Publicly held companies will be subject to increased investor pressure on executive remuneration through and beyond the "shareholder spring,” according to the latest research from FTI Consulting.
Eighty-eight percent of the more than 170 global institutional investors polled by FTI Consulting say that executive compensation is important to their investment decision, with 62 percent wanting an annual say-on-pay vote.
While some of the investors support a variable cash compensation cap of 100 percent of salary (18 percent), the ability to claw back payments (38 percent) and a deferral of variable compensation into shares (58 percent), even more are asking for greater transparency: 67 percent want disclosure of specific performance targets for variable compensation.
On the issue of remuneration, investors are starting to use their voting power to communicate dissatisfaction with performance to their portfolio companies and to better align pay with performance and shareholder returns. And 72 percent of investors think that a threshold of below 30 percent of shareholders opposing executive compensation is enough to warrant a corporate response, while 15 percent believe that 10 percent or less is enough for a corporate response.
According to FTI, this signals a shift in shareholder power where, historically, companies often would receive votes in excess of 90 percent for most, if not all, resolutions put to a shareholder vote.
"Investor focus on executive remuneration is not confined to a few high-profile cases nor to a single region or market," said Mark Kenny, managing director in the strategic communications practice of FTI Consulting. "We found they expect greater transparency from companies on executive remuneration and will exercise their votes to address any variance between executive compensation and performance.
"These findings support our own experience of working with companies, institutional investors and proxy advisors that corporate governance, and executive remuneration in particular, is a subject that requires greater transparency, disclosure and dialogue. We believe that the long-term interests of companies and their owners are best served through constructive and continuing dialogue."
The research also found that board directors no longer can rely solely on written communications with shareholders. Ninety-two percent of the investors surveyed say that companies need to engage in corporate governance road shows with major shareholders, with over half (58 percent) expecting it once a year. Moreover, shareholders want to hear more from the chairman. Fifteen percent expect the chair to be constantly accessible, and a further 52 percent expect to hear from him or her at least once a year.
“The requirement, under best practice governance guidelines, that a board understands the views of major shareholders is strongly endorsed by investors,” says Kenny. “This appears to place a more affirmative obligation on a board to actively engage, through established channels, with principal shareholders,”