways in which expectations have changes are often overlooked. Current Remuneration Committee process may not be sufficient to fully meet changed expectations. 2 1

2 Co-investigators Calvin Jackson John Pymm Vicky Wright 3 Financial Time Articles on 'Remuneration Committees' Articles Year

3 Companies declaring Remco membership (1990) Remco membership 30% No Remco membership 70% Source: Main, Brian G.M. and Johnston, James (1992), Remuneration Committees as an Instrument of Corporate Governance, Hume Occasional Paper no. 35. Edinburgh: The David Hume Institute, 54pp Executives on Remco 2 execs 15% 3+ execs 4% 0 execs 48% 1 exec 33% Source: Main, Brian G.M. and Johnston, James (1992), Remuneration Committees as an Instrument of Corporate Governance, Hume Occasional Paper no. 35. Edinburgh: The David Hume Institute, 54pp. 6 3

4 1990 CEO on Remco No CEO 58% CEO 42% Source: Main, Brian G.M. and Johnston, James (1992), Remuneration Committees as an Instrument of Corporate Governance, Hume Occasional Paper no. 35. Edinburgh: The David Hume Institute, 54pp. 7 Institutional influences Outcomes of a series of committee reports on governance and executive pay: Cadbury, 1992 Greenbury, 1995 Hampel, 1998 Higgs, 2003 Combined Code, 1995, 2003, 2006 comply or explain vast majority of companies simply comply 8 4

5 ABI Guidelines E.g., on topic of performance based remuneration: It is particularly important that Remuneration Committees should bring independent thought and scrutiny to the development and review process together with an understanding of the drivers of the business which contribute to shareholder value. Etc., etc.,. Leading/setting expectations or reflecting expectations? - Distinction unimportant here 9 What s expected of Remuneration committees (i) Choose a remuneration package (i) Calibrate the remuneration package to align incentives with company s chosen strategy. (iii)confirm periodically that reward behaving in accord to the company s current needs. (iv) Communicate effectively to the shareholders with regard to the above. 10 5

6 ABI Guidelines Association of British Insurers Manifest Proxy voting agency IVIS Institutional Voting Information Service Comply or Explain: Combined Code the Media etc. PIRC Pensions Investment Research Consultants Ltd Remuneration Consultants RREV Research Recommendations Electronic Voting REMUNERATION COMMITTEE NAPF +ISS National Association of Pension Funds Institutional Shareholder Services Executives Shareholders 11 Realised share option gains in m 350,000, ,000, ,000, ,000,000 74m 150,000, ,000,000 50,000,000 0 UK top 500 Mike Eisner (Disney Co.) 12 6

7 Incentive Alignment Principal-Agent Relationship: Principal (owner) wants focused executive Director may have own ideas Remedies: Supervision Pay for Performance Incentive alignment Participation Constraint 13 The solution Pay mechanism agency theory BUT: Information Impactedness/ Opportunism Bounded rationality/ imperfect information Social influence / reciprocity 14 7

8 Incentive Alignment and the Participation Constraint Variable Pay Base pay Base pay 15 CEO-Director relations Westphal and Zajac (1994 ) Ingratiation Persuasion Advice & counsel Friendship ties versus Similarity Monitoring Reciprocity 16 8

9 Bebchuk and Fried (2004) Pay without Performance 17 Institutional isomorphism DiMaggio and Powell Economics is all about how people make choices; sociology is all about how they don t have any choices to make Duesenberry on the distinction between economics versus sociology: 9

10 Remuneration Consultants The couriers for this epidemic of greed were usually consultants and human relations departments, which had no trouble perceiving who buttered their bread. As one compensation consultant commented: There are two classes of clients you don t want to offend actual and potential. Warren Buffet 2003 Berkshire Hathaway inc Annual report. Previous research: Ogden and Watson Bender Perkins and Hendry Lincoln et al. (Parc) political considerations conformance v. performance social realities competence, performance considerations, and workflow issues 10

11 Representation of Remuneration Committee roles Conformance Performance [judging; questioning; supervising; watchdog.] [contributing: know-how; expertise; external information; networking.] External facing Accountability: Reporting to shareholders Strategic Thinking: Attracting and retaining directors Internal facing Supervision: Implementing STI and LTI awards Corporate policy: Designing compensation package Source: Adapted from Spira and Bender (2004) and Tricker (1994) Institutional influence Greenbury Report Performance share plans..schemes along these lines may be as effective, or more so, than improved share option schemes in linking rewards to performance From literally nowhere the use of performance share plans in the FTSE100 had risen to: 84% by 2005 Consideration should be given to criteria which reflect the company s performance relative to a group of comparator companies in some key variables such as shareholder return (TSR) 86% used relative TSR in 2005 Booker and Wright (2006, p27) 11

12 IVIS Proxy and future shareholder return Main & Neate (2005) Blue Green Amber Red ABI-score and future shareholder return tsr GOOD Main & Neate (2005) ABI score BAD 12

13 Award Ambiguity Relative Performance Low High Absolute High???? High Payout Performance Low Low Payout Payout in low priced shares Source: Lincoln (2006) Percentage of performance shares vesting: Booker and Wright (2006, Figure 3, p8) 1-month averaging 13

14 Finding 1 Remco choices Mixture of experience and interests sit on the remco Detail does not appeal to all of them Choices are being made with an eye to conforming. e.g.: performance shares + relative tsr etc. Finding 2 Remco technical analysis - calibration Scheduling, Duration, limit effective discussion time Metrics limited range of discussion Choice of performance metric relative to corporate strategy not a consideration Constant presence of CEO/Chairman inhibits Main concern is to avoid over-payment Less concern with exact pay-performance metric Tendency to draw on well used usual suspects Discretion is neither welcome nor sought 14

15 Finding 3 Remco revisions - confirmation Fire-and-forget attitude to share plans The idea of calibrating this year s plane in the light of development pf prior years plans met with alarm Fairness of process rather than outcomes. Any learning comes about through adjustment of EPS or TSR etc. benchmarks Finding 4 Remco communication Heightened sensitivity to communication/ approval Desire for one voice from institutions But one voice to follow - not one voice with whom to engage in debate or negotiation. 15

16 Conclusion The remuneration committee a latter day Gulliver? Can things improve? Design process: calculation calibration Choose; Calibrate; Confirm; and Communicate Discretion 31 16