Indepth: the protest over Man Group’s pay

At Man Group’s May 8th annual general meeting, 42% of shareholders voted against its remuneration policy and 34% against its remuneration report, with a further 1.8% abstaining from the latter. This amounts to one of the largest remuneration-protest-votes of the season.

What sparked the ire of shareholders? Let’s take a walk through Man Group’s recent history. During the good old days circa 2007 and 2008, shareholders routinely saw share prices over 600p. Fast track to the last day of 2012 and Man Group’s shares closed at 82.75p – a mighty fall for one of the biggest listed hedge fund firms in the world. An explanation of what caused this fall can be read here.

This free fall was presided over by CEO Peter Clarke. At the height of Man Group’s performance in 2008, Clarke took home $27 million in earnings. By 2011, he was restricted to a generous $7 million package while shareholders saw their shares fall dramatically in value. Finally, in 2012, performance was so poor that there was nothing the remuneration committee could do to justify awarding Clarke a bonus or a long-term incentive. He saw his income drop to just over a meagre $1 million.

Early in 2013, Clarke stepped down. He was succeeded by Emmanuel Roman, the head of GLG, which had been taken over by Man Group in 2010. In transitioning from GLG to Man Group, it was agreed that Roman would retain his $1 million base salary even though this was higher than the salary earned by Clarke. With his contract in hand and his salary secure, Roman was tasked with turning the company’s fortunes around.

2013 was set to be a year of difficult decisions, restructuring, and lay offs. The year-end share price increased only marginally between 2012 and 2013, and some of the CEO’s performance targets were not met. While the 280-plus laid off employees were packing their desks, Roman was awarded $3,397,163 in total earnings, including a $1.75 million bonus and long-term incentives (‘LTIs’) valued at almost $600,000. Former CEO Peter Clarke took home $811,494 during his 2013 gardening leave, likely more than many of the laid off employees combined.

It is not surprising that at the 2014 annual general meeting, the advisory vote to approve the remuneration report disclosing these payments saw 31% of votes being withheld. The steady decline in Man Group’s shares, the lay offs, and the handsome rewards being earned by executives combined to cause shareholders to protest in silence by withholding their votes. At the same meeting, Man Group introduced its new 2014 remuneration policy for its first binding shareholder vote. This policy imposed a cap on bonuses and LTI awards at 250% and 350% of salary respectively, and was approved with very little complaint. Shareholders signalled their dissatisfaction with actual pay levels by withholding votes but did not actively campaign against the new remuneration policy.

By 2014, it was clear that improvements had been made at Man Group. The tough decisions made in 2013 had helped to turn the company’s fortunes around. The closing share price at the end of 2014 rebounded to over 160 pence, profits were up, the dividend increased and the company announced a share buy-back program. All of these results pleased shareholders. Following this performance, Roman was awarded $5,067,792 in remuneration, including his $1 million salary, the maximum $2.5 million cash bonus and $1.4 million in LTIs. This last payment constituted only 40% of his maximum potential LTI entitlement because 2013’s performance continued to play a part in the calculation.

As a result of the successes of 2014, the board decided that it should strike while the iron was lukewarm. Despite the fact it had just passed a remuneration policy in 2014 which would be valid for three years, it now wanted to amend this policy as being far too restrictive. This decision demonstrates either short-sightedness, or cunning evasion on the part of the board. My vote is for cunning evasion

Now that shareholders were mollified, bonuses of 250% and LTI awards of 350% of salary were no longer going to cut it. The board wanted the ability to reward executives like they had in the golden years and it saw a window of opportunity to increase the maximum potential bonus to 300% of salary and LTI to 525% of salary. All along, the board knew it would increase maximum payouts under its remuneration policy, but it also knew that such a decision would not have been possible when Man Group had been performing so poorly. Instead, it waited for the very first year of good performance to do so.

It is telling that in the Notice of AGM, the board disclosed that it had made the decision that limits placed on 2014 awards should no longer apply, stating that:

Man Group’s more restrictive incentive limit was imposed deliberately at that time as the Board wished to signal to the executive directors and provide assurance to our shareholders that it would not be awarding high levels of compensation so long as the Company’s performance remained disappointing. [emphasis added].

Evidently, bonuses of 250% of salary and LTI awards at 350% of salary do not constitute high levels of compensation. Also evident, it was a deliberate decision to impose restrictions on pay during a period of poor performance and to increase those limits once that period was over.

This proved to be a risky decision. 42% of shareholders voted against the new policy. However, Man Group’s cunning paid off because only 50% support was required for the new policy to take effect.

In response to the shareholder vote, Man Group released the following statement:

While the Board notes that there were a significant number of votes cast against Resolution 2 (approval of the new Directors’ remuneration policy) and Resolution 3 (approval of the Directors’ remuneration report), it has found that, as part of an extensive period of engagement with the Company’s major shareholders ahead of the AGM, the majority of those shareholders with whom the policy proposals were discussed were supportive….

