One of the world’s largest institutional investors speaks on executive remuneration
24/03/2011
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BlackRock manages over US$3.7 trillion of funds globally.  It is probably the most active of the “mega” institutional fund managers on governance matters.

Ms. Michelle Edkins, BlackRock’s Managing Director and Head of Corporate Governance Europe talked about executive remuneration in Europe during her presentation at the Australian Remuneration Forum on 21 March 2011.

Independent board remuneration adviser Guerdon Associates, and institutional proxy adviser, CGI Glass Lewis, sponsor the Forum.

Forum attendees included institutional investors, company directors, executives and regulators.

While the Forum was a private, Chatham House rule event, Ms. Edkins has allowed us to summarise her talk and show the video of her presentation.  The 6 minute video of her presentation can be seen HERE

Ms. Edkins had some key observations:

1.     Executive pay increases in Europe have resumed after some years of stagnation, with salary increases generally in the 10% to 25% range

 

2.     Companies have tended to explain the large rate of increase as stemming from either a change in responsibilities, or a  “benchmarking” exercise

3.     BlackRock and other institutional investors are sceptical about such “benchmarking exercises”

4.     Bonus pay, as a percent of fixed pay, looks to have doubled in some cases, with half being deferred in stock

5.     There has been a trend to try and align pay with long-term outcomes.  Executive shareholding requirements have increased from one times pay to two to three times pay.

6.     Share awards, in many cases, are contingent on short-term performance, with just a service requirement to ensure receipt.  This simplifies the understanding of likely value for management and shareholders.  However, some shareholders do not support the reliance on short-term performance as the requirement for an award, while others see value in simplification.

7.     Long-term incentive performance requirements are becoming more diverse.  Instead of earnings per share growth, more attention is being paid to operational measures, as well as environmental and social factors.  As described it appears to resemble a balanced scorecard.  Accompanying these, boards reserve the right to limit vesting based on an assessment of risky behaviours.

8.     Accompanying the remuneration report vote in the UK since 2003 has been an increase in board and investor engagement.  While investors tend to exercise their vote in context for each company, Ms. Edkins noted that the public and politicians have observed rates of increase, in aggregate, outstripping shareholder returns, resulting in calls for further restraint.

9.     Interestingly, Ms. Edkins suggests that, coincident with the increase in board engagement with large shareholders like BlackRock, there may be room for “collective” resourcing among shareholders to share the engagement load.

10.  The engagement process appears to be a process whereby boards seek to share responsibility for remuneration outcomes with investors.  BlackRock considers this shared accountability inappropriate, and puts it back to the board.  BlackRock would like to see directors have more “courage” to take remuneration decisions.

11.  Lastly, BlackRock would like to see better disclosure of reward outcomes and discussion of their alignment with performance.

© Guerdon Associates 2021
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