I attended the Annual General Meeting of National Grid this week (on the 28th July). It was a typical FTSE-100 company AGM with questions on all kinds of matters, mainly from private shareholders of course. There is a full report on the meeting here, where many other AGM reports are supplied for members.
I tackled the issue of high remuneration at this company and the change in the LTIP with a couple of questions, and I expected there to be many more from other shareholders but there was surprisingly only one other.
Let me just summarise the key pay issues at the company first, to save you reading the whole 16 pages of the Remuneration Report. It’s a typical FTSE pay scheme for executive directors – namely high base salaries, a short term bonus plan (called APP here) and a long term incentive plan, i.e. LTIP (also called PSP or LTPP here just to confuse you). Last year this produced the following for the CEO, Steve Holliday: base: £1m, APP £1.2m, LTIP £2.2m and pension of £0.4m. Total “single figure” remuneration for the CEO was therefore £4.8m last year including other benefits. That’s up from £3.1m in the prior year. Other executive directors got similar large total remuneration – Andrew Bonfield (FD): £3.2m, Tom King (US head): £4.2m and Nick Winser (UK head): £2.6m.
Do you think that is fair and reasonable for a boring utility company that is in reality a cosy monoply? If so you may not care to read further.
The company actually reviewed their pay scheme recently and have decided to move to rebalance the variable pay elements (APP and LTIP) by reducing the maximum amount under the APP to 125% of salary, and increase the LTIP to 350% of salary (previously 225%). There were some other changes with a stronger focus on awards in shares, and retention of those shares and a change to the performance measurement, but those were the key changes. It is expected that these changes might lead to a small reduction in overall pay if the financial results of the company remain similar.
What I said at the AGM was that I did not like LTIPs because their introduction has led to a racheting up of total pay in companies, and to move to a rate of over 300% for the CEO is ridiculous─ it will not incentivise him further. Indeed I asked Mr Holliday, the CEO, if he was going to work any harder as a result of this new incentive scheme. The Chairman attempted to divert the question to the Head of the Rem Comm, so I moved into Paxman mode and ended up repeating the same question four times. Eventually Mr Holliday agreed to answer the question but then evaded doing so. Of course I did not necessarily expect an answer as it was more of a rhetorical device than in expectation of a real answer. But the point was made.
I also pointed out that such high leverage rates for bonuses in the banking sector were one of the factors that caused the financial crisis as it encouraged risky behaviour.
Now you would have expected with such large pay figures, and the surely contentious and badly designed change to the LTIP that shareholders might have voted against the relevant resolutions. But the company only got 1% against the Remuneration Report and 3.7% against the Remuneration Policy and the same against the LTIP. So the new “binding vote on pay” legislation proved to be totally ineffective in reining in abusive and poorly formulated pay schemes such as the one at National Grid. Opposition would have needed to increase by ten times to get anywhere near defeating the pay proposals.
The High Pay Centre Reform Agenda
Now coincidentally the High Pay Centre have recently published a “Reform Agenda” to tackle the general issue of excessive and growing remuneration for the executives of companies. This has contributed to rising levels of income inequality which many see as of social concern. Others simply see it as unfair and unnecessary that FTSE-100 CEOs now get 160 times the pay of the average worker when it was only around 20 times in the 1980s, i.e. disparities have been consistently widening.
The High Pay Centre proposes 7 policies to tackle this problem, because they recognise that the recently introduced pay regulations have not so far had a significant impact on the problem. These policies are:
1. That Remuneration Committees should include a worker representative to bring a “real world” perspective to bear.
2. A legally binding corporate governance code to encourage good practice on pay (although they don’t really make it clear how this would operate).
3. A revised duty for company directors and investment professionals to act in the interests of all stakeholders. Comment: the former was surely adequately incorporated in the 2006 Companies Act and asking institutional investors to take account of stakeholders interests when voting on pay seems problematic to say the least.
4. A qualifying period for shareholders voting at AGMs so only those with longer term interests could vote (on pay for example).
5. A higher top rate of income tax to discourage disproportionate pay increases. Comment: when bankers had a higher marginal rate of tax imposed, many simply used it to justify asking for a pay rise to compensate!
6. Company wide profit sharing so that all employees benefit from a company’s success.
7. A maximum pay ratio between executives and their lowest paid employees.
8. A legally binding commitment to reduce inequality.
ShareSoc has of course looked at this problem in the past. Some of the above proposals might help to some extent (for example the proposal about workers representatives). But in essence the real problem is to disrupt the whole consensus of high pay that is established by remuneration consultants (whose interest is in raising pay levels), comparability measures (where nobody wants to be below the median), and remuneration committees packed by directors setting and voting on their own colleagues pay. We have suggested that pay should be determined (i.e. devised) by shareholders on an independent remuneration committee, not by the directors, as a simple first step.
Regrettably I do not think all of the High Pay Centre proposals would be workable, nor would those that could be implemented be totally effective in tackling the issue of high pay. But it is good that they are keeping this issue in front of people because more steps certainly have to be taken if the problem is to be solved. Perhaps a few simple threats of even tougher legislation may focus the minds of those on Remuneration Committees before it is too late. The evidence from National Grid and most other FTSE-100 companies is that they have no plans to really tackle the issue in a major way, with cosmetic massaging being more to their taste.
Roger Lawson
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