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Heated argument at Shell AGM over “fat cat” retention bonuses

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Pay back as investors flex some financial muscle

By Tom Burgis

Published: May 22 2008 03:00 | Last updated: May 22 2008 03:00

In an outburst reminiscent of the most heated arguments over “fat cat” pay, one aggrieved shareholder at Royal Dutch Shell’s annual meeting on Tuesday bellowed: “I find this bonus culture repulsive and I beg people to vote against it.”

The Anglo-Dutch oil giant went on to suffer a severe dressing down when nearly half of its voting shareholders failed to back a plan to pay one-off retention bonus- es of stock worth up to €1m (£801,000) to three of its executives to entice them not to quit their jobs before 2011.

The revolt marked an escalation of increasingly testy relations between investors and big companies over pay, reigniting a confrontation that prompted a series of shareholder revolts earlier in the decade.

BP, Bradford & Bingley, Reed Elsevier, GlaxoSmith-Kline and Rexam are among the FTSE 100 companies in-vestors have rebuked this year for making or planning retention payments – known in some quarters as “pay for respiration”. One leading shareholder in Shell, which voted against the retention bonuses, said: “We believe that the trend towards paying people for simply re-maining in situ with no performance conditions is completely the wrong way for companies to be going.”

Another, however, was convinced by the company’s argument that it needs to ensure that continuity by locking in the services of the three likely candidates to succeed Jeroen van der Veer, who steps down as chief executive in June next year.

Shell said: “The particular circumstances facing the business in the coming months have been considered and discussed by the remuneration committee.

“In their judgment [offering retention bonuses] was the most appropriate means of addressing these conditions and supporting continuity in the leadership of the company during a period of unprecedented global investment.”

All the same, the size of the rebellion marks a growing willingness by investors to stand up to managements they feel have not consulted them on changes to remuneration and which are making pay ever less linked to performance.

“Retention payments are something we don’t like,” Anita Skipper, head of corporate governance at Morley Fund Management, says. “But there’s a wider issue of the trend towards ad hoc payments for doing your job. Wasn’t this why incentive plans were established in the first place: to retain, motivate and align management with shareholder interests?”

Others question boards’ justifications for retention payments – especially at energy companies, whose executives often have vast stock options any rival looking to poach them would have to buy out. “The usefulness of a retention bonus is highly debatable given the high value of unvested stock options,” Peter Bogin, headhunter at Spencer Stuart, says.

Some fund managers are particularly irked by retention bonuses paid to executives who lose out in succession contests. Both BP and, yesterday, GlaxoSmithKline, saw at least one in three shareholders fail to back plans for one-off multi-million-pound awards to senior managers who were overlooked for the chief executive’s post. Big investors also complain that that some companies are forcing through more lucrative packages for executives in the teeth of a downturn.

“Shareholders are pushing back against further escalation in executive remuneration when it is universally acknowledged that we are going into straitened times,” says Robert Talbut, chief investment officer at Royal London Asset Management.

David Paterson, head of UK research at shareholder advisory agency Risk Metrics, warns that the rush to secure top talent to take the helm in choppy waters may lead boards to further relax performance criteria.

George Dallas, head of corporate governance at F&C Asset Management, says: “A lot of investors are not that fussed about the quantum of pay as long as that pay aligns the incentives of management and shareholders. Pay for performance is fundamental.”

Mr Dallas says the tussles have not reached a “tipping point” but others are steeling themselves for more showdowns, especially on discretionary payments.

“I believe shareholders have got to the point where they think it’s gone far enough,” Morley’s Ms Skipper says. “If you don’t start showing your concern then the trend will continue.”

Additional reporting by Michael Steen in The Hague

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