Active investment commentary & analysis

What is appropriate remuneration?

An important feature of SVM’s focus on corporate governance is executive remuneration where we seek to ensure that senior management pay schemes are appropriate in terms of their quantum and priorities. There are 5 specific elements which we scrutinize and will vote against proposed remuneration schemes which do not meet these principles. The remuneration policy and report should;

  1. Be clear in their objectives and comprehensive in their disclosure without being complex and incomprehensible
  2. Be aligned with long term shareholder interests
  3. Allow for an effective and truly independent audit committee
  4. Avoid reward for “failure”
  5. Ensure non-executive director remuneration is appropriate

Complexity is increasingly a problem when analysing the detail and priorities of remuneration packages. A simple look at the index of an annual report can often highlight the problem. The 2018 publication from the UK’s largest company by market capitalization, Royal Dutch Shell, serves as a good example. Here the director’s remuneration report spans from page 119 to page 147. By comparison the company’s strategic report on the environment and society runs from page 66 to 71. Perhaps also a great indicator of where the company’s priorities lie.

 Alignment with long term shareholder interests was also a concern when we recently voted against the remuneration policy of the UK’s Diploma PLC. Here the incoming chief executive had been awarded a full year’s bonus for the fiscal year ending September 2019. As the CEO had only been with the company for 7 months the award of a full year’s bonus was impossible to justify. Although the majority of shareholders did vote in favour of the report, an important threshold was crossed. As 20.02% of shareholders failed to support the policy the Board is now compelled to consult with shareholders and explain their actions in the following year’s annual report. If nothing else this should focus the Board’s attention on a more appropriate remuneration structure in the years to come. This is a satisfactory outcome for shareholders and despite SVM’s modest assets under management the 0.02% margin by which the threshold was crossed means our vote was far from wasted.