It is clear that Man Group does not view the 42% dissent as problematic. It now has free rein to resume hefty payouts to executives without addressing the concerns of those 42%. As Tom Powdrill, another blogger, has put it, this response amounts to saying “we’ve talked to our shareholders and the ones that count agree with us..”

I would add that they are probably thinking: Now will the rest of you just go away already?

Let’s hope that three years from now, when Man Group is required to put another remuneration policy to a binding vote, Man Group shareholders do not just go away. Shareholders should use the next three years of advisory votes on the company’s remuneration policy to voice their displeasure. This will maximize the chances that Man Group will listen to the 42% the next time it develops a remuneration policy. Until then, we await the results, and payouts, of 2015.

Two strikes and you’re out

The past few weeks have been active ones at UK annual general meetings, as multiple companies’ shareholders have rebelled against their executive remuneration reports. In the past two weeks alone:

  • 16% of shareholders at RSA Insurance voted against its remuneration report;
  • 18% of shareholders at BG Group voted against the remuneration report;
  • 18% of Reckitt Benckiser shareholders voted against the remuneration report;
  • Ladbrokes saw 30% of votes cast against its remuneration report;
  • 28% voted against the remuneration report at Inmarsat, rising to rising to 35% if deliberate abstentions are included;
  • 33% of Centrica’s shareholders cast negative votes against the remuneration report;
  • 36% of shareholders at Tullett Prebon voted against the remuneration report; and
  • 42% of Man Group’s shareholders voted against its remuneration policy, and 34% against its remuneration report.

What will come of these protests? Likely not much. In its response to the 42% negative vote, Man Group stated that the majority of its shareholders were supportive of its remuneration policy. While this is in fact true, a 42% negative vote indicates that something is wrong with remuneration in the company. This outpouring of negativity should not be ignored or brushed off by the executive with flippant remarks.

What will force remuneration committees to react to these negative votes? Currently, so long as 50% of votes are in favour of the remuneration report, there is no requirement for companies to respond when a large proportion of shareholders vote against it. In recent years, Australia introduced a rule incentivizing companies to respond if 25% of votes are cast against their remuneration policies for two consecutive years. If this occurs, shareholders must vote to determine whether the entire board must stand for re-election. Known as the ‘two-strikes rule,’ this has provided motivation for boards to respond to negative criticisms of pay policies.

Perhaps if their jobs were on the line, instead of just their salaries, remuneration committees and executives would have a better response to investors when their remuneration reports receive such negative support. Until then, we must wait for reports to outright fail before we can be assured that we will see action.

Escorted out in handcuffs – the golden ones

When an executive leaves a company following the release of disappointing results or mismanagement, the payment of a golden parachute (a generous severance package) is often seen as rewarding the executive for failure, sparking the ire of shareholders and the public alike. More problematic is the practice of granting lucrative golden parachutes to executives who resign in order to accept a high-ranking appointment in the government. A recent article in the Financial Times explains how some banking executives receive generous payments upon entering into public service in the United States, payments they would not have been entitled to had they joined any other employer. For example, Jack Lew, who became head of the US Treasury in 2013, was permitted to retain all of his incentive rewards upon leaving Citigroup, a benefit which is uncommon for employees with unvested incentives. His new counsellor, Antonio Weiss, received $21 million upon leaving Lazard for his government position.

Instead of being called golden parachutes, these payments would be more aptly coined “golden handcuffs”. The phrase golden handcuffs usually refers to incentives used to tie an executive to a company and prevent them from joining a competitor. However, in this case, the handcuffs work by incentivizing the employee to leave the company for a position of influence in the government, and to then use that influence for the betterment of the company. Though no longer an employee of the company, the executive remains tied to it out of a sense of obligation and indebtedness, and may be inclined to repay the company in political favours. We must seriously question whether handcuffed civil servants are truly engaged in “public” service once they have been paid millions of dollars by their previous employers, or whether this payment ensures the civil servant’s support in the policy making process.

Even more problematic is the limited requirement to disclose these payments. Corporate governance standards only require disclosure of an individual’s remuneration if the recipient of the payment is the CEO, CFO or one of the top three earners in the company. Thus, unless the departing employee happens to be one of these individuals, or is subject to a confirmation hearing where he is directly asked about his remuneration, the public will never know whether he has been “handcuffed.”

AFL-CIO recently tabled a proposal at Citigroup’s annual general meeting which would have required Citigroup to disclose any golden parachutes paid out to employees entering government service. Unfortunately, this proposal only received 26.4% of votes in its favour. This result is not particularly surprising. Shareholders are not trustees of our democratic institutions. Most self-interested shareholders would support corporate actions that ensure a favourable political environment for their investments.

Instead, government action is needed to disallow payments to incoming government employees, or to at least require their disclosure. Companies should be prohibited from making payments to employees bound for government positions if those payments are different from what the employee would have been entitled to had he left for a position with any other company. Public servants should not be handcuffed to their former employers, and if they are, we should at least know about it.