Debate over ‘say on pay' gathers momentum

As job losses mount and economic suffering worsens, anger at highly-paid bank executives is rising on both sides of the Atlantic. The meltdown in the credit markets has sparked the ire of political leaders, media commentators - and above all taxpayers, who are saddled with costly bail-outs. Most importantly, it has been confirmed that the unprecedented pay packages of the past few years at some financial institutions were driven by extraordinary risk-taking rather than real, sustainable profits.

With share prices plunging and banks scrambling for bailouts, shareholders have faced extreme dilution - and now they expect to see executives who profited in the good times take responsibility in the bad ones. Yet while a few high-profile banks have reacted to the public outcry by announcing zero bonuses for their top executives in 2008, much has yet to be done by banks to convince shareholders and the public that banks are serious about reforming their remuneration practices.

In the US the debate on pay restraint has fully reached the political level, as President Obama imposes a $500,000 cap on salaries of top executives at banks receiving support from the federal bail-out package - a move that has whetted public appetite for further restraints, including at institutions not directly involved in the bail-outs. In Europe, politicians in Germany, the UK and France have also expressed concerns about the amount of both salaries and bonuses to be paid to executives at bailed-out financial institutions.

F&C remains concerned about government-mandated controls on pay that may create unintended consequences and incentives that are not always aligned with shareholder interests.

"Companies have made a grave strategic error by allowing the controversy over pay to enter the realm of legislators," said Boston-based Elizabeth McGeveran, Senior Vice President for Governance & Sustainable Investment. "We have been urging voluntary action by companies for some years. Some of the worst pay excesses might have been avoided if shareholders had been able to demand greater accountability on pay from our board representatives."

"Most US companies do not put executive pay up for a shareholder vote, meaning that there are few constraints on runaway pay. We are encouraged by leadership companies such as Hewlett Packard and Occidental Petroleum that have voluntarily agreed to submit their executive compensation report to an advisory shareholder vote on pay following dialogue with F&C. But it may be too late for companies to shut the barn door now that the horse is loose - and we expect US companies are going to have a one-size fits all solution imposed upon them by regulators."

In the meantime, F&C will continue its engagement with US companies directly to encourage boards to adopt so-called "Say on Pay" provisions. Currently, it is sponsoring a shareholder resolution at consumer finance giant Capital One, having withdrawn its proposal from Hewlett Packard.