Long-term incentive plans ‘fundamentally flawed’, according to shareholder advisory body
PIRC, the independent UK body that advises pension funds and local authorities, is calling on clients to vote against all new long-term incentive plans (LTIPs) this year.
The advisory body, whose clients have combined assets of more than £1.5 tn ($2.3 tn), says its 2013 guidelines place ‘greater emphasis’ on the management of shareholder capital and a tough approach to remuneration issues – especially where pay is linked to company performance.
Supporting investor rebellions that have affected a number of high-profile firms in the past year, PIRC says it will oppose all new LTIPs ‘on the grounds that they are fundamentally flawed’.
‘Our conclusion regarding LTIPs is simple: they are not long term and they do not incentivize,’ says Alan MacDougall, managing director of PIRC, in a company press release. ‘They are also ineffective due to amendments and manipulation by remuneration committees. We believe superficial reform – trying to redesign the same flawed model – is not good enough, so we’re taking the radical step of opposing all new LTIPs. Since the onset of the financial crisis, we have fundamentally overhauled how we look at a range of governance issues.’ He adds that the new guidelines ‘represent a significant shift’ in PIRC’s approach.
PIRC is also taking on the remuneration consulting industry, which has ‘a vested interest in creating complex and accommodating outcomes’, and says that companies offering such services to boards ‘often also have other commercial relationships’. If a company uses the same firm as its auditors when compiling reports and accounts, then these should not be supported, PIRC adds, noting that in such situations, it will no longer support the re-election of the director chairing the remuneration or audit committee.
The 2013 guidelines are also marked by a focus on corporate governance, with PIRC voicing concerns that some companies have used reporting rules to distort the firm’s value. The shareholder advisory body says it will no longer support either the re-election of the finance director or the company accounts in cases where ‘adherence to IFRS has led to a failure of the accounts to provide a true and fair view.’