Fidelity Worldwide Investment has stepped forward to register its opposition to overpaid executives by calling for firms to lengthen lock-in periods for share grants to at least five years.
The privately owned firm, which manages about $217 billion for institutions and individuals globally (independently of Boston-based FMR, i.e. Fidelity in North America), last month changed its voting policy on executive remuneration to better align the interests of managers and owners over the long term.
Corporate pay has become a major issue for investors and company boards alike, particularly in the US where pay levels tend to be highest and company ownership holdings most diversified. It comes after a populist backlash against highly paid chief executives that, in the UK, has seen the government table legislation to give shareholders with a supermajority a binding vote on executive pay.
"We can't pretend the issue of executive remuneration doesn't exist," says Fidelity's London-based CIO, Dominic Rossi. "We need a market-friendly solution," otherwise companies and investors could have governments impose more rules. "This places pressure on the asset-management industry to take seriously its stewardship role and assert itself."
To that end, Fidelity has revised its principles of ownership to encourage companies to better align long-term incentive programmes, which typically pay out executives on a rolling three-year basis. Fidelity intends to shift investment to companies with five-year rewards, to better reflect corporate planning horizons and prevent long-tenured executives from continuously cashing out shares.
Fidelity also wants to see a portion of equity bonuses paid as 'career shares', meaning they can vest early but can't be sold until the executive leaves the company. Rossi notes that HSBC Holdings and Barclays Plc have recently enacted such measures, and expects more listed companies to follow.
The issue of executive pay is less prominent in Asia as more firms have controlling shareholders, whether state- or family-owned. In those instances, owners are less likely to overpay people they hire to run their company and more likely to overpay themselves as directors.
Still, Fidelity’s move is welcomed by Hong Kong-based activist shareholder David Webb. “I think it is important for institutions to register their opposition to overpaid executives, even if the vote is non-binding as it usually is,” he states.
“They should still vote to indicate their dissatisfaction. I would be delighted if more institutions would come out and state their policies. So hats off to Fidelity for making a stand on the issue. It is important to recognise the importance of rewarding performance.”
Webb stresses that aligning managers’ incentives as closely as possible with those of shareholders is key as they are more likely to make decisions that maximise shareholder value, particularly if a large portion of their net worth is tied to the success of the firm.
“Of course there is a risk that [Fidelity’s] policy would result in squeezing the system so that their board starts paying more in cash and less in shares. It could backfire if people think the voting policy is so strict they would rather not have shares at all and just be paid a cash bonus.”
Rossi says Fidelity is deliberately vague about timetables. The firm doesn't want to suddenly force itself to cash out of the majority of its equity holdings. "We want to nudge the debate in the right direction," he says. But at some point Fidelity will start to vote against managements that do not meet its revised principles. "We are very serious about this," he says.