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Investor scrutiny of exec remuneration to continue, says FTI

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Publicly held companies will be subject to increased investor pressure on executive remuneration through and beyond the "shareholder spring", according to the latest research from FTI Consulting,

Eighty-eight per cent of the more than 170 global institutional investors polled by FTI Consulting say that executive compensation is important to their investment decision, with 62% wanting an annual say-on-pay vote. While some of the investors support a variable cash compensation cap of 100% of salary (18%), the ability to claw back payments (38%) and a deferral of variable compensation into shares (58%), even more are asking for greater transparency: Sixty-seven per cent want disclosure of specific performance targets for variable compensation.

The research found that, on the issue of remuneration, investors are starting to use their voting power to communicate dissatisfaction with performance to their portfolio companies and to better align pay with performance and shareholder returns. Seventy-two per cent of investors think that a threshold of below 30% of shareholders opposing executive compensation is enough to warrant a corporate response, while 15% believe that 10% or less is enough for a corporate response. This clearly signals a shift in shareholder power where, historically, companies often would receive votes in excess of 90% for most, if not all, resolutions put to a shareholder vote.

"Investor focus on executive remuneration is not confined to a few high-profile cases nor to a single region or market," says Mark Kenny, Managing Director in the Strategic Communications practice of FTI Consulting. "We surveyed investors across all major financial centres and found they expect greater transparency from companies on executive remuneration and will exercise their votes to address any variance between executive compensation and performance.

"These findings support our own experience of working with companies, institutional investors and proxy advisors that corporate governance, and executive remuneration in particular, is a subject that requires greater transparency, disclosure and dialogue. We believe that the long-term interests of companies and their owners are best served through constructive and continuing dialogue."

The research also found that board directors no longer can rely solely on written communications with shareholders. Ninety-two per cent of the investors surveyed say that companies need to engage in corporate governance road shows with major shareholders, with over half (58%) expecting it once a year. Moreover, shareholders want to hear more from the chairman. Fifteen per cent expect the chair to be constantly accessible, and a further 52% expect to hear from him or her at least once a year.

"The requirement, under best practice governance guidelines, that a board understands the views of major shareholders is strongly endorsed by investors. This appears to place a more affirmative obligation on a board to actively engage, through established channels, with principal shareholders," says Kenny. "It is also becoming established practice for issuers to undertake corporate governance road shows. An annual governance road show is increasingly seen as best practice even in circumstances where there are no perceived governance issues or contentious resolutions for the annual meeting."

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