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Investors shooting themselves in foot with acceptance of "golden hellos"

Pay Awards | Investors shooting themselves in foot with acceptance of Ian Fraser

The £3.3 million, no-strings-attached “golden hello” recently handed by Unilever to its incoming finance director, Jean-Marc Huet, caused dismay among some investors ahead of the Anglo-Dutch consumer goods company’s annual general meeting on May 13.

The main reason that investors, including UK-based Cooperative Asset Management, were so incensed was that the pay award came without any performance conditions attached—and therefore rode roughshod over corporate governance guidelines.

CAM vowed to vote against Unilever’s remuneration report—which included the unconditional award of £2.6m in free shares and £680,000 salary to former Goldman Sachs investment banker Huet to buy him out of the long-term incentive plan at his former employer Bristol-Myers Squibb.

Ahead of the Unilever shareholder meeting, Abigail Herron, corporate governance manager at CAM, said: "We will not tolerate recruitment awards where there is no link to company performance. Such awards undermine the nature of long-term performance awards which are designed to motivate both success and retention. But, unfortunately, such payments are becoming increasingly common."

However when push came to shove,  the promised rebellion against the “golden hello” ended with more of a whimper than a bang.

This may have been because the fund managers who act as intermediaries for a company’s ultimate owners (pension funds, endowments and other institutional investors) actually have little to gain from reining in executive pay awards—according to Andrew Smithers, chairman of Smithers & Co.

But for whatever reason, spinelessness and apathy ruled the day. At the AGM, only 12% of votes [PDF, 28 KB] failed to support the Unilever board's remuneration report and a mere 2% failed to support the re-election of non-executive director Jeroen van der Veer, chairman of Unilever’s remuneration report committee.

As Julia Finch wrote in the Guardian:

“That is shameful and no disincentive for any other company considering paying a golden hello.”

However, continued apathy in the face of management greed may be a slippery slope for investors. There’s a danger that continued tolerance of "golden hellos" along the lines of that given to Mr Huet, leads to a vicious cycle of every increasing pay awards and long-term incentives plans ostensibly designed to ensure executive loyalty, on the one hand, being continually shattered by “golden hellos” designed to undermine loyalty, on the other.

As Herron put it: "We understand that recruitment awards are often used to compensate for loss of bonus from the incoming director's previous job. However, this is a circular argument and does nothing to improve the link between pay and performance when performance targets are absent."

Further reading on pay awards and "golden hellos"



Tags: bonuses , executive pay , fund management , investor relations , Unilever
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