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How not to lose the race over pay and bonuses

Financial Times

By Andrew Hill

Published: May 5 2009 20:16 | Last updated: May 5 2009 20:16

The clock says you came in fourth by a fraction, but, hey, there was a headwind, you were trying hard and, what’s more, that stopwatch is wrongly calibrated. Have bronze, instead, with our compliments.

The decision by Royal Dutch Shell’s remuneration committee to overrule its own pay policy for top executives – for the second year running – looks terrible. Like Xstrata, whose shareholders on Tuesday lodged a significant protest against the mining company’s remuneration package, Shell has put itself in the line of fire.

But Shell is no Bellway, the housebuilder that last year retroactively scrapped its performance targets without consulting shareholders, earning itself a justified beating at its annual meeting. In fact, the directors on Shell’s remuneration committee have done almost everything right.

They asked for the right to use discretion, in favour or against pay awards, three years ago to avoid being forced into making an anomalous decision. They rightly identified the inadequacies of total shareholder return, which has grown like leylandii at many companies, overshadowing better measures of performance. They reviewed the policy in the light of investor concerns and added new relative measures for 2009. Finally, they managed all this without over-reliance on compensation consultants. That shows a reassuring independence of mind. After all, if the likes of Sir Peter Job (former chief executive of Reuters), Lord Kerr (once Britain’s ambassador to the US), Deutsche Bank’s Josef Ackermann and Jorma Ollila of Nokia needed their hands held, Shell really would be in a pickle.

Where did they go wrong? Simple: the committee exercised its discretion twice in two years to grant shares that executives did not, under a strict interpretation of Shell’s own rules, deserve, and it did so without going back to shareholders.

These aren’t hanging offences. Not all investors will don their black caps and vote down the remuneration report. Shell could refine its procedure next year and allow a couple of days between meetings of the committee and the board, to flag issues to big investors. But the titans and titled folk on the committee can’t complain about being called to account. Laggards at other companies look to the race leaders to set the standard.

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