Shell set to clash with investors

It is only a few weeks since BP clashed with its shareholders about pay for its top executives at its annual meeting. Now Royal Dutch Shell appears to be heading in the same direction.

BP’s remuneration report won yes votes from only 62 per cent of shareholders, making it one of the most contentious resolutions put before investors this year.

The vote on BP’s remuneration report reflected some general investor dissatisfaction with the board, including the poorly handled succession of Peter Sutherland, the chairman.

But investors’ anger focused on BP’s decision to pay a bonus to executives even though the company failed to beat targets.

Now Royal Dutch Shell is to ask its shareholders to vote through a bonus for senior executives even though it, too, failed to beat set hurdles against a peer group of five oil majors that included BP.

RiskMetrics, the international voting agency, advises shareholders to vote Shell’s pay plan down. And the Association of British Insurers has put an “amber top” alert out, warning its members of a potential breach of good governance.

If Shell’s investors do as RiskMetrics suggests – and international shareholders generally do follow the agency’s advice – it will be the second year the Shell board has clashed with shareholders over pay.

Last year, they objected to the oil group’s plan to pay a discretionary award to hold on to three directors in the running to be chief executive. Shareholders objected to the lack of financial or operational targets attached and described it as “pay for respiration”.

The proposal squeaked through with only 50.5 per cent of votes in favour. It was the highest level of dissent against a single resolution from a FTSE100 company in one year, says Manifest, the proxy voting agency.

Shell’s vote, this month, may prove as controversial. One of Shell’s biggest shareholders, who also protested against last year’s pay plans, said: “This year the company is paying rewards for meeting unchallenging targets and we are opposed to it.”

Another investor said he was keen to make other big companies think twice about following Shell’s example.

Regulators and politicians, such as Lord Myners, accuse investors of being “absentee landlords” and are intensifying pressure on shareholders to exert their power to end the reward culture that is blamed for contributing to the financial crisis.

Investors were already becoming more hawkish about directors’ pay rises that would seem unacceptable in an economic downturn when most workers’ rewards and investors’ returns are frozen or falling.

Investors are not only watching out for hikes in base salaries but also softened performance targets, discretionary awards and big increases in pensions.

Shell’s annual report for 2008 shows Jeroen van der Veer, the chief executive who steps down at the end of June, was paid a total of €10.3m (£9.2m), up 58 per cent on his remuneration in 2007. His package included €1.93m salary, €3.75m bonus, €1.54m pension benefits and €2.69m from the long-term incentive plan related to performance in 2005-07.

His total remuneration was more than twice that of Tony Hayward, BP’s chief executive.

Total pay of Peter Voser, who will take over as chief executive in July, increased by 45 per cent to €4.14m. The two disappointed candidates who had been considered for the job enjoyed bigger rises. Malcolm Brinded, head of exploration and production, more than doubled his total pay to €6.37m. Linda Cook, head of gas and power, had an 82 per cent rise to €6.69m.

Investors are quick to point out they do not object to big pay-outs per se, but only when pay rewards failure or is detached from performance.

Their concerns about Shell centre on the discretionary share awards now proposed for directors for Shell’s performance between 2006 and the end of 2008, even though Shell did not attain the targeted total shareholder return that would have ranked it third or higher among its peers.

Shell’s remuneration committee argues its TSR was very close to Total’s, which ranked third, and therefore directors only narrowly missed a bonus. And after talking to shareholders, Shell is to broaden the performance criteria to include operational and financial measures. But that may not be enough to assuage the oil group’s critics in time for the meeting this month, particularly those keen to reinforce the point made last month at BP’s meeting – that investors are not absentee landlords.

EDITOR’S CHOICE

Shell follows BP with 58% first-quarter fall – Apr-29

Copyright The Financial Times Limited 2009

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