What was behind the votes in Europe’s “shareholder spring” and what does it mean for 2013?

Divergency between share price and pay not likely to be tolerated.

This year’s shareholder spring in Europe had its origins in discontent over executive pay practices seen by many as one of the sources of the financial crisis. Twenty-four companies in Europe have so far received a significant “against” vote on executive pay this annual general meeting (AGM) season, defined as less than 75 percent support. Votes have been used to protest against pay rises insufficiently linked to performance as well as other payments such as signing and retention bonuses. Some CEOs have been forced to resign as at AstraZeneca and Trinity Mirror. While the shareholder spring was most active in the U.K., several other Western European countries saw significant shareholder protest over pay, including Switzerland, Germany and Austria. The protest has been accompanied by legislation. For example, the British government has indicated that by 2013, future pay plans will have to pass by a majority vote or shareholders will have the binding authority to reject management’s remuneration proposal outright. In mainland Europe, the new French Socialist government is planning pay limits on executives at companies in which it owns a majority stake. In this article we discuss five companies that received significant or majority votes against their remuneration policy to look at what lay behind the shareholder revolt.

  • Aviva
    At the 2012 AGM, 58.6 percent of votes were cast against the company’s remuneration report. Subsequently, Aviva’s CEO Andrew Moss resigned from the company. Mr. Moss had attempted to stave off a shareholder revolt by waiving a proposed 4.8 percent base salary rise. The price of the group’s shares fell by 21 percent during 2011, declining from a high of around 475 pence in March to 300 pence at year-end. It fell further to 261 pence at the end of May 2012.Despite this somewhat precipitous stock price decline, Aviva’s 2012 annual report says that it performed well against its Key Performance Indicators (KPIs). However, in a year which saw a significant decline in value at the firm, Mr. Moss’s salary increased, his bonus increased, his conditional long-term incentive plan (LTIP) award increased. In addition, Mr. Moss also partially vested in an earlier LTIP award from 2008 with a value of £1,136,208, more than four times the value of the award that vested in 2010. KPIs may have been exceeded, but this level of pay growth against a background of stock price decline must have been difficult for shareholders to understand and the remuneration committee report does not attempt to place it in context or defend it. Aviva’s pay is rated a “D” by GMI Ratings.
  • Cairn Energy
    Just 30 percent of votes cast at Cairn Energy’s AGM were in support of executive remuneration. Of most concern was the £1.4 million paid to Sir Bill Gammell, the company’s founder, to compensate for his move from CEO to non-executive chairman. In addition to the pay vote, more than 10 percent of shareholders voted against Sir Bill’s re-election to the board as chairman. During 2011, Cairn Energy’s share price fell from 420 pence at the beginning of 2011 to around 265 pence at the end of the year. While it has since recovered a little, it is still far below its 2010 value. Nevertheless 59 percent of the Cairn India Awards granted in May 2008 vested, while full vesting (133 percent) of the awards granted in May 2008 under the Replacement LTIP occurred. Cairn’s pay is rated an “F” by GMI Ratings.
  • Trinity Mirror
    For 2012, executive directors and senior managers at publisher Trinity Mirror experienced a fourth consecutive year of pay freeze. However, this restraint did not convince
  • shareholders to approve the company’s remuneration report, with 54 percent of votes cast against. Following continued losses, shareholders wanted CEO Sly Bailey’s pay reduced. Instead, she resigned from the company effective June 2012, with compensation for loss of office of almost £1 million. Trinity’s market cap fell significantly during Ms. Bailey’s tenure, from £1.1 billion in 2003 to around £65.7 million in 2012. During her nine years as CEO, she earned about £14 million while the stock price declined by about 90 per cent. Investors in Trinity Mirror have frequently called for executive remuneration to be more commensurate with the declining size of the company. Trinity Mirror’s pay is rated a “D” by GMI Ratings.
  • UBS
    In the third successive year of significant opposition to remuneration policies at the bank, nearly 40% of UBS shareholders voted against pay. After the board hired Axel Weber to replace Kaspar Villiger as chairman, shareholder scrutiny focused on his signing fee of $4.3m. Some parts of UBS’s remuneration policy are effective, clearly linking pay to performance, including a decline in the bonus pool reflecting a decline in profitability. In addition, half of the deferred bonuses in at least two of the current plans were forfeited in 2012 due to trading losses. Two senior staff members also elected either to decline incentive payments and/or base pay or receive reduced awards. Against the background of a declining stock price during 2011 – from around CHF 15.5 to CHF 11.2 – this seems reasonable. However, other types of non-performance-related awards are still current. For example, the company states that it has, and will continue to, pay replacement payments, guaranteed cash and equity awards, sign-on and retention payments. For example, retention awards were made to many senior employees in April 2012, though these are subject to performance conditions. UBS’s pay is rated a “D” by GMI Ratings.* WPP Group
    At the 2012 annual meeting, around 59 percent of WPP shareholders voted against the company’s 2011 remuneration report and CEO Marin Sorrell’s £6.8M pay package, the second year of pay protest at the company. The 2011 vote prompted the company’s remuneration committee chair to reach out to investors prior to the 2012 AGM. Mr. Sorrell’s total pay, including base salary and bonus, rose by just under 60 percent in 2011. At the same time, WPP’s share price fell 15 per cent. On the other hand, net income increased by 43 per cent, and diluted earnings per share by 33 per cent. According to a graph in the annual report WPP also outperformed the five-year total stockholder return of two of its three main competitors, as well as that of the FTSE 100. The increased level of dissatisfaction with pay is ironic given the group’s attempts to consult with shareholders. Clearly, consultation or not, shareholders resented the increase to Mr. Sorrell’s bonus and base salary at a time of a decline in the share price, regardless of increased profitability.

In conclusion, a declining share price concurrent with increasing remuneration or remuneration that did not decline sufficiently, would appear to be the driving force behind most, if not all, of these shareholder protest votes. At some companies, such as WPP and Aviva, increases in pay may have been justified by other performance indicators, but when executives were held to account against the indicator of most immediacy to shareholders – share price – the vote was no. At other firms, such as Cairn Energy and UBS, specific payments which were unrelated to performance at all were of sufficient size in a year where the company was performing poorly to draw protest.
Perhaps most significantly, some votes led to CEOs losing their positions. While there was a significant amount of turnover at the top of UBS, this was due to CEOs and chairmen taking responsibility for performance failures. At Aviva, Trinity Mirror, and AstraZeneca poor performance and pay protests led to the resignations.
Shareholder voting patterns appear to be influenced by concerns about CEO pay rises and/or levels juxtaposed with both the stock price performance of individual companies and the disparity in experience between CEOs and others in the workforce who have either been made redundant or received little or no income increase. What happens to those trends over the next six months will determine whether we shall see another “shareholder spring” in Europe next year.
Paul Hodgson is Chief Research Analyst and Greg Ruel, Senior Research Associate at GMI Ratings. This article is based on a recent report ‘Europe’s Shareholder Spring: Shareholder Discontent with Executive Remuneration’ Link