2020 AGM Season - April update
Whilst voluntary reductions to pay due to the impact of COVID-19 have been the focus for many Remuneration Committees over the past few weeks, other interesting trends in remuneration practices have also emerged as the AGM season gets into full swing. We set out below our key findings from 110 FTSE350 reports to date (comprising 52 FTSE100 and 58 FTSE250 companies).
Salary increases Prior to the significant number of companies announcing voluntary temporary reductions to salaries to recognise the impact of COVID-19, around three-quarters of companies were awarding salary increases to Executive Directors. Where an increase was awarded, the median was 2.5%; for 80% of companies, this was in line with or below the average increase awarded to the wider workforce. Changes to incentive opportunities Around 25% of the sample have proposed an increase to incentive opportunities from 2020, albeit with caveats around their operation, as well as strengthening of deferral and holding requirements. Of the companies that have proposed an increase, just under half have increased the annual bonus opportunity, for example:
Mondi (FTSE100) has increased the Policy maximum from 175% to 200% of salary to ‘take account of market norms’, but will not be using the maximum headroom for 2020; target bonus has been reduced from 62.5% to 50% of salary; and
Flutter Entertainment (FTSE100) has rebalanced its pay mix from the LTIP to the bonus; CEO bonus has increased from 180% to 285% of salary (with increased deferral, and a revenue underpin on the deferred portion), and LTIP has reduced from 300% to 180% of salary
Around 80% of the companies to propose an increase to incentive opportunities have increased the LTIP opportunity, for example:
IHG (FTSE100) has increased its LTIP opportunity from 205% to up to 350% of salary. The remuneration report refers to the company’s increased US business and need to compete for talent in the US, and a need to better differentiate pay by organisational level; bonus opportunity remains unchanged. Note, IHG subsequently released an RNS stating that due to COVID-19, 2020 LTIP awards will be granted in line with the existing Policy, rather than the new Policy; and
CLS (FTSE250) has moved away from a performance-granting LTIP to a more traditional model, following shareholder feedback. The LTIP opportunities have increased from up to 100% to up to 150% of salary to take account of the reduced certainty of vesting outcomes.
Malus and clawback As market practice and legal opinion on enforceability in this area evolve, a trend this year has been the strengthening of malus and clawback provisions for incentives, for example:
William Hill (FTSE250): provisions extended to include reputational damage and corporate failure/insolvency;
IHG (FTSE100): triggers extended to include corporate failure; and
Grafton (FTSE250): provisions extended to include a material failure of risk management, damage to the Group’s businesses or reputation and breach of applicable restrictions on competition, solicitation or the use of confidential information.
CEO pay ratio Many FTSE companies will be reporting their CEO pay ratio for the first time this year. So far, despite challenges around data collection for large employee populations, 64% have adopted methodology Option A, which requires the calculation of every single UK employee’s total remuneration on a ‘single figure’ basis; 30% have adopted Option B, and the remaining 6% Option C.
To date, the FTSE100 median pay ratio is 79:1; for the FTSE250, it is 30:1. A minority of companies have also disclosed a salary or fixed remuneration pay ratio, to provide additional context.
Proxy adviser voting recommendations This is an evolving area, as IVIS has yet to release the majority of reports for the 2020 AGM season. Emerging evidence suggests IVIS will ‘amber top’ a company’s Policy if its recruitment variable pay maximum opportunity is greater than that set out in the Policy Table; examples of IVIS commentary:
Drax (FTSE250): ‘In addition, for awards on recruitment, the Committee has the discretion to make a grant in excess of the Policy limits (up to a maximum of 300% of salary)’;
Micro Focus (FTSE100): ‘Under the Recruitment Policy the maximum variable pay limit (500% of salary) is above the variable pay limit set out in the Policy Table (350% of salary)’; and
UDG Healthcare (FTSE250): ‘The Committee will retain the flexibility on recruitment, to make variable awards in excess of the limits set in Policy table up to a limit of 350% of salary’.
Executive pensions In response to the 2018 UK Corporate Governance Code and investor expectations, the majority of companies continue to choose to make some changes on executive pensions:
The vast majority of companies (98% of those in the FTSE100, and 95% of those in the FTSE250) have committed to align the pension contribution for new hires with the workforce rate;
For 36% of companies, the CEO’s pension is already aligned with (or lower than) that available to the workforce as at year-end; and
For the companies that are not yet aligned, 68% have set out an action plan for reducing rates to align with the workforce over the next few years, with 48% (out of 68%) doing so under the IA-recommended approach. Many of those who have not provided an action plan have stated that their position will be considered further as part of their next Policy review, in light of evolving practice.
Since our last update, a greater proportion of companies (85% of the FTSE100 and 64% of the FTSE250) now have a formal post-employment shareholding requirement. Out of these companies, around two-thirds have chosen to align with IA guidance;
For those companies not adhering to the IA guidance, non-compliance relates to a phased reduction to the post-employment holding for 80% of companies, and 25% specify a holding requirement over a shorter time period than two years; and
Companies that have refrained from introducing a requirement largely refer to their existing deferral and holding arrangements as providing a mechanism by which executives retain an interest in the company post-employment.
This briefing is for general guidance and does not necessarily cover all areas of the topics included in this briefing. It is not designed to give legal or other professional advice.