Summary of Legal and General Investment Management’s (“LGIM”) October 2020, UK Principles of Executive Pay

The key changes:

Pensions - They expect incumbent directors’ pension provisions to be aligned with the majority of the workforce by 2023. If there have been no changes proposed to address any disparity between executive and workforce pension contribution levels, LGIM has indicated that it will vote against the next remuneration policy.

Bonuses - For the 2020 financial year, LGIM does not expect bonuses to be paid at companies that have made redundancies or received government or shareholder support due to Covid-19 (via additional capital or suspended dividends). They will examine this on a case-by-case basis, but the payment of a bonus in these circumstances may result in a vote against the remuneration report. Additionally, achieving a threshold level of financial performance should be a pre-requisite for the award of any bonus including personal/strategic objectives, unless the company is in a turnaround position where changes to non-financial targets may take priority for a few years. This position should be clearly explained within their remuneration report. LGIM expects personal performance measures to be ‘meaningful and quantifiable’ as they should relate to delivering strategy. If they are not, and/or not well explained, and/or too high, LGIM may vote against. They also expect achievement under such measures to be dependent upon a threshold level of corporate financial measures.

Long-term incentives - If there has been a significant fall in the share price (more than 20%), companies are expected to reduce the size of awards to avoid windfall gains and disincentivise failure. This applies to restricted share awards as well as PSPs. If a company in this situation does not do so LGIM will vote against their remuneration report. Some companies have stated that they would adjust vesting outcomes to avoid windfall gains rather than reduce the size of the grant. LGIM has indicated that it prefers to see a reduction in grant levels.  Where a company has committed to consider reducing vesting levels, LGIM expects this to be reported in each subsequent DRR leading up to vesting. At the point of vesting, they require a detailed explanation of how discretion has been applied to ensure appropriate outcomes.

In addition, LGIM does not generally support retrospective changes to LTIP awards, so material changes to in-flight awards should be subject to shareholder consultation and support. LGIM can be taken ‘off-side’ regarding such conversations. Due to Covid-19, they are supportive of a 6-month delay in setting performance targets, although generally targets should be disclosed in advance and not adjusted retrospectively. They would not generally support the setting of targets at a lower level than the previous award. However, if a committee thinks this is appropriate, they must give a thorough explanation of why those targets are equally stretching, if materially lower.

All performance metrics – Companies should use ‘a basket’ of criteria to achieve their strategy and to ensure that achieving one performance target does not lead to ‘double-dipping’ under different pay schemes.

ESG metrics - Generally, LGIM thinks that these lend themselves to acting as a modifier to financial outcomes, rather than as a target in themselves. However, for a company that has ‘specific ESG performance objectives that go beyond the company’s purpose’, or that are linked to growth opportunities (e.g. green revenue), they encourage the setting of specific targets that are linked to this strategy. LGIM singles out oil and gas companies as problematic and does not favour the use of volume targets (stating that their use may result in a negative vote).

Post-exit shareholding requirements – These should reflect no less than 80% of the in-post requirement. Purchased shares do not need to be included in the post-exit holding requirement. If any have been used to make up the in-post shareholding requirement, these should be replaced when shares vest from incentive arrangements.

Salary - When a new director is appointed, LGIM expects the committee to reset executive pay and consider the current circumstances of the business as well as the previous experience of the individual. Salaries for new directors should be phased over time based on their level of experience. This appears to encourage benchmarking relative to the new (presumably lower) market cap of the business at the time of replacement.

Leavers - Golden goodbyes are not supported. Any departing gifts with a material value should be fully disclosed.

Remuneration Committee Chair – They expect the chair to have a good working knowledge of the key people for whom they are setting pay structures, and the pay and benefits offered throughout the company. 

DRR disclosure – They want to know how the committee has taken into account the impact of the pandemic on its operations (including stakeholders) when deciding pay outcomes. 

Gender pay gap reporting - Although this has been suspended for the 2019/20 period due to COVID, they encourage those that can to continue reporting.

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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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