Hermes new pay guidelines – no long term incentives are now ok
13/12/2016
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Regular readers may recall that we have been observing the changes being wrought in the UK investor guidelines, given that they have a substantial impact on guidelines applied in other countries, including Australia.

The prime mover in all of this has been the UK Investment Association (UKIA), as it tried to “simplify” remuneration from the current “Fixed Pay:STI:LTI” models that, coincidentally, investor guidelines made complex in the first place. The UKIA’s “simplification” was to move away from the “one size fits all” approach to a “4 sizes fits most” approach (see HERE, HERE, HERE, and HERE).

One of the issues we identified at the time was the likelihood that investors will not agree among themselves on these alternatives, and would adopt variations of the guidelines that would result in every company’s remuneration complying with an ever smaller proportion of their investors’ respective guidelines.

Now we have our first evidence! Hermes Investment Management has picked up on bits and pieces of the UKIA’s alternatives in its own guidelines. ASX 200 company boards should take note of the Hermes guidelines because it has significant funds invested in ASX 200 companies. Directors need to consider what could happen longer term as institutional investors rethink their already many and various guidelines.

Hermes’ “Remuneration Principles: Clarifying Expectations” document calls for “much simpler, more transparent and less-leveraged” remuneration. The suggestion is even made of a move to paying nothing but entirely fixed remuneration, “based primarily on shareholdings, together with a cash salary similar to today’s levels”.

Sounds appealing, doesn’t it? One Remuneration Committee meeting a year should do it, with a 3-page remuneration report to round it off.

Alas, Hermes goes and spoils it with caveats and conditions associated with relative TSR, vesting and holding periods, strategic scorecards etc. etc. etc.

Nevertheless, there is likely to be much appeal to many,including executives, in Hermes’ remuneration guidelines (which they have labeled as “principles”).

As with the current guidelines of other investors, the Hermes preferences will not be fit-for-purpose for many companies, and will not permit the board to have remuneration policies that effectively focus executives on what the board requires.

There will also be those odd occasions when companies make significant losses, and executives continue to receive their “massive” remuneration that fail to vary with performance.

While the Hermes’ paper is interesting, it does have a touch of whimsy. We especially like the part where they hark back to the good old days, suggesting that “pay practices should be reversed and resort to the simpler models of the 1970s or 80s before commonly discredited ideas associated with classical economic theory influenced practice”. The authors may not recall that in these good old days UK company performance was woeful, there were multiple economic recessions, union militancy and mine strikes, and that the UK was the “sick man of Europe”.

Really, the world has moved on. Nevertheless, Hermes’ perspectives are refreshing. See the Hermes principles HERE.

© Guerdon Associates 2021
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