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Smith & Nephew wants to increase pay for its US executives to bring it closer to American levels, with the chair of the FTSE 100 medical devices company calling UK pay packages “not sustainable”.
The company, which has had four chief executives in five years, on Monday published a package of changes to its remuneration policy as part of efforts to address high executive turnover.
Smith & Nephew’s move is the latest signal that big UK-listed companies with a large proportion of overseas revenues will try to challenge shareholder reluctance to approve higher pay in this year’s AGM season.
“There is an entire group of companies who are what I call Brilos: British in listing only,” Rupert Soames, who took over as chair of Smith & Nephew last September, told the Financial Times. These were “companies that are listed in London but have a relatively small part of their revenues arising in the UK”.
Executive directors at listed groups are typically paid according to where the company has its primary listing, so Smith & Nephew’s chief executive Deepak Nath, an American based in Fort Worth, Texas, is at present paid in line with UK peers.
“The current position on pay is not actually sustainable,” said Soames. The company’s new policy would put US-based executives on a path to higher pay, in line with local competitors and diverging from the UK market, where its chief financial officer is based.
The reform “is a sensible and pragmatic way of handling an issue where companies listed in London need to be able to recruit talent from markets around the world and those markets have different practices”, Soames said.
Other large UK-listed businesses, including the London Stock Exchange Group, are preparing to seek shareholder backing to increase pay for UK executives by benchmarking them against US peers.
Pay has been a source of antagonism for Smith & Nephew. In October 2019, Namal Nawana quit after 18 months as chief executive because the company would not meet his pay demands.
“This is my push, not the [current] chief executive’s,” said Soames, who is also the new president of the CBI, the UK business lobby group. “The board is facing up to the reality of being a company where the weight of gravity of the med-tech market is in the US and where all the operational managers — the leadership of the business — pay tax, are citizens of and live in the US.”
Smith & Nephew was founded in Hull 168 years ago and has grown to employ 18,000 people in about 100 countries. The UK accounts for only 3 per cent of its revenues and 7 per cent of its employees, while more than half of its revenues come from the US. Almost all of its senior operations managers, including its chief executive, are US citizens and based in the US.
The London stock market is facing questions about its international competitiveness after a series of companies with significant North American operations, including betting group Flutter, building materials group CRH, packaging company Smurfit Kappa and plumbing supplier Ferguson, decided to quit the FTSE 100 for a primary listing in the US.
“We’re not considering moving the primary listing to the US,” said Soames. “Why would we want to move our primary listing unless there was a compelling reason that we had to.”
Smith & Nephew’s share price is down 8.3 per cent over the past 12 months and is up 1.6 per cent this year.
Under the new pay policy, Nath would stand to be paid up to $11.8mn next year if all targets were met.
The package will include a new restricted share plan worth 125 per cent of salary, vesting over three years. Nath’s maximum award under the company’s long-term incentive plan, which is linked to performance, would rise from 275 to 300 per cent of base pay.
The package will be put to a shareholder vote at the company’s annual meeting on May 1.
“The reception among investors is more open now than it would have been two years ago,” said Soames. “Everybody in the UK has an interest in a thriving London market, and I think that people will be genuinely concerned if they see the London market continuing to lose market share and they want to do something about it.”
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