UK: Directors' pay and bankers' bonuses

The Financial Services Authority's chief executive, Hector Sants, delivered a speech yesterday evening (at the Investment Management Association's AGM dinner) in which he considered recent market events and the FSA's response. Of particular interest are his comments concerning remuneration structures:

I feel that it is also worth taking some time here to consider the effects of incentive and remuneration structures. As I have said before, it is important for Boards to recognise that having asymmetrical structures where employees receive immediate reward and do not bear the consequences of losses is a risk to shareholders. I do, therefore, believe that firms should focus on minimising this risk by ensuring, as far as possible, the structures ensure employees and shareholders both share in the risk, in the upside and the downside.

There are various ways of achieving this goal, such as deferred compensation with claw back and the increased use of share options. None, however, is perfect, but I do believe Boards and shareholders need to carefully consider the incentive structures in place in their companies and their propensity to encourage risk. I know many of you already do this, but I ask you to increase your focus on this critical issue.

From the regulatory point of view, it is not our role to dictate the quantum of individual remuneration, that is for the market, but we do need to consider the implication of remuneration structures when judging the overall risk of individual institutions. We will do this with increased intensity.

Away from London, Royal Dutch Shell plc held its AGM yesterday. Remuneration proved a controversial issue. As reported here in the Financial Times:

One in three Royal Dutch Shell shareholders at the oil company's annual meeting yesterday voted against plans to award three executives one-off bonuses worth about €1m ($1.6m) to stay in their jobs. The vote adds to a growing chorus of dissent over so-called "retention payments", in which managements at some of the UK's most venerable companies have felt the wrath of investors in recent weeks".

It should, however, be noted that many shareholders withheld their votes; the results were:

• Votes for: 1,517,884,288
  
• Votes against: 706,398,270
  
• Votes withheld: 776,213,431