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Wave of pay rows is an urgent wake-up call

Daily Telegraph 

As if boardroom recruiters weren’t already finding it difficult enough to land their catches, this year’s round of investor pay rows looks certain to add another category to the list of City pariahs: the chairmen of remuneration committees.

He may not boast the same notoriety as the Sir Fred Goodwins of this world, but Sir Peter Job, who heads the group that decides directors’ pay at Shell, knows what it is like to be on the receiving end of a barrage of shareholder criticism all the same.

Last week’s annual meeting of the oil giant in The Hague might have been off the beaten track for most institutional investors, but it was probably worth the air fare if you wanted to witness a right royal bust-up. Not far short of two-thirds of the company’s shareholders voted against the remuneration report, making it one of the biggest-ever rebellions of its kind.

Job, of course, is not alone in facing flak over executive pay, although Shell’s lack of respect for its shareholders was particularly brazen. Having decided to award bonuses if the company hit certain – not particularly demanding – targets, Job (who some might decide would be better called jobless) and his colleagues approved them anyway.

The audacity and arrogance of the decision were breathtaking, but, sadly, far from isolated. It has been difficult to keep tally in recent months of the number of chief executives who have “voluntarily” forsaken pay rises as their profits have collapsed. It is an indictment of the approach many boards have taken to the issue so far that these individuals automatically assumed that they were due to receive an increase.

One of the reasons investors have become so angry in recent months is that many companies are paying mere lip service to the notion of serious engagement with their owners. As my colleague, Jonathan Russell, reports on page two today, the pace at which pay increases are being enjoyed by the bosses of FTSE 100 companies is outstripping their peers elsewhere, even as most companies are being forced to consider cutting dividends or confronting freefalling profits.

Last week, it was suggested to me by one senior fund manager that the way forward was simply to scrap the discretionary nature of investor votes on remuneration by making their decisions binding: if shareholders decide that bonuses for the previous year should not have been paid, then there would be an automatic right to claw them back.

Given the level of anger being vented across the City, it is an idea that might strike a chord among many large institutions. It would not be a simple solution, however. The danger of such a move would be to make pay a lightning rod for other areas of investor dissent. It would also be suspect from a legal perspective. The last thing that business can afford at the moment, given the damage its reputation has already suffered, is more negative publicity triggered by embarrassing boardroom pay disputes.

That message does not yet appear to have reached the tin-eared occupants of many boardrooms. The votes at Bellway and Shell (the recent protest vote at Royal Bank of Scotland was an anomaly created by the Goodwin pension outrage and the Government’s majority stake) sharply underline that the status quo is embarrassingly inadequate when boardroom attitudes to lining directors’ pockets fail to keep pace with broader economic trends. It is, of course, hardly a wry observation to note that that only tends to be the case when corporate profits are under downward pressure.

A more workable solution to this escalating pay crisis could be to make remuneration committee chairmen stand for re-election on an annual basis. Knowing that their (part-time) job was on the line each year would focus their minds in the rather cosy board meetings where there is too much back-slapping and too little genuine interrogation of their executive colleagues.

Someone should remind Job that targets are there to be met, not ignored, and his counterparts across the FTSE 100 must take note too. On this subject, shareholders are right to keep making a fuss.

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