Additional pressures facing those chairing AIM Remuneration Committees – a less onerous regulatory regime and lighter time commitment compared to the main market, but not always an easier role to fulfil

The AIM market is home to companies from a wide range of countries, sectors, size and stages of development. AIM companies have access to a range of institutional and retail investors and are afforded lighter touch regulation, where NOMADs are tasked with regulating compliance with the AIM rules. 

But reduced levels of regulation, reporting and governance, and a greater diversity of shareholders produces more choice and often more questions in respect of remuneration design and governance.  While the broad design of executive pay on the main market has become increasingly homogenous, this is not the case on AIM given this increased level of choice.

When considering remuneration on AIM, there are very broadly three types of companies on AIM:

• Larger and more mature businesses, which see it as a stepping-stone to the main market. Such companies are likely to be heavily influenced by such practice;
• Smaller but higher growth potential companies which see AIM as an alternative to another round of PE-funding. Such companies are more likely to be competing with PE-backed companies where pay is structured significantly differently; and
• Those companies which see AIM as a long-term home. Such companies may need to consider their pay practices in a more nuanced way.

While each of these categories can be subdivided, they perhaps illustrate why pay practices on AIM are much more varied and why simply looking at median pay analysis without fully understanding these nuances can create issues.  Accordingly, designing the most appropriate pay structure on AIM is likely to require more, rather than less, judgment. Being clear on which of these categories a company falls is likely to help in deciding on the appropriate answer to many of the questions posed in this briefing.

This briefing sets out some of the most common questions posed to FIT by AIM Remuneration Committee Chairs which hopefully helps to demonstrate some of the challenges associated with the role.

How much detail should AIM company Directors’ Remuneration Reports contain?

While the disclosure requirements on the main market are highly prescriptive, this is not the case on AIM.  Indeed, the AIM Rules do not require AIM-listed companies to publish a Directors’ Remuneration Report at all.  The AIM Rules and UK Companies Act together do set out some minimal expected disclosures but this is limited compared to those required for main market companies.  The QCA provides some guidance on content in its “Remuneration Committee Guide for Small and Mid-size Quoted Companies”, although much of this echoes main market practice and is, arguably, somewhat aspirational for all but the larger AIM companies.

AIM-listed companies therefore have a spectrum of choices from: (i) the minimum remuneration disclosures required (these often sit in the notes to the financial statements rather than in a separate Directors’ Remuneration Report); (ii) a separate report mirroring the prescriptive disclosure requirements for main market companies (which can result in a Directors’ Remuneration Report running to circa 20 pages or more); or (iii) a balanced level of disclosure somewhere in between these two extremes.

In FIT’s experience, the level of disclosure and length of the Directors’ Remuneration Report is normally correlated to the size of an AIM-listed company, with the very largest AIM companies often following much of the main market requirements (including separating the report into an Annual Statement, a Directors’ Remuneration Policy and the Annual Report on Remuneration) and the smaller AIM companies typically only providing one or two pages of remuneration-related disclosures.  This is reflected in the disclosure statistics in respect of those companies voluntarily providing a separate Directors’ Remuneration Report – around 90% of companies in the AIM 100, 80% of companies in the AIM 101-200 and c.50% of the rest of AIM.

However, market capitalisation and/or turnover is not a predictor of disclosure levels, and FIT is aware of several AIM companies which choose to keep remuneration disclosures to a minimum, believing that the greater the level of disclosure, the: (i) greater the risk of adverse feedback from shareholders and/or (ii) lower the flexibility that this affords the Committee on remuneration decisions.

In practice, FIT’s experience is that most AIM companies will seek to be somewhere between main market and minimum disclosure levels. The challenge for a Remuneration Committee is striking the balance between trying to look and feel like a main market company and giving shareholders transparency on remuneration but without providing some of the more onerous disclosures. 

That said, the pressure is intensifying to disclose more on directors’ pay both from the proxy services such as ISS and Glass Lewis and a number of major AIM shareholders, particularly on base salary increases and how they compare with those for all employees, annual bonus targets/payouts and long-term incentive performance measures and targets. AIM-listed Remuneration Committees will therefore need to think about whether they wish to lead or lag the AIM market in this regard.  

Should AIM companies offer an advisory vote on the Directors’ Remuneration Report?

Unlike main market practice, where companies are required to have an advisory vote on their Directors’ Remuneration Report every year, and a binding vote on their Directors’ Remuneration Policy at least every three years, there are no such requirements for an AIM Directors’ Remuneration Report to be put to a shareholder vote.

