A new type of advisor
3 October 2006 Marcus Peaker
The prospect of yet another type of advisor when floating a company will probably send shivers down the spines of CEOs.
The identify of this advisor as a remuneration consultant does not always improve the situation – after all why does the company need someone to tell them what to pay their executives – isn't the answer blindly obvious? In addition, there is often a high degree of suspicion and concern from some CEOs about involving a third party in an area where, to a large extent, they have had the first and last say.
Unfortunately in this day and age executive pay is a significant issue for listed companies on the main exchange and increasingly for AIM companies.
The price of getting it wrong can be a lashing from the company's institutional shareholders, the potential embarrassment of the company's remuneration report being rejected and a crash course in the terminology used by their representative bodies with the worst 'excesses' given a 'red top' by the Association of British Insurers – this is not a distinction that the board will enjoy.
All of this can damage relationships between the company and its investors, use up valuable management time and in some cases result in executives reading about their pay in the press. Reading about your pay in the press it something that no executive enjoys – unsurprisingly, as in most cases the context is not flattering.
In addition, with the virtual universal setting up of remuneration committees in listed companies CEOs may need to accept that the process of establishing and setting senior level pay is a more collaborative exercise than perhaps when the company was private.
THE REMUNERATION CONSULTANT
What can a remuneration consultant do to help a company on listing to avoid the above situation?
- Provide an independent view to the board. The remuneration consultant is not providing accounting, legal or banking services to the company on flotation, this allows the advice to be provided without overdue concern to the consequences of that advice on the other services also provided to the company. Clearly there is never a problem when the consultant is telling directors that they are underpaid – matters can become more interesting when the opposite advice is being given.
- Help the company design a remuneration policy that can be explained in the company's report and accounts which satisfies the requirements of good corporate governance but also meets the company's business needs.
- Help the company transition its pre-float bonus and share plans to arrangements which will be supported in the listed environment.
- Give the company an indication of where its current compensation package stands compared to its listed competitors.
- Advise the company on corporate governance issues in relation to the appointment and remuneration of non-executive directors and the formation of the remuneration committee.
IS IT NECESSARY?
The question that often gets asked is why do we need a consultant to advise us on this? Can't our accountants, bankers or lawyers give us this advice? The honest answer is yes and no.
Some of the services provided by remuneration consultants are also provided by these other types of advisors. However, there are few that will have the depth and width of experience to cover all the areas to the same standard as a remuneration consultancy. Some of the typical issues that arise are:
- Accountants – the most comprehensive offering in this area is generally provided by the big four accountants. The accountants can be a good source of this type of advice. However, it is only one of a multitude of services provided on a flotation and not their main focus. In addition, while recognising the sweeping generalisation being made, their advice is often stronger when it comes to the technical and tax aspects of remuneration rather than market practice and more commercial considerations.
- Bankers tend to give the most problematic advice in this area, mainly because they do not want to do it, tend to recognise that they probably do not actually have the expertise and, perhaps the most important final nail in the coffin, are unlikely to be paid for providing the advice. From the bankers perspective the more plain and bland the proposed executive compensation the better, as this is the least likely to upset any potential investor.
- Most law firms will provide share plan documentation. However, often they cannot provide the most useful advice in connection with these plans such as what type of plan should we use, what levels of grants should the company provide, what performance conditions should we use and what will the reaction of institutional shareholders be to the proposed operation of our plans. In addition, it is rare for a law firm to be able to provide the remuneration benchmarking and general advice on the levels of other elements of the compensation package provided to executives.
Anecdotally the best indication of the benefit a remuneration consultancy might have provided a company on flotation can be seen by the timing of their appointment.
Remuneration consultants often get appointed immediately after the first AGM when the corporate governance officers in the company's institutional shareholders first consider a company's remuneration committee report.
Just because no issue is raised about the remuneration in the prospectus when investors are buying into the float does not mean that the very same investor will not have kittens about the remuneration at the first AGM.
The audience has changed from the fund mangers who are concerned about valuations and price to the corporate governance officer who cares about levels of remuneration, structure and best practice. When you are not expecting this it can come as a considerable shock.
At worst a remuneration consultant advising in respect of the flotation will give you a heads up about the issues you will face, at best you will be provided with a solution which still meets the company's objectives.