Anglo American has delivered on its promise and pared back the scope for mining executives to be excessively rewarded as a consequence of surging commodity prices and favourable exchange-rate movements.
The undertaking to limit rewards was not as much as some shareholders demanded at the 2016 annual general meeting, but it marked an effort to ensure that executives do not score big remuneration payouts for developments beyond their control. In particular, it should help ensure that executives do not pocket hefty bonuses in times of negative returns.
The mining group’s remuneration committee is also trying to limit the profit accruing to executives when they are awarded large tranches of shares during a slump in the share price.
After the shareholder revolt in 2016, when a record 41% of shareholders voted against the remuneration policy, CEO Mark Cutifani promised to heed their concerns.
In 2015, Cutifani was paid £3.4m, which seemed reasonable, but his package included an eye-popping 1-million shares. These were awarded to Cutifani in terms of the company’s long-term incentive plan, which allowed for the awarding of shares valued at up to 350% of his basic salary.
In 2015, Anglo’s share price fell a whopping 75%, which meant Cutifani was automatically in line for a huge share award. During the year, the share price plummeted from just more than £12 in January to just more than £2 by year-end. Those shares are now back at close to £12 thanks to a recovery in commodity prices.
The chairman of the remuneration committee, Philip Hampton, said the committee was determined to tackle concerns about windfall gains for executives caused by share price volatility and the mining industry generally.
To do this, the new policy divides the measurement of earnings per share — half to be measured on actual earnings and the other half to exclude commodity prices and exchange rate fluctuations.
“The committee considers that this change will help smooth volatility and result in outcomes which provide a better balance between items within management’s control and those outside it,” said Hampton.
Other changes are aimed at limiting the benefits from spikes and troughs in the share price. Long-term incentive awards will be more closely aligned to total shareholder returns, with the maximum award for the CEO being reduced to 300% from 350%.
The proposed new policy will cap the value that can be received from shares awarded in the past as well as the future.
Executives will receive none of the shares awarded in 2014 because the three-year targets for total shareholder return and return on capital employed were not met.
According to Reuters, Luke Hildyard, an executive at one of the UK’s largest pension fund associations, the Pensions and Lifetime Savings Association, said that while Anglo’s direction was to be welcomed, an annual bonus potentially worth 300% of a salary on top of fixed pay approaching £2m still seemed “far too generous”.
Anglo’s proposals may have been influenced by the association’s plans to encourage its members to take a tougher line in re-electing remuneration committees.
Anglo is just one of many London-listed companies to have experienced shareholder revolts in 2016. Others included BP, Smith & Nephew, Shire and Babcock.
But despite the protests, shareholder action has so far proved to be largely ineffectual. The British government is working on proposals to reform executive pay.