That said, the QCA’s current guidance suggests that companies should consider holding an advisory shareholder vote to approve pay arrangements and many AIM companies voluntarily do this (around 50% of companies in the AIM 100, 40% of companies in the AIM 101-200 but only c.20% of the rest of AIM).  In addition, we note that around two-thirds of companies which held a vote on remuneration in the last year chose to disclose the percentage of votes supporting the remuneration resolutions, with the remainder only disclosing whether or not a vote was passed. As remuneration is often considered to shed light on the wider governance of a company, many companies provide for a retrospective vote on remuneration with the hope of helping to broaden the existing shareholder base.

Such an advisory vote has no real consequence on pay outcomes, but it does expose the company to reputational risk in the event of a significant vote against. Consistent with the thought process above, there is a subset of AIM-listed companies that do not wish to provide an advisory vote as they seek to minimise the opportunity for shareholders and proxies to influence remuneration.  This tactic is not without its risks - if shareholders/proxies do have a concern regarding remuneration and there is no separate vote on remuneration, they will often recommend a vote against the resolution to approve the Annual Report instead (and this may be extended to votes against Directors as we have seen happen on the main market).

Indeed, we have seen examples of companies where ISS has expressed its concerns on an amalgamation of “non-voting” points including remuneration and recommended a vote against the Annual Report, which has led to a significant vote against.  Had the issues been spread over several resolutions, a significant vote against could have been avoided.

A similar point can also be made in respect of whether to seek shareholder approval for the introduction of long-term incentive plans.  While shareholder approval is required on the main market (assuming Executive Directors may participate and/or awards may be settled by new issue shares), there is no such requirement on AIM. As such, the introduction of new share plans, and amendments to existing share plans, are often done without shareholder approval (although clearly the NOMAD should be comfortable with this approach).

How much coverage do AIM companies get from the proxies?

Unlike the main market, the Investment Association does not cover AIM-listed companies.  The main proxies covering AIM are Institutional Shareholder Services (“ISS”) and Glass Lewis which typically review AIM remuneration practice against a simpler version of the guidelines operated for the main market.

ISS’ AIM guidelines tend to focus on material breaches of “best practice”, e.g. where service contracts provide for more than 12 months' notice; where Non-Executive Directors have received performance-related pay during the year under review; or where re-testing is allowed throughout the long-term incentive performance period.  However, ISS:

• has a “catch all” statement in its AIM voting guidance which states that it may consider a negative vote if “there are any other serious issues with the policy/report when measured against good market practice”; and
• will look at its main market voting guidance when considering the policy and practices of the larger AIM 100 companies.  While there is no guidance provided by ISS on how large or prominent a company needs to be to be assessed against the main market guidelines, from our experience, this tends to be for the companies roughly in the top half of the AIM 100.

Glass Lewis states that it aims to take a broadly similar approach to main market listed companies although it does recognise that the “remuneration structure and level of disclosure may be less developed at AIM-listed issuers than at larger, more established firms”.

In FIT’s experience, while it is true that ISS and Glass Lewis tend to be less critical of AIM-listed companies outside of the AIM 50, and often the impact of a “vote against recommendation” is less material than on a main market company given a lower percentage of AIM shareholders follow these proxies closely, the risk of a surprise vote against recommendation on the Directors’ Remuneration Report, or Annual Report resolution if no separate vote, is arguably higher given the AIM guidance is less prescriptive.

How much of main market practice should an AIM Remuneration Committee apply?

While the overarching structure of a typical pay package – salary, benefits, pension, bonus and long-term incentives – has remained unchanged over the last ten years or so, in that period there have been a number of developments in practice in respect of main market directors’ pay packages. Such developments have often resulted from individual investors’ preferences (for example, the concept of post-vesting holding periods or post-cessation shareholding guidelines) or where proxies have taken a particular interest in certain concepts (e.g. ISS and minimum 200% of salary shareholding guidelines and the Investment Association and executive to workforce pension alignment).

