This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

ShareSoc Launches New Director Remuneration Guidelines

ShareSoc has issued the following press release on its new Remuneration Guidelines. These Guidelines have been developed by ShareSoc Director Cliff Weight who has substantial experience in these matters, supported by other ShareSoc directors.

In summary the press release said:

  • FTSE100 CEO pay is too high. It should be less than half of current amounts.
  • FTSE 100 CEO’s maximum bonus should be 100% of salary (currently 200% is common) and the LTIP maximum normal annual award should be 100% of salary (currently 300% is common).
  • Remuneration creep needs to be reversed.
  • Share Options have a role to play in Directors’ remuneration.
  • ShareSoc has specific guidelines for smaller companies. Small companies will find these simple guidelines helpful. We suggest companies should follow these guidelines.
  • ShareSoc Members will criticise companies who do not follow the ShareSoc guidelines and will raise questions at AGM’s on compliance.
  • The full Guidelines are present in this document on the ShareSoc web site: https://www.sharesoc.org/ShareSoc-Remuneration-Guidelines.pdf

Commentary

Mark Northway, Chairman of ShareSoc, said “Members of ShareSoc, The UK Individual Shareholders Society, have a right to expect a fair return on their investments. We are deeply concerned by the continuing trend towards excessive and unnecessary CEO remuneration. ShareSoc has therefore developed simple, equitable guidelines, which we would like to see adopted by listed companies as an integral component of their governance framework.”The ShareSoc guidelines contain broad best-practice principles for larger companies and specific guidance for smaller companies (defined as those with a market capitalisation of less than £200 million).

Mark Northway added “We hope that, as a result of our initiative, ShareSoc members will be even more vocal about poorly designed and overly generous remuneration policies. We will continue to question remuneration reports at AGMs, placing further pressure on the directors of underperforming companies.”

Sarah Wilson, Chief Executive of Manifest, the corporate governance experts, said “Manifest welcomes ShareSoc’s remuneration guidelines. Retail shareholders are an important but often overlooked constituency in the governance debate having been significantly marginalised by the broker nominee arrangements in recent years which make voting unduly burdensome. We are delighted to be able to support their active ownership and very much value their thoughtful contribution.”

Tim Ward, Chief Executive of The Quoted Companies Alliance commented “The ShareSoc guidelines provide detailed guidance on levels of salary, incentives and the percentage of equity dilution.  These guidelines give companies an insight into what private shareholders expect to see regarding the remuneration of directors in public companies. We are pleased that the ShareSoc guidelines reflect the principles set out in the Quoted Companies Alliance’s Remuneration Committee Guide for Small and Mid-Size Quoted Companies, reflecting mutual support of remuneration disclosures that build trust between investors and companies.”

Oliver Parry, head of corporate governance at the Institute of Directors said, “We welcome ShareSoc’s report, which represents an important intervention in the debate on executive pay. Companies do need to listen to shareholders more and respond in a constructive manner. Today’s report highlights a number of ways to simplify pay in large companies. The guidance for smaller companies is also very practical and applicable to both quoted and unquoted companies.”

Summary of the ShareSoc Remuneration Guidelines.ShareSoc has adopted different guidance for large and small companies, because there are significant differences in the way remuneration is approached between large and small companies.

For larger companies, ShareSoc believes and recommends:

  • FTSE100 CEO pay is too high. It should be less than half of current amounts.
  • FTSE 100 CEO’s maximum bonus should be 100% of salary (currently 200% is typical) and LTIP maximum normal annual award should be 100% of salary (currently 300% is typical). It may be necessary to offer more to externally recruited CEOs, in their first year.
  • Remuneration creep needs to be reversed. Remuneration has tripled over the last 18 years, but the FTSE 100 share index has barely increased at all.
  • To strengthen the focus on the genuine long term, share options should be an element in the remuneration package, while also toughening share-holding requirements so that a meaningful portion of share incentives must be held to retirement or beyond.

ShareSoc have agreed with Manifest to publish Manifest’s reports on the ShareSoc Members’ website. Manifest’s reports contain a detailed analysis of remuneration in main market and larger AIM companies.

For smaller companies (those with market cap less than £200 million), ShareSoc have developed specific recommendations:

  • Salaries should not be more than median of comparable sized companies. For a CEO, we give specific guidance on what is reasonable.
  • Bonus. Fast growth companies should conserve cash. ShareSoc prefers such companies to reward management through equity incentives. Once a company is profitable, a bonus may be appropriate. For a profitable company, the maximum bonus for a CEO should be 100% of salary: a lower limit is often sufficient.
  • Share Incentives: Share Options are a simple and clear incentive for managers of small companies. The exercise price of share options should be set at not less than the market price at the date of grant. LTIPs and nil cost options, with complex performance conditions are unnecessary for small companies and should not be used. Value Creation Schemes should also not be used.

Dilution should be less than 10% of equity over a 10-year period. This can be front ended, but some should be reserved for top ups and new recruits. A typical structure might be 2% for the CEO with another 3% for top team, so the CEO and top team have 5%, but how this is shared out will depend on the roles and skills of the top team.

Disclosure. There should be clear disclosure of remuneration in the annual report and shareholders should be asked to vote on remuneration and share schemes.

Roger Lawson

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