Daily Lessons from Life 16 February 2010

"February 16, 2010, 7.08 pm (Singapore time) - Shell to curb pay, bonuses after investor revolt

LONDON - Royal Dutch Shell Plc said it was overhauling its pay practices for top management, including a pay freeze for its chief executive, Peter Voser, and a limit on bonuses, after a shareholder revolt last year.

The head of Shell's remuneration committee said salaries for Mr Voser and Chief Financial Officer Simon Henry, which are 20 per cent lower than their predecessors', were being frozen until 2011.

Directors will not, this year, be allowed to award management bonuses if they fail to meet pre-agreed targets."

Executive compensation has always being a fascinating subject for many who were appalled at the lack of accountability and compatibility to performance and rewards in the past. The so-called bankers' pay (which as far as I am concerned really meant: traders) in the USA and around the world is famous or infamous for outsize rewards using other people's money to bet on trades one way or the other without creating any real physical goods and economic activities. The best part is they do not have to take responsibility when they lose except to walk away from their 'jobs'!

Lessons for me are:

1. it is good that investors are up in arms against the overly generous and forgiving attitude of the 'board of directors' on the top management's reward scheme. One expert has said in the past that expecting the 'directors' to watch over the compensation of the top management is like asking 'cats hired by the fat cats to watch over the fish' where impartiality is hard to achieve sine the 'cats' are hired, in some way, by the 'fat cats'!!;

2. Europeans used to balk at the 'excessive' compensation drawn by their USA counterparts as their sense of appropriateness relative to the ordinary and honest and hardworking workers (blue and white collared) is it cannot be more than 20x or it cannot exceed X millions! It makes a lot of sense as management and workers are working for the shareholders if you like and the shareholders are the last to get paid when the company turned a profit after deducting the pay of the management and workers. So, why should the providers of capital be penalized for taking a higher risk! i.e. last to get paid!!;

3. it is wonderful that giant corporations like Shell is taking the lead to do the right thing on executive compensation. The requirements of:

a. linking compensation to a longer term performance measurement i.e. 2-year after initial performance is measured;
b. putting more into stock instead of cash; and with a claw back clause in case mis-statement of performance occurred!;
c. capping the top salaries of the top management to a number of multiple that demeaned the salaries of the lowest paid employees;
d. making executives accountable to the rewards they get instead of just some arbitrary awarding of bonuses even when pre-agreed targets and goals were NOT met!!

For me, I believed that a top management's compensation must be split into fixed and variable portion when the fixed portion must NOT be more than 10x the lowest paid employee's fixed salary while the variable part can be any number of multiple of the profit generated as long as the shareholders approved it!