Some of the UK’s largest companies are to be encouraged by two large
investors to link their senior executives’ pay to aspects of social and
environmental performance.
The Universities Superannuation Scheme, which is the country’s second
biggest pension fund, will raise the matter when engaging with FTSE100
companies over the next year and will be supported by the fund
management company Henderson Global Investors.
The pair decided on their course of action after a joint analysis of
existing links between FTSE 100 directors’ pay and non-financial
performance uncovered only a handful of examples. There was also room
for improvement among those companies that did link directors’
remuneration with the social and environmental performance of the
business. Now they will have ‘ongoing discussions’ with companies, and
‘bring the subject up with fellow investors, remuneration consultants
and other interested parties’.
USS and Henderson highlight seven companies – BHP Billiton, BT, Rio
Tinto, Scottish and Southern Energy, Shell, United Utilities and
Vodafone- that link executive remuneration with social and
environmental targets. Most use key performance indicators, ranging
from one (on customer satisfaction) at BT, to four each at BHP Billiton
and Shell.
The payments range from ten per cent of annual bonus awards at BHP
Billiton to one third at Scottish & Southern. Some incentives based
on non-financial measures were not conditional on the company’s
financial performance.
United Utilities is considering whether to introduce non-financial
factors into long-term incentives in some way, but this approach was
rare.
The funds would also like to see more companies linking share-based
incentives to non-financial performance, as they believe this would
send a clear signal to executives about management issues that matter
most to a company and would relate to long-term company results. Only
BHP Billiton, BT and Scottish & Southern used such share-based
incentives. Before awarding bonuses, most had the performance data
verified by a third party.
USS and Henderson are to urge companies to introduce such linked
incentives as a way of encouraging boards to build the value of the
business over the longer term and to disclose when they begin offering
them.
The two investors’ study is in line with the Association of British
Insurers’ guidelines on social responsibility introduced in late 2001.
These warn companies that ‘investors are likely to seek from the annual
report … ‘whether any remuneration incentives relating to the
handling of social, environmental and ethical risks [are] included in
risk management systems’.
