Our performance has been so bad that we must pay our executives more. If this corporate pitch for an increase in top-level rewards strikes you as laughably unconvincing, you’d be surprised.
At Smith & Nephew, the FTSE 100 medical devices group whose shares were touching £20 in 2019 but are now £10, 57% of votes on Wednesday were cast in favour of the new remuneration scheme. The rebellion was large, but ultimately the company won. Instead of chasing a potential $9.5m (£7.6m) a year – he actually got $4.7m last time – the chief executive, Deepak Nath, can now shoot for $11.8m.
At least the head of the remuneration committee, Angie Risley, didn’t try to disguise the severe limp in the artificial hip-maker’s share price. “We understand that some investors would ideally wish to see the financial performance meeting expectations in advance of increasing LTI [long-term incentives],” she wrote in the annual report. Yes, “ideally” the horse comes before the cart.
The board’s argument was that the changes must happen now to “incentivise long-term stability”, a reference to the fact that Nath is the fourth chief executive in five years and every switch has caused what Risley calls “an increase in downstream senior leadership attrition”. So pay up if you don’t want more chaos.
In other circumstances, one suspects even pusillanimous City fund managers would have kicked out this proposal. But the clinching factor was that the plan came draped in stars and stripes. Smith & Nephew is “British in listing only” – a Brilo – as the chair, Rupert Soames, puts it, because less than 4% of its revenues are generated in the UK and more than half in the US. Since most of the executives, including Nath, work in the US, home of megabucks rewards, Soames could argue that that’s the hiring pool that matters.
It is, one has to concede, a point that can’t simply be ignored. The pay numbers are absurd in the abstract, but there’s no denying that the gap between boardroom pay norms in the UK and US has widened in recent years. Smith & Nephew can also point out that one of its revolving cast of chief executives did indeed quit over pay. And note that the finance director, who will continue to count the numbers from Watford, will stay on a more conventional UK package.
None of which makes the sums easier to swallow. But we’ve now had three high-profile votes in which Footsie companies, against a backdrop of panic about defections from London, have played the US card as an ace and they have won every time. At the London Stock Exchange Group last month, 89% were in favour of a scheme to double the boss’s max to £13m. At AstraZeneca, 64% approved a boost for Pascal Soriot to a potential £18.7m, with implied uplifts for US-based research chiefs.
At 3-0 to the Brilos (or semi-Brilos as the other two really are), there’s little point in grumbling that the system is a racket and that a chief executive, wherever he works, ought to be able to get out of bed for $9.5m a year. Smith & Nephew approached this vote from a position of extreme weakness, and it still got over the line. The boardroom pay game in the UK has changed for ever.
