Kate Mackenzie Shell remuneration: the many warning signs

Royal Dutch Shell had several reasons to be cautious about its remuneration report, which was just voted down at its AGM today.

It might be an unusual event for shareholders to reject such a move but the warning signs were all in place.

At the broadest level, the financial crisis has provoked a generally critical sentiment about executive pay.

At the sector level, this year’s lower oil prices have clearly rankled with shareholders. While oil companies have fared relatively well in the recession and Shell is raising its dividend this year, its debt ratio is also set to rise significantly.

Closer to home, BP last month only won a 62 per cent vote in favour of its remuneration report even without any particular campaign against it (some investors opposed the reelection of the chairman Peter Sutherland; however in fact he fared relatively well when it came to being re-elected). Shell’s own remuneration report only just scraped by last year when it chose to award three executives €1m each to stay in their jobs as a new chief executive was chosen.

Shell already had opposition from the Association of British Insurers, RiskMetrics and Pirc. Standard Life’s head of corporate governance even spoke at the meeting today to express his “dismay” at the remuneration.

So what did Shell do?

Oil companies typically measure their performance against their peers to avoid fluctuations in oil prices affecting remuneration.

Shell finished fourth out of the five oil majors in performance over the period of 2006 to 2008, but although the threshold was third place, the company said it finished a close third and opted to allocate some of the shares that its executive board members would have been eligible for, if the company had reached the number three spot.