With oil prices still relatively low, it was perhaps surprising that the shareholders of BP were presented with a proposal for a 20% increase in pay for its chief executive, Bob Dudley, at its AGM on 14 April.
BP is not alone though. Chiefs at Exxon and Chevron have received recent increases and are paid more than the BP chief, even though their financial results have been worse than BP’s.
Presented with the increase, which would bring Mr Dudley’s total package to around £14m per annum, only around 41% of shareholders “approved” the package. But from a legal perspective that does not mean that the board are now bound not to award the pay rise; the shareholders vote here is effectively only advisory.
Although changes in 2013 mean that the remuneration policy of a listed company has to be approved by more than 50% of shareholders, this does not mean that shareholders have the “legal” right to shoot down any specific pay awards. BP’s latest remuneration policy was approved in 2014 and it is that remuneration policy that has created this proposed pay award. Just in case you are wondering about whether the passing of the last remuneration policy was a close run thing, 96% of shareholders approved it!
However, what is more interesting is that commercial reality is likely to win the day and, despite the strict legal position, the pay increase is unlikely to be awarded. BP will not want to run the risk of upsetting major shareholders, including two large asset investment managers, who have both criticised the pay deal - not to mention the risk of any further negative PR.
Whilst most private companies will not suffer from the problems mentioned above to the same degree, most private investors will still be concerned that the board do not award large packages as a mechanism to avoid paying dividends or to suppress the company’s value. However, there is a balance to be struck here, as a high quality and incentivised management team should ultimately increase the overall value of the company. Fundamentally, that is exactly the same issue as being experienced at BP!