Now Aberdeen Asset Management has been compelled to clarify its remuneration policy for departing employees, will other listed asset managers face shareholder pressure over executive pay?
Aberdeen responded to criticism of its remuneration policy ahead of its AGM earlier this month by stressing that incoming executive directors will not be entitled to a bonus after they have left the company, except in exceptional circumstances such as ill health.
A spokesperson said the company did not believe in rewarding failure, with executive bonus awards taking account of key financial performance indicators.
Shareholder activism on remuneration has not been commonplace, but since October of last year, shareholders have had a legally binding vote on directors’ remuneration in a listed company. This means more than half have to agree on a policy for it to be passed.
The changes were the brainchild of business secretary Vince Cable, who wants there to be a ‘clearer link between pay and performance’.
The new rules also force firms to reveal how much chief executives are paid as a single cumulative figure, rather than a potentially complex breakdown of their salary and various benefits. If they leave the company, their payoff must also be made public.
Aberdeen was one of the first companies to be affected, but other firms may also come under pressure to make changes so they do not appear to be ‘rewarding failure’.
Paul Hewitt, a business development manager at Manifest, a leading proxy voting and corporate governance support service, believes the fact that Aberdeen issued an update of this kind was significant because the firm was aware of how a less specific policy could look to shareholders.
‘It’s interesting that Aberdeen specifically referred to the fact that it won’t apply in the case of poor performance because they are cautious of what the public response to that kind of announcement could be,’ he said. ‘Investors are a little bit more focused now, and they are less willing to assume the best where there is doubt.’
Hewitt believes Aberdeen’s move could set a precedent for AGMs in the future.
‘Reputationally speaking, in the financial and banking sectors that is going to be something to look out for in the coming earnings season. They are setting their stall out for shareholders, to see where they are happy with things or not.’
Peter Michaelis, head of sustainable and responsible investment at Alliance Trust Investments, predicts the asset management industry ‘definitely will’ see others following Aberdeen’s lead, now that shareholders can throw out policies they find unacceptable.
‘Now it is binding, it will be something boards take more seriously,’ he said. ‘From a societal point of view, executive pay has risen disproportionately to the rest of the economy. Where shareholders like us can get involved is to make sure that pay is linked to performance – that is the first step.’
But he said this does not spell the end of big bonuses.
‘The remuneration committee are trying to make pay and policy reflect what these leaders are achieving. But the proof is in the pudding. Has that really affected what chief executives are being paid? I don’t think it has that much.’
Dominic Johnson, founding partner and chief executive of Somerset Capital Management, added: ‘Bonuses should be for exceptional performance. If someone is being dismissed, how can they perform exceptionally? The whole point is they should be variable.’
But he does not think more regulation would be the answer. He prefers a cultural change, which he believes would be ‘more powerful’.
Johnson is also deputy chairman of the New City Initiative, a think-tank of 43 independent asset management firms that aims to provide an expert voice on financial regulation.
He said: ‘I would prefer there was not regulation around this but anything that gives shareholders more power is a good thing. I admire what [Aberdeen chief executive] Martin Gilbert (pictured) has done with that company hugely and if other firms follow suit is great.’
Johnson also emphasised that asset managers are largely better at self-regulating than the large banks, but don’t always get the credit for it.
David Norman, formerly CEO at Credit Suisse Asset Management and co-founder of TCF Investment, argues the cultural shift described by Johnson has already taken place, with shareholders ready to question guaranteed payouts.
‘There is a kind of societal shift over what is reasonable and what you can’t get away with. A chief executive can’t earn 20 times what their employees do now,’ he said.
‘It used to be if you couldn’t pay the bonus you couldn’t get the right people but now people are thinking, “hang on, if you don’t give us the performance, why should you get the reward?”’