Comment 

Weir not in this together

No Free Lunch

Suppose a price slump plunges the company you work for into loss. It has no control over the pricing problems that have caused its clients to cancel orders and the strategy now is to cut costs. Your salary and benefits are frozen and, despite all your efforts, your annual bonus ends up being cut by two-thirds. Now suppose that there's no end to it. In each of the past few years, the pay you receive has been cut. Last year you received just a fifth, to be precise 22.5 per cent, of what you received four years ago. What would be your reaction?

No fantasy, this. It is what Keith Cochrane has experienced at Weir (WEIR) since becoming its chief executive (see the table below). You could argue that it is right that he takes responsibility for Weir's performance – after all, he is in charge – but why has his pay fallen so much? The main reason is that his matching and performance share awards have failed to pay out in the past two years, due to shrinking earnings per share and an underperforming share price. As Melanie Gee puts it in Weir's annual report, the remuneration committee, which she chairs, is struggling to set realistic targets for both the annual bonus and current performance share awards, given “the unprecedented end-market environment for both our Oil & Gas and Minerals divisions”. Together, these two divisions generated 87 per cent of Weir's revenues in 2015.

The truth is that Weir is a cyclical business and is geared to economic growth. In the upswing, its pumps and sophisticated engineering services are in demand; in the current downswing, where its clients have collectively over-extracted both oil and commodities, demand has shrunk. Between 2008 and 2011, a tailwind helped Weir's share price to surge. The same tailwind helped it pass its performance conditions in full, and the value of Mr Cochrane's vesting shares was much higher than his initial award. Similar windfall gains applied the following year. Then the downturn began to bite and the opposite happened. Weir's share price fell from a peak of £27 in late 2014 to below £9 in February this year.

You could argue that volatile pay comes with the territory and a long-serving chief executive must expect to take the rough with the smooth. But this clearly troubles Weir's directors. Senior executives – about 260 of them – have also suffered pay cuts. There is an increased risk of losing key people. So the directors consulted their largest shareholders and tailored a new policy around their consensus view. One answer would be to design performance conditions that stabilise pay over the cycle so that people have a better idea of what they'll get in three years' time, and to dovetail them with company strategy.

Instead the directors chose to scrap performance conditions for most people. The chief executive would be awarded shares worth

165 per cent of his salary, of which 75 per cent would still have performance conditions and 90 per cent would not. Shareholders' positive responses made directors confident that they supported the new pay policy. It had been built around their feedback and was in step with the thinking of the Investment Association's Working Group on Executive Pay. But then some had second thoughts. Modest as it was, the policy proved too radical. It did not follow standard UK practice. At the AGM, 70 per cent voted it out.

Shareholder votes on pay policies are binding on companies, so all that Weir's directors could say is that they are “looking forward to further engagement with shareholders regarding remuneration”. You bet they are. Meanwhile, shares under Weir's old scheme, still with the old volatile performance conditions, have been awarded to Mr Cochrane. They are potentially worth 250 per cent of his salary. Weir's share price has already gone up by a quarter since the award was made and it's possible that tailwinds might return to blow Weir past its performance targets in three years' time. Ironically, Mr Cochrane could end up with shares worth far more than was proposed at the annual meeting.

Now there is another uncertainty, for what if shareholders vote down its remuneration report next year and Theresa May has kept her surprise election pledge to bring in binding shareholder votes on executive pay packages? Currently such votes are advisory – when the coalition government introduced binding votes on pay policies, they shied away from going further. They feared the legal consequences if a company were to agree pay with an executive, possibly after delicate negotiations, only for shareholders then to force it to renege on the contractual agreement. More company bureaucracy and more work for lawyers, perhaps?

Binding votes are supposed to focus remuneration committees on delivering an acceptable level of executive pay. But giving shareholders these powers assumes that they and their advisory bodies really understand the issues. Weir's experience suggests that this might not always be the case.

Keith Cochrane's salary
Weir201020112012201320142015
Chief executive pay£2.91m£4.73m£3.36m£1.79m£1.46m£1.065m

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