The real dangers in AstraZeneca’s blockbuster pay policy
The byzantine approach we take to rewarding top executives often means wailing about payment for failure. It turns out the system can’t really cope with paying for success either.
AstraZeneca is facing a revolt at its shareholder meeting on Tuesday over the pay for chief executive Pascal Soriot. The issue is not his £15.4m package for last year, about a quarter of which is from the rising value of the company’s shares in his long-term incentive plan (LTIP).
But a parade of investor advisory groups, from the Investment Association and ISS to Glass Lewis, are recommending that shareholders vote against a new pay policy, which would raise the maximum award for 2021 under the LTIP to 650 per cent of base salary, from 550 per cent. Soriot’s maximum bonus would also rise, to 250 per cent of salary from 200 per cent.
What’s unusual about this bout of pay angst is that Soriot is a talented chief whose performance in the job actually lives up to the multimillion-pound billing.
He has taken the unloved laggard of the European pharmaceutical sector and established it as a leading player in oncology and speciality care. He has just delivered a second consecutive year of double-digit revenue growth. Meanwhile, he spearheaded the production of 350m-odd doses of a Covid-19 vaccine (at cost) in a way that many in the industry dismissed as impossible, both scientifically and logistically.
AstraZeneca shareholders have benefited along the way: the company puts total shareholder return at 300 per cent over the past eight years, compared with 183 per cent for the global pharma sector and a paltry 44 per cent for the FTSE 100. Soriot’s leadership contributed to the company clearly helping society at large in the past year too. That is why the investor bodies aren’t arguing with his payout for 2020: board discretion used to increase his bonus, over and above what spewed from the financial metrics, feels justified.
So where is the problem? There is something for everyone here. There is a decent case that the company’s board could struggle to retain a genuinely world-class chief amid a box-ticking approach to oversight on pay.
Soriot’s pay last year actually compares quite well with his contemporaries at Roche or Pfizer. But AstraZeneca argues that Soriot’s “on-target” pay, as opposed to the top whack on offer, is below European peers and the policy will rectify that. Soriot has, shall we say, a strong appreciation of his own worth and hasn’t been shy about publicly complaining that his package doesn’t match up to it.
But that, in itself, is the longer-term danger for investors: that the dynamic in the AstraZeneca boardroom has irredeemably tipped in favour of its superstar boss, who is now being feted as the saviour of the UK’s health and economy as well as a FTSE 100 pharma company.
This was an unfortunate time to pick another pay fight, after investor unease in recent years. Remuneration is an unusual window into the inner workings of a board and the power relationships at play, argues former executive pay consultant Tom Gosling.
Look at the justification for a second successive policy change. Soriot’s pension contribution is being reduced to 11 per cent, in line with the wider workforce. That follows best practice and should be happening regardless. But the quid pro quo here was a substantial increase in performance-related pay: for about £112,000 less in guaranteed pension contributions compared with last year, Soriot had added almost £2m to his potential performance pot. That’s a punchy trade — as is the expansion of his total variable pay from 650 per cent of base salary to 900 per cent in two years, noted by ISS.
Leave aside general distaste about executive pay. Soriot has earned his millions. The board should want to hold on to him. But there will always be bigger bucks on offer in the US. And the $39bn deal to buy Alexion, also subject to a vote on Tuesday, could easily be teeing up the next wrangling over the increasing size and complexity of the business and a pay cheque to match. Then investors may start to question who is actually the boss in the boardroom.