By Sinead Cruise and Simon Jessop
LONDON (Reuters) - Change the way you pay or risk losing your jobs, corporate governance watchdogs have warned the boards of Britain's top companies, as investors call for a reality check on salaries.
Four years on from 2012's "investor spring" over spiralling executive pay, shareholders are mounting a fresh rebellion against firms they say have lost touch with the real world after a year of falling share prices, lacklustre profits and job cuts.
With the season for corporate annual meetings just days old, oil firm BP (LON:BP) and medical equipment firm Smith & Nephew (LON:SN) have already seen investors reject last year's payouts in non-binding votes. Shareholders in miner Anglo American (LON:AAL) came close. BP and Anglo said they would consult with shareholders to refine policy for the future.
On Friday Europe's biggest bank, HSBC, took pre-emptive action and announced changes to its future potential executive payouts in response to shareholder concerns.
Now investors are warning that if their concerns about pay are not addressed they will stop board members who set remuneration policy from being re-appointed.
"We take a robust approach on the election or re-election of individuals and groups of directors who do not live up to this responsibility," said Hans-Christoph Hirt, co-head of investor advisory firm Hermes EOS.
Investor willingness to challenge boards on pay has traditionally been tempered by a desire not to demotivate CEOs and risk losing them to rivals in a global war for talent.
But after a year in which the FTSE 100 has fallen 5 percent, companies are being asked to justify why their leaders should be so well paid.
"Excessive remuneration has always been an issue as ultimately investors pay for performance not failure," said Isabelle Cabie, Global Head of Sustainable & Responsible Investment at Candriam.
"But investors and other stakeholders have also started looking at this as a 'moral or social justice' issue rather than just a performance issue."
Investors at every UK company can vote yearly on the firm's remuneration report, which details the pay and perks given to executive directors in the year under review. Those votes are non-binding.
Since 2014, shareholders have also been guaranteed separate, binding votes at least once every three years on a firm's remuneration policy, which governs future payouts.
Should more than 50 percent of votes oppose the board, it is required to rewrite the policy, although according to data from vote advisory firm Pensions & Investment Research Consultants (PIRC), that has not happened a single time in 619 such resolutions for the FTSE All-Share firms it tracks.
Eight votes went completely unopposed and more than half had less than 5 percent opposition.
However, the high-profile rejections of BP and other companies in the non-binding votes on the past year could bode ill for some of the 90 percent of firms which need to seek fresh approval for their future policies by 2017.
Data from governance and pay consultancy ISS Corporate Solutions on Friday showed an average of 5.8 percent of votes were cast against remuneration reports and policies so far this year, compared with an average of 3.9 percent last season.
“There is a notably higher level of shareholder voting dissent we are now seeing compared with the same period last year. A number of blue chip companies will hold their meeting in the coming weeks and we anticipate investors will continue to focus their engagement on portfolio firms failing to adequately tie pay to performance,” said Stephan Costa, an executive director at ISS Corporate Solutions.
Shade Duffy, head of corporate governance at AXA Investment Managers said: "There's an absolute need to be conservative – we all know what the wider economic environment is like - and pay should reflect that."
The opening skirmishes of this year's season carry with them echoes of 2012, when investors used their non-binding votes to reject remuneration reports at companies including advertising giant WPP (LON:WPP) and Centamin.
Several CEOs, including Andrew Moss of Aviva (LON:AV) and David Brennan of AstraZeneca, stepped down in the wake of the 2012 "shareholder spring", and the government responded by introducing the tougher rule enabling investors to veto pay policy.
Stefan Stern, director of think tank the High Pay Centre, which aims to reduce the pay gap between the super-rich and everyone else, says this AGM season is evidence of a hardening in investors' approach to board pay.
"I think what you're seeing is genuine and substantial concern being expressed in these votes. There's a bit of 'enough is enough' in the air."
Remuneration consultants who advise companies on their pay policies defend their clients, however, and point to recent innovations aimed at aligning executive pay with shareholder interests.
"Clawback is now going to be there for five years," said Alan Judes, consultant at Strategic Remuneration, referring to the option company boards have to force executives to repay bonuses in the event of poor performance.
"They (companies) are all moving in the way shareholders want them to."
(This version of the story corrects title of Stephan Costa in paragraph 17)
