CFO Corner: UK Shareholder Spring Was Barely a Fling

Dan Walter, Performensation

In recent presentations I
have heard several compensation professionals from the UK refer to their “Shareholder Spring” of 2012. The reference is to the
raising of voices from shareholders. While we all love a little hyperbole, I
believe that their Shareholder Spring was barely a fling. The UK’s Shareholder
Spring led to a lot of posturing, but as of yet, the player and rules of the
game are still familiar.

Yes,
investors want more from Say on Pay results, but they are not asking for
perfection. The problem is not you. It’s that other company who continues to
target the 75^th percentile of pay, while achieving 25^th
percentile performance. It’s the company who uses Total Shareholder Return
(TSR) as a metric, but creates goals that allow it to pay handsomely even if
the return is mediocre. It’s not the company that pays their CEO a ton of
money.  It’s the company who pays their
CEO a ton of money without significant evidence that it is deserved.

Here’s
the rub. Say on Pay has existed in the UK for a decade. This vote is currently
only advisory, like the U.S. For the first eight or nine years, the votes
against executive pay were low (you could usually count them on your fingers.)
After the global economic crisis of 2008, there was a bit of a grace period. In
hindsight, investors were probably reeling and focused on recovery just as much
as companies. But, during this period, companies did little to curtail poor
practices (yes, TSR has been a popular metric since the inception of Say on Pay
in the UK) and compensation packages seldom reflected the entirety of the drop
in corporate performance.

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If
there was truly a Shareholder Spring event in the UK it would have resulted in
one of two things happening. 1) Shareholders would have divested themselves of
shares of every company with poor executive compensation practices or, 2) they
would be demanding that the executives be removed and replaced by “better” executives.
In an approach that can be seen as a bit more reasonable, they chose instead to
push for more regulations and power over the process. This is a trend we can
quickly expect to see in the US if investors (many of whom are the same on both
sides of the Atlantic) feel ignored.

Just
a quick overview of some of the recent changes proposed in the UK.

• Make the Say on Pay vote binding. A world
  where companies could no longer disregard the feelings of the shareholders.
• Even more disclosure requirements.
  Remuneration disclosure in the UK is already at least as extensive as the US. More
  disclosure means more time, effort and questions (probably without increasing
  the compensation staff.)
• Are advisory votes on how the prior year’s
  compensation policies actually being implemented? In other words, did you do
  what you said you would do?

So
far, every UK compensation rule has had a close cousin implemented in the US.
If we cannot find a reasonable balance between our compensation practices and
the voice of our investors, an unbalanced solution will be created for us.
Currently, we are masters of our own destiny in the world of executive
compensation. That could change dramatically if we don’t work to create a
distinct line between good and bad pay practices.

When
someone threatens an important relationship, the prudent person sits down and
asks what they can do to salvage it. The smart person actually does as many of
those things as possible. If we are smart
(and I think we are) we can do the critical things that must be done to
restore balance and satisfaction. While shareholders are certainly more active,
vocal and with more power than they have been in a very long time, they are not
looking get rid of most C-suite executives. In other words, I don’t think we are breaking
up anytime soon.

Dan Walter is the
President and CEO of Performensation an independent compensation consultant focused on the needs of
small and mid-sized public and private companies. Dan’s unique perspective and
expertise includes equity compensation, executive compensation,
performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.”
Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a
dynamic and humorous speaker covering compensation and motivation topics.
Connect with him on LinkedIn or follow
him on Twitter at @Performensation and @SayOnPay