If there is one thing that annoys private shareholders, it is the inflated remuneration packages paid to directors of many public companies in recent years. Total pay of directors has grown much more rapidly than that of employees in general, and often much faster than the growth in profits or dividends of the companies concerned. In the bad times, they do not fall, and in the good times, they increase faster than other costs, much to the disadvantage of shareholders. In addition, more methods of remuneration are added, inflating the total cost to the company of the board of directors. So in addition to basic salary, we now have short term bonus packages, LTIPs (long term incentive plans), share grants, share options, and escalating pension packages. The provision of more detailed information in the Annual Report, and the voting on the Remuneration Report section has helped to bring this subject into sharper focus, but much yet needs to be done to base pay more soundly, and align it more closely with shareholders interests.
For the submissions by UKSA to various bodies on the general subject of director's pay over the last few years (and it will no doubt a perennial topic of concern to UKSA members), see the following:
- Directors' Pay, 2002
- Directors' Pay, 1999 (appendix)
- Directors' Pay ceiling, 1999
- UKSA response to Greenbury reporton directors' pay, 1995
- Directors' Pay, 1994
Note that one of UKSA's key proposals is to set a limit in total annual boardroom remuneration. The ceiling can be raised or lowered at any time by a vote of the shareholders. It is our main recommendation for returning control of directors' pay to the owners of the company.
Share Options
There is much debate on the merits of share options, how many should be granted and on what terms, and how to account for them, if at all. Martin White's letter, published in the Financial Times in November 2003 on the accounting issue, or this letter published in November 2002 or to this press release from 2000 for more information. However in April 2004 the Accounting Standards Board (ASB) issued FRS20 which requires share options to be expensed in the accounts of listed companies from the beginning of 2005. This should help to discourage the over generous granting of options to directors and management that currently takes place in some companies.
A common problem with share options is the need to adjust them after various company actions such as the issue of new shares, consolidation of shares, or share buy-backs. This was highlighted in 2004 at Mitchells & Butlers - the full story is here where the views of two UKSA members on how it should be done are given.
An edited version of this letter was published in the Financial Times in August 2005, following comments from the QCA on the difficulty in valuing share options in smaller companies and the demand for a better methodology.
Confronting Excessive Pay and the Bonus Culture. UKSA issued this press release in February 2009 which urged the Prime Minister to follow Barack Obama's lead in confronting the excessive pay and bonus culture in the financial services sector.
