Reviewing your Remuneration Policy

As we emerge from the cut and thrust of the 2019 AGM season, now is an opportune time for Remuneration Committees to take stock.  FIT has been monitoring the executive pay environment in 2019 closely and we highlight some of the hot topics to have emerged and the key considerations for Committees to take account of, in particular in the context of planning for a review of the Directors’ Remuneration Policy for approval in 2020.

2019 was not a policy renewal year for most companies and the majority of FTSE Main Market companies will be seeking shareholder approval for a new policy in 2020.  For these companies, the clock is already ticking.  With the continuing heightened focus on executive pay, along with the proliferation of regulatory and investor guidance to contend with, in our view, Committees should be careful to allow sufficient time to fully engage with the prevailing context (and with all key stakeholders) and ensure the time horizons incorporate contingencies to allow for the unexpected.  It has never been more important for Committees to monitor developments continuously and to gauge the mood wisely.

What lessons have we learned from the 2019 AGM season?

FTSE 350 Policy renewals

• 39 companies have sought approval for a remuneration policy so far in 2019
• 12 sought to increase variable pay opportunities
• Alternative structures continue to be scarce and potentially contentious – only two companies have introduced restricted shares in place of a standard LTIP and only one has introduced a Value Creation Plan – although our most recent experience suggests that there is now greater scope to consider restricted shares in appropriate cases
• Policies have received high levels of support in the majority of cases

FTSE 350 Shareholder support for directors’ remuneration policy resolution at 2019 AGMs

FTSE 350 – reasons for significant (20%+) votes against policies at 2019 AGMs

FTSE 350 advisory votes

Generally, support for remuneration reports has been high but over 10% of companies have received votes of less than 80% (considered ‘significant’ and resulting, for those companies, in appearance on The IA’s register).  In 80% of cases those companies receiving less than 80% support also received a vote against recommendation from ISS. ISS continues to be very influential.

FTSE 350 – shareholder support for remuneration report resolution at 2019 AGMs

The main reasons for discontent are set out in the graphic below. In many cases dissent was attributable to more than one reason, for example high incentive quantum alongside poor disclosure of outcomes. In line with warnings contained in the November 2018 proxy guideline updates, several companies this year have received high votes against for not scaling back LTIP awards following a share price fall.

Main reasons for significant votes against remuneration report resolutions at 2019 AGMs

What are the key policy considerations for 2020?

1. Salary positioning

• Is the current salary positioning appropriate and will it enable the company to retain and recruit directors of the appropriate experience and calibre?  Above workforce increases will require robust rationale and investors typically expect this to include directors taking on additional responsibilities. However, increases are possible, for example, in 70% of recent cases, an above workforce increase for a CFO resulted in very little opposition from shareholders due to, in the majority of cases, a compelling (non-benchmarking) rationale being put forward.

2. Increasing incentive quantum

• Continues to be difficult even if supported by market data. Committees should step back and consider the case for any increase based on the size and complexity of the business, and the calibre of current and future executives, as well as internal reference points. While difficult, increases are possible in compelling cases with appropriate rationale and careful positioning with investors, many of whom we meet with regularly.

3. Equalisation of pension contributions with workforce levels

• While the ‘fairness’ rationale is hard to argue against, how fair is it to cut contractual pension arrangements for existing directors? This is likely to have been on the agenda of every Remuneration Committee this year and approaches to date have varied significantly (as evidenced by mixed practice across the market). In our view, at this stage, there is no one-size-fits-all approach as much will depend on, for example, current contribution levels (vis-a-vis The IA’s 25% of salary line in the sand), salary positioning, overall value of the package, recent voting history, proposals for other changes across the package and the Committee’s risk appetite.
• Our analysis shows that 37% of FTSE 350 companies have sought to address pension disparity this year with the majority changing their policy for new appointments only. Interestingly, 42% remained silent and are likely to tackle this as part of the next policy review.

FTSE 350 – Approach to pension equalisation

4. Post-cessation shares

• Most companies are in fact already in line with the provisions of the UK Corporate Governance Code requirement by operating, for good leavers, LTIP and deferred bonus awards vesting at the normal vesting date (with an additional holding period applying for LTIPs).  However, some investors have been calling for companies to go further and The IA’s latest guidance on this issue expects executives to hold at least the lower of the shareholding ownership guideline (‘SOG’)” and the actual shareholding on cessation for two years post employment. Ensuring executives have an interest in shares is important but finding the right balance is equally so.  Around a fifth of FTSE 350 companies (not already operating one) have disclosed adoption of a post-cessation guideline so far in 2019.
• Our analysis shows that, of those who have post-cessation guidelines, practice varies significantly, with only a minority compliant with The IA’s request to continue the full guideline for two years post employment.

How companies have implemented post-cessation share ownership so far

5. Clawback

• Clawback provisions in incentive plans are now virtually universal.  However, there is now a push for companies to ensure the provisions are robust and enforceable.  UK Corporate Governance Code guidance suggests a wider set of triggers should be adopted to include, for example, business failure and reputational damage. Around a fifth of FTSE 350 companies appear to have reviewed and/or strengthened this provision in 2019. In practice, this is likely to be higher as disclosure in this area is mixed.

6. Discretion

• Companies should seek to ensure that the Committee has sufficient flexibility to ensure ‘fair’ incentive plan outcomes and that they are not slaves to formulaic outcomes (in line with the expectations of the Code).

How we can help you with your remuneration policy review

There have a been a number of developments in recent months which will influence the design of new remuneration policies. The Partners at FIT have significant experience in assisting FTSE companies on developing pay programmes that strike the right balance between doing what is right and commercial for the company and including some, but perhaps not all, of the shareholder-friendly features that have emerged in recent times. 

We hold regular conversations with the major proxy voting agencies and yesterday met with ISS to ensure we fully understand the likely direction they will be taking on a range of issues when they come to revise their voting guidance for 2020.  

We would be pleased to discuss this and any of the other issues raised in this note with you.

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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