BP is one of the world's largest energy companies and as a public company it has certain responsibilities to its shareholders. So just how does BP justify a 41% increase to Hayward's remuneration package in the current economic climate and can the shareholders do anything about it?
The directors of BP owe fiduciary duties to the company under common law and under the Companies Act 2006, which include acting in good faith and in the best interest of the company. This would mean that any increase to Hayward's remuneration would have to be considered to be in the best interest of the company in order for it to legal.
As a public company BP also has to have regard to the Combined Code on Corporate Governance, which sets out corporate governance recommendations for UK listed companies.
A remuneration committee's responsibilities generally include setting the policy for the remuneration of the executive management together with determining targets for performance-related pay or share schemes and determining the total individual remuneration package of each executive director. This includes deciding the levels for salary, bonuses, pensions, incentive payments and share schemes. The Combined Code recommends that a company's remuneration committee consists exclusively of independent non-executive directors to ensure as much independence as possible.
The Good Practice Suggestions from the Higgs Report provides that a remuneration committee determines the targets for any performance-related pay schemes operated by a company and that it ensures that failure is not rewarded.
The BP remuneration committee has defended the increase by claiming it was the right decision and that the chief executive should be rewarded for the operational performance.
The remuneration committee's decision to increase Hayward's pay by 41% is particularly curious considering that this is in excess of the its own guidelines for the BP bonus scheme. This would now be the second consecutive year that bonuses at BP have been paid out in excess of the remuneration committee's own guidelines. It will leave many people questioning exactly on what basis the committee reaches its conclusion to award pay increases and whether such large increases may indicate that the BP remuneration committee is not truly independent.
There has been public outcry over the many recent pay increases and bonus pay-outs by companies in general because they seem unjustified and disproportionate in light of the poor performance of such companies and ensuing job losses.
Many people will no doubt reach the conclusion that there must be a short supply of capable executives since companies are so desperate to hang on to the ones they have got that they are willing to pay large sums at a time when profit is down.
A large part of Hayward's remuneration package will no doubt be discretionary. However, if BP continues to pay out bonuses in excess of its own guidelines it might run the risk of executives arguing that it has become custom and practice to pay bonuses above the guidelines and that bonuses at such levels have become contractual.
Public companies are required to prepare a directors' remuneration report and put the resolution on the report to a shareholders vote. The vote to be held will be an ordinary resolution to approve the remuneration report and gives the shareholders the opportunity to consider the company's remuneration policies and the remuneration paid to directors in the previous financial year. The shareholders vote is only advisory and no aspect of an individual director's entitlements under a service contract is conditional on approval by the shareholders.
PIRC, a UK independent research and advisory consultancy providing services to institutional investors on corporate governance and corporate social responsibility, recommended that BP shareholders vote against the remuneration report. However, it appears that about 84% of the shareholders voted in favour of the remuneration report despite the company being criticised for the large pay increases.
Had the shareholders not agreed to the remuneration package there would not be much they could have done directly to change the level of remuneration. However, indirectly shareholders could seek to make their opinion count by putting pressure on the directors in various different ways, but for this to have any weight the pressure would have to come from a majority group of shareholders.
Emmanuelle Ries is a partner and head of employment in the London office of European business law firm Miller Rosenfalck LLP
