The Advisors' Blog

– Broc Romanek

Here’s an article from the “Financial Times”:

BlackRock has demanded an end to pay awards that outpace ordinary employees at the UK’s biggest companies ahead of a round of critical shareholder votes in 2017. The world’s largest asset manager is also pressing companies to curtail the generous pension packages that are commonly granted to top executives, calling for retirement contributions to be “in line with the rest of the workforce”. BlackRock’s tougher stance on executive pay is detailed in a letter, seen by the Financial Times, that was sent last week to the chairmen of all companies in the FTSE 350 index. The letter will provide fresh ammunition to campaigners calling for reform of executive pay.

Total pay for bosses of FTSE 100 companies has quadrupled over the past 18 years as repeated efforts by shareholders to control spiralling remuneration awards have failed. BlackRock initially indicated that its stance on executive pay had hardened during a parliamentary hearing in December, when it said it would vote against members of remuneration committees that agreed to excessive rewards. The asset manager’s letter goes further, arguing that pay increases for top executives should reflect those given to the broader workforce. “In the case of a significant pay increase that is out of line with the rest of the workforce, BlackRock expects the company to provide a strong supporting rationale,” said Amra Balic, head of BlackRock’s investment stewardship team in Europe.

The letter also states that board committees should consider and respond to voting results on remuneration awards at the previous year’s annual shareholder meeting. Companies historically have frequently used comparisons with pay awards made to executives at peer groups as a justification for agreeing more generous remuneration packages for executives. BlackRock is highly critical of this widespread practice, known as benchmarking. “Benchmarking should only be used as a frame of reference for what competitors are paying, rather than as a starting point for negotiations,” said Ms Balic.

Companies should also disclose more information about their use of remuneration consultants, including the names of those appointed and their fees, she said. Roughly half of the companies in the FTSE 350 index will face binding votes on pay in 2017. Binding votes give shareholders the final say on executive pay awards, instead of company directors. Anger among pension funds over the long-running failure of companies to curb excessive pay for top executives is threatening to spark a fresh round of shareholder revolts this year.

Theresa May, the prime minister, has promised to tackle the issue and the UK government published a consultation paper in November that outlined a range of possible reforms. The government wants the link restored between executive pay awards and company performance. Academics say the metrics used most widely to judge performance — earnings per share growth and total shareholder return — are easily manipulated and promote damaging short-term decision making by executives. “We are wary of companies using metrics such as earnings per share or total shareholder return [as performance measures],” said Ms Balic. BlackRock would instead “encourage” companies to use fundamental measures of the value created by a company such as comparisons of returns on invested capital, she added.