For yet another season of shareholders’ meetings, the area of remuneration is one of the issues that has generated the most controversy in Europe, the United Kingdom and the US, repeatedly being among the issues with the highest level of dissidence on the part of the market. Last week we saw how, in several companies in the US, more than 50% of shareholders voted against their remuneration models, which included a very high compensation package for the CEO. This is just one example of how investors have taken a much more demanding stance, and how companies must be prepared for increasingly common episodes of activism in this area. The crisis caused by covid-19 has been a turning point not only in how companies are accountable in terms of remuneration, but also in what the investment community expects of them.
Among the main reasons why the internationally listed companies have received votes against in the area of remuneration during the 2022 meeting season, we find the following:
• The company has not taken into account the disagreement of minority shareholders on the remuneration proposals. Perhaps this is one of the main workhorses for the Spanish and European listed companies. Investors and proxy advisor (Voting advisors) require companies to give an adequate response to the market, regarding remuneration aspects that have obtained a high level of dissent in previous years through a specific action plan led by the remuneration committee.
• The delivery of one off awards and extraordinary payments. The proxy advisor and investors are against the delivery of these extraordinary payments if they are not properly justified and linked to specific objectives.
• Misalignment of executive compensation with the results of the company or with the profitability of the shareholder in comparison with its comparables.
• Lack of disclosure of incentive plans, lack of information on individual goals, or lack of detail on metrics. Both institutional investors and proxy advisor They continue to demand greater disclosure of incentive plans, detailing the maximum limits, the different metrics and their weights.
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• Excessive payments for the non-executive president. Any additional payment or supplement must be detailed and justified.
• Excessive pension plans. To value pension plans, proxy advisor and investors consider the compensation structure and market practices. Some investors specify in their policies that contributions to pension plans should not exceed 30% of salary, and should be aligned with the rest of the workforce and not exceed the average level of retirement benefits for the rest of the workers. .
• Excessive contract termination payments; in this sense, these payments, including the non-compete clause, should not exceed the limit of two years of total remuneration.
• The lack of a long-term incentive plan, strictly speaking. Institutional investors expect companies to submit this plan for approval as a separate item on the agenda. These plans must have accrual periods of an adequate duration (between three and five years).
• Long-term remuneration should account for a greater weight of total remuneration, since the market tends to demand from companies that most of the remuneration of executive directors be variable and long-term oriented.
In short, the reasons mentioned above constitute a compelling reason for the remuneration committees of listed companies to take note after each meeting season to try to align the remuneration models of the boards of directors with the demands and requirements of the market. It is a verifiable fact that there is a new paradigm in the remuneration field linked to greater transparency and “payment for results” in line with the measures adopted by the company with the rest of its stakeholders.
Carlos Saez Gallego is responsible in Spain for Georgeson.
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