Pushback from shareholders at last year’s AGM, where both non-binding resolutions on remuneration failed to be approved, seems to have caught FirstRand off guard.
Both resolutions received votes in favour just under the 75% threshold. This, says FirstRand chair Roger Jardine “gave us cause to undertake some deep introspection”.
“I have always believed that the group’s remuneration practices were well aligned to shareholders, in that we ensured that management has never done better than shareholders.”
The group says over the past six years “growth in normalised earnings, NAV [net asset value] and dividends per share has exceeded the growth in prescribed officers’ and executive directors’ total remuneration”.
The group completely overhauled its remuneration report this year, and Jardine says it outlines “the process we went through to understand the issues, which we saw as partly design and partly disclosure”.
“We engaged with investors and analysed proxy voter services’ reports on design and commissioned independent research to benchmark our disclosure relative to local and international peers. We have made significant changes to both, and I hope this better demonstrates that true alignment between management and shareholders does exist.”
Its follow-up call with shareholders on January 31 was attended by those representing a significant 38.58% shareholding. During this call, hosted by Jardine and chair of the board’s remuneration committee Grant Gelink, a number of concerns were raised:
1. The link between performance and variable pay (short-term incentives) is not clear.
2. Annual bonuses/short-term incentives (STIs) are more material than long-term incentive (LTI) awards, leading to a perception that short-term performance is favoured.
3. The group does not reference total shareholder return as a performance metric.
4. LTI targets are not ‘stretch’ enough, are too simplistic and do not cover holistic performance.
5. Remuneration committee discretion regarding LTI vesting was questioned.
6. Cliff vesting (either 0% or 100%) of the LTI awards was questioned, with some shareholders expressing the view that a proportionate or pro rata (graded) vesting should be applied.
7. No differentiation across management levels for LTI vesting conditions.
Gelink says the remuneration committee (Remco) “believes that the changes implemented, and the improved disclosure in this report, substantially address these concerns”.
“Additional disclosure of executive director and prescribed officer performance metrics, which formed the basis for its considerations in determining annual bonuses” are provided in this year’s report.
The metrics used for CEO Alan Pullinger, COO Mary Vilikazi and group financial director Harry Kellan are normalised earnings growth, return on equity, net income after capital charge, growth in net asset value and dividend per share growth.
Detailed financial and operational metrics are provided for each of the prescribed officers (FNB CEO Jacques Celliers, Wesbank CEO Chris de Kock, RMB CEO James Formby and Aldermore CEO Phillip Monks).
Celliers is measured on the following operational metrics:
“Remco acknowledges that the appropriate mix of STI and LTI is key to shareholder alignment and is proactively reviewing and incrementally adjusting the mix to achieve outcomes anchored to long-term performance.”
Share price link
It argues that a “movement in share price cannot always be correlated to [the] strategic efforts of management, and therefore Remco believes that it is inappropriate to drive management behaviour through setting performance targets against the share price [which is a significant component of total shareholder return]”.
“The value of the award is indexed to the FirstRand share price, however the LTI vesting criteria are based on continued employment and performance conditions linked to ROE [return on equity] and earnings growth, which are largely under management control and drivers of shareholder return.”
Following feedback from shareholders, the deferred portion of short-term incentives for executive directors and prescribed officers has been extended to “up to 36 months, indexed to the change in the FirstRand share price over the same period”.
“Remco is required to assess performance, and balances that assessment against various objectives and constraints, which requires experienced judgement. As such, Remco does not believe a purely formulaic approach is appropriate in discharging its responsibilities. However, this judgement is fully anchored to the group’s performance management framework and takes into consideration key sustainability metrics along with the overall remuneration philosophy.”
It is not clear where the opposition to these resolutions came from.
The Public Investment Corporation, the group’s second-largest shareholder with a 9% holding, did not vote against the remuneration resolutions according to proxy voting records.
Coronation and Investec Asset Management did not oppose them either.
Old Mutual Investment Group notes that “a vote against [either] isn’t warranted”. On the policy, it says it has “previously engaged the company on their remuneration policy and the metrics for performance criteria and stretch are not of concern”, while on its implementation, it says “upon engagement, the company has explained the increase in relation to the [financial director] and his significant expansion of role within the company as well as his pay structure against peers.”
Prudential, however, notes that it voted against the advisory endorsement of remuneration implementation report.
Hilton Tarrant works at YFM. He can still be contacted at firstname.lastname@example.org.