At its Jan. 16 annual meeting Bellway plc announced it would review future remuneration policy in conjunction with shareholders after an overwhelming 59% vote against the remuneration report. The revolt by shareholders was in response to the bonuses of 55% of basic salary recently paid to Bellway’s three top executives for their performance during a year when sales, profits and share price fell considerably.

Bellway plc is a UK housebuilding company that builds homes throughout England, Scotland and Wales. UK company meetings offer shareholders an advisory vote to approve the Company’s remuneration report for the year under review. The arrangements at Bellway created a revolt among shareholders after it did not base its bonus payments of more than GBP 630,000 (US $945,000), or 55% of their basic salaries, to its three Executive Directors on pre-set targets, but rather used discretion to make an assessment at year end. The payments, just below half of the ‘normal’ maximum available, were made despite a sharp fall in Bellway’s financial performance compared to the previous year.

The company’s financials deteriorated markedly from fiscal 2007 to 2008, according to its annual report, and the annual report did not clearly explain the rationale for the awards; neither did the company in extensive discussions with RiskMetrics.

In these discussions, the company maintained that external events were changing so rapidly it was not “sensible” to preset targets, although the 2007 remuneration report had stated that targets would be set for the 2007/08 financial year (as part of a general exercise in tightening up the key terms of the bonus). The Remuneration Committee instead decided to take a broader view of performance over the year as it did not want management to strive for arbitrary targets at the expense of taking the necessary actions required to deal with the rapidly developing crisis in the mortgage and housing markets.

In making its assessment at the year end, the Committee said it considered a number of factors, most notably the performance of management in positioning the company to focus on debt control, cash conservation, and the performance of management against that of other housebuilders struggling under enormous debt burdens and having to re-negotiate their bank facilities and associated covenants. The company is proposing to pay a final dividend to shareholders, resulting in a total dividend of 56% of the previous year’s level.

The Committee decided to pay bonuses to the three executive directors because it considered that they had performed well during the year in “hostile” circumstances and the Committee saw a direct link between their bonus and their performance.

The opacity of the Remuneration Committee’s discretionary process for assessing a bonus, however, raised concerns as to whether the Committee’s judgement reflected a proportionate response to: (i) the company’s significant deterioration in financial performance for 2007/08; (ii) the significant exceptional charge arising from the writedown of land and property assets; and (iii) the future outlook for the housebuilding sector given the difficulties that have continued to hamper lending by the major mortgage providers and for the recessionary outlook for the global economy as a whole.

Various shareholder representatives’ unease over the payment were reported in the media. The Financial Times reported that the Association of British Insurers (ABI), for example, had expressed concern that provisions of best practice have been violated and this matter should be taken into consideration by shareholders as they vote at the AGM. Peter Montagnon, the ABI’s Director of Investment Affairs, said, “Management had targets and abandoned them when it became clear they were not going to meet them. They decided to pay bonuses anyway.” Accordingly, the ABI issued a rare “red top” alert, signifying concern of the highest level for the pay-outs.

The Regulatory News Service revealed that, at the AGM, Chairman Howard Dawe told shareholders that the Board has noted shareholders' views on the Report of the Board on Directors' Remuneration and believes it was wrong in not consulting with major shareholders earlier. It therefore proposes to review future policy on this matter, in consultation with them, in the coming months.

Shareholders expressed their opposition to the bonus payments by registering a 59% vote against the remuneration resolution, which RiskMetrics had recommended its clients oppose.
This revolt shows that remuneration matters are under the intense scrutiny of shareholders in the current downturn. The response to the use of discretion by Bellway may be seen as an example of what is yet to come for the 2009 voting season.