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Investors gave the supermarket chain a bloody nose at its annual general meeting today , when nearly half of shareholders (47%) voted against its boardroom pay policy or abstained. Almost a third cast their vote against the remuneration report and another 15% withheld their vote.

"The extraordinary opposition vote reflects investor outrage over the excessive pay awarded to Tim Mason, Tesco's second highest paid executive, despite the dismal performance of the US Fresh and Easy business he oversees," said Michael Garland of American investment group CtW, which had urged investors to vote against the remuneration report.

There was also a smaller revolt against some of Tesco's top executives. Under the pay plan, they qualify for a bonus payment equal to an average of the previous two years' bonuses if they are axed or asked to leave. At least 5% of votes were withheld or cast against the re-election of US boss Tim Mason, chairman David Reid and corporate and legal affairs director Lucy Neville-Rolfe.

The result also sends a signal to Marks & Spencer ahead of its AGM in two weeks time. Many investors have already decided to vote against the M&S remuneration report in protest at the £15m pay package handed to Marc Bolland, its new chief executive, and other boardroom bonus payouts. Earlier this week the Association of British Insurers issued an "amber top" alert indicating that investors should think twice before voting in favour of the M&S pay plan.

Several corporate governance groups, including Pirc and RiskMetrics, have also expressed concern about Tesco's boardroom pay in the run-up to today's meeting. CtW, which works with pension funds that hold shares in Tesco, has written to Tesco's senior independent director Patrick Cescau to demand answers about the lossmaking US offshoot Fresh & Easy and Mason's pay.

Sir Terry Leahy, Tesco's outgoing chief executive, received about £10m in pay and cheap or free shares last year, while Mason got about £7m.

Tesco had already been warned about mounting shareholder concern last year, when 7% failed to support its remuneration report and 41% voted against amendments to the grocer's share option plan.

Sarah Wilson of the corporate governance group Manifest told the Guardian today: "Tesco has clear warning of shareholder discontent, but in common with many companies it would appear remuneration committees are not listening to what is said."

Reid was forced to defend Tesco's acounting policies at the meeting, after a report by Citigroup analysts accused it of "aggressive" accounting and argued that last year's profits would have been £800m lower if the retailer added up the numbers in the same way as rivals such as Morrisons. The chairman said there were "material inaccuracies" in the analyst note, without being more specific, and insisted he was "absolutely satisfied that our accounting policies are appropriate".

Shareholder concern

The issue of Fresh & Easy came up repeatedly at the AGM in London. Mr Winters, a private shareholder, told the board: "I'm sceptical about your venture into the US but you disregarded me." A representative of CtW demanded to know whether Tesco has taken any steps to independently assess its business strategy in the US, where Fresh & Easy has failed to reach profitability. He also asked whether the pay of Mason and other executives was connected to performance metrics.

"We do have strong independent oversight of the board," replied Reid. "It's not easy [in the US] because of the economic conditions but we absolutely believe in it. We are on the case and getting on with it."

Reid added that in every country outside the UK where Tesco has rolled out new stores, the business made losses in the first few years, arguing it takes time to put in infrastructure and build sales.

In another heated exchange, Bill Dempsey, a representative of the United Food and Commercial Workers international union, accused the Tesco management of following a "litigious, divisive approach" in America and refusing to meet with the union.

"If the Tories and the Lib Dems can agree to form a government, why can't the management agree to one meeting with the union?" Dempsey asked.

Leahy hit back: "Your union has never welcomed Tesco to the US. You opposed Tesco from day one, and you have gone on opposing and obstructing. This is no basis for a partnership." He claimed that Tesco had "excellent relations" with its US workers, who did not wish to join the union.

Dr Pamela Robinson, a former Tesco employee and shareholder, and now an academic at Birmingham University, asked about working conditions for factory workers at Tesco's suppliers overseas. Reid said the company has a code that addresses issues ranging from working conditions to living wages and the role of women.

He said Tesco also rates the risk of suppliers and the countries they operate in; it audits high-risk suppliers every year and medium-risk suppliers every two years.

Other issues raised by shareholders included petrol prices that are higher than at most other supermarkets, cheap alcohol and Tesco's sourcing of products from Israel.

Some investors also praised the company for its performance, and thanked Leahy in particular.

Leahy, who is stepping down next March and will be replaced by Philip Clarke, the international and IT director, said: "It's been an incredible privilege to lead this company for 14 years. I've often said running Tesco is the best job in the world."

Read more at:

http://www.guardian.co.uk/business/2010/jul/02/tesco-agm-shareholders-reject-pay-policy