While some of these developments have been viewed as aspirational on AIM, others have become market, or at least good, practice:

• Malus and clawback provisions – In FIT’s experience, the majority of recently introduced AIM company incentive schemes include provisions to enable the withholding or recovery of remuneration in the event of significant negative events such as gross misconduct, material misstatement, reputational damage or company failure. That said, AIM companies will sometimes have a shorter list of “trigger” events and/or a slightly shorter clawback period than is generally seen in main market incentive schemes. 
• Shareholding guidelines – Almost all of the main market companies have guideline levels of shareholdings for Executive Directors, whereby there is an expectation that executives build up and maintain a shareholding (usually 200% of base salary or more) over time.  In addition, following pressure from the investor community and a specific provision addressing this in the 2018 UK Corporate Governance Code, almost all of the main market have extended such guidelines for up to two years after ceasing to be employed. The benefits of shareholder alignment are clear, yet currently only around 40% of AIM 100 and under 10% of AIM 101-200 companies disclose the operation of in-employment shareholding guidelines (although these numbers are growing steadily), while only a handful of AIM companies have extended these to post cessation.
• Pension alignment – Over the last two years, there has been a strong push on the main market to align Executive Directors’ pension contributions with the workforce level. This follows a specific reference to pension equalisation in the 2018 UK Corporate Governance Code and a drive by the Investment Association for contributions to be workforce aligned by 31 December 2022.  Those main market companies which have not acted, or not acted quickly enough, have generally received significant votes against their remuneration resolutions. The impact on market practice has been significant – currently, around 90% of main market companies are either compliant or will be so by the end of 2022.  However, there has been some uncertainty in respect of how this should apply to AIM given that the QCA Corporate Governance Code is silent on pension alignment and the main proponent of this on the main market (the Investment Association) does not report on AIM practice.  That said, we are seeing practice start to shift for larger AIM companies. At present this is typically in respect of aligning new Executive Director appointments to the workforce, rather than changing incumbent provision. It is also worth noting that AIM company pension contributions are often significantly lower than on the main market and therefore the workforce differential is typically narrower.  While pension alignment has not been a voting issue on AIM so far, FIT does expect greater scrutiny in this area going forward, particularly where double digit pension provision is currently offered to incumbents, but not to the wider workforce.

Market value options, LTIPs or restricted shares?

Despite efforts from different stakeholders not to straitjacket companies into one standard PLC model, the vast majority (75%) of main market companies operate an LTIP, aka a Performance Share Plan (i.e. grants of options at nil or nominal cost which vest after three years subject to service and performance) alongside an annual bonus plan. There has been a steady increase in companies moving to restricted shares (nil or nominal cost options that vest after three to five years subject to continued service only) but as things stand, this only makes up around 10% of the market. Only a handful of companies on the main market grant market value options (where the exercise price is equal to the award price).

Practice on AIM is significantly more mixed:

• Some companies make annual awards while others are more sporadic, balancing the need to avoid fallow years in which a director has no awards capable of vesting with cost and dilution concerns. Indeed, while most AIM companies do not operate a 5% in 10 year discretionary award dilution limit, even a 10% in 10 year all share award limit (which is the same limit operated for FTSE 100 companies) can be very restrictive for sub £100m market capitalisation companies.  Looking at the AIM 100, around 75% of Executive Directors received some form of long-term incentive award last year and around 60% of directors in the AIM 101-200.
• Of those granting awards, around two-thirds of AIM 100 companies make awards of LTIPs/performance shares but this reduces to around one-third of the next 100 largest AIM companies. While the use of absolute Total Shareholder Return (“TSR”) performance conditions tend to be frowned upon on the main market, these remain very popular on AIM for performance shares, and indeed outnumber relative TSR performance metrics outside of the AIM 100.
• Smaller/higher growth AIM companies have tended to grant market value share options often without performance conditions although we continue to see a steady shift from market value options to performance shares due to: (i) proxy agencies insisting on attaching performance criteria to market value options, and (ii) dilution concerns given that performance shares are more efficient than market value options.
• Only a small number of our AIM clients have adopted restricted shares for Executive Directors, which are often much less recognised by AIM investors and NOMADs, and therefore require careful shareholder engagement to ensure there are no surprises at the AGM.

Given the variation in countries, in practice and shareholder views (e.g. some AIM shareholders do not support the concept of nil or nominal cost options, preferring market value options instead), the structure – and for that matter the performance metrics – usually need careful consideration in the context of a company’s medium- to long-term strategy and shareholder base.

Conclusion

We hope that the above has demonstrated that acting as a Remuneration Committee Chair of an AIM-listed company can be just as challenging as the same role in a main market company.  Reduced levels of regulation, reporting and governance, and a greater diversity of shareholders and views, produces more choice and often more questions in respect of remuneration design and governance.

If you wish to discuss anything arising from this briefing, please ask your usual contact at FIT or call us on 020 7034 1111 or email us at Info@fit-rem.com. 

This paper is intended to be a summary of key issues but is not comprehensive and does not constitute advice. No legal responsibility is accepted as a result of reliance on the contents of this paper.

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