No more rewards for failure – how to claw back pay
ONE by one, companies with either sub-par performance or poor compensation plans have been brought to account by shareholders. The most spectacular of these was at Aviva where Andrew Moss, recently stood down, but there have been major revolts at William Hill, Pendragon and Trinity Mirror.
All of this has been achieved without one bit of legislation, as Vince Cable’s reforms of executive pay are still under consultation. The proposed reforms seem to have got a lot more people, us included, looking at what has been going wrong and what can be done about it, and such nudging, rather than excess regulating, remains the best way forward. For example, the government is proposing to make shareholders votes on pay binding. Doing this with a 50 per cent threshold is unlikely to catch many companies. Even with the shareholder spring, most revolts have fallen well short of this.
Our new report, Rewarding Success not Failure, to be published next week, advocates a two strikes alternative to a binding vote, with a higher threshold for approval of 65 per cent. If the company lost the first, advisory, vote it would have a year to implement change. If it did not and lost the following year’s vote, it would automatically become binding. This would allow shareholders to express their displeasure but still allow companies time to change things. Raising the threshold is likely to nudge companies to listen to shareholders more, while shareholders can feel free to fire warning shots at companies if they need to.
Such votes will not stop the biggest problem – rewards for failure. The biggest irritation for Joe Public is when a chief executive, or indeed any executive, of a company that has underperformed or even failed, walks away with his or her compensation intact. Aviva’s Moss is likely to receive £1.75m in severance pay. Cable has proposed a cap of one year’s salary on exit payments, but this would only be enforceable for a firing. In most cases, the need for speed and an amicable parting means that a deal is done and the executive resigns.
Our report proposes clawback elements in the remuneration package. Today, remuneration pays out if certain targets are hit but there are no equivalent downside targets. Clawbacks should be triggered when a company has clearly underperformed, much like when covenants are breached in the case of a bond or loan. A large proportion of executive compensation could be deferred into a form of escrow account so that repayment would be easy to facilitate. With such a strategy in place Moss would likely have been walking away with considerably less or indeed nothing at all.
A true clawback regime would eliminate rewards for failure and arguably trigger a shift in executive behaviour. If executives believe their past pay is at risk then perhaps they will weigh the risks of a failed strategy more carefully.
James Barty is senior financial adviser at Policy Exchange. www.policyexchange.org.uk