Remuneration trends from September 2019 year-ends
Mercer │Kepler has been monitoring the annual reports of September year-end companies to identify the latest trends in remuneration practices ahead of the main 2020 AGM season.
We set out below our key findings from the 25 FTSE All-Share companies that have reported so far:
The 2018 UK Corporate Governance Code (“Code”) recommends that pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the rest of the workforce. Guidance from the Investment Association (“IA”), clarifies that its members expect the pension arrangements for new executive directors (or any director changing role) to be aligned with this rate. Where the pension contributions for incumbent directors are above the majority workforce rate, Remuneration Committees are expected to set out a credible action plan to reduce the pension contribution by the end of 2022.
The 2018 Code applies to accounting periods beginning on or after 1 January 2019 and therefore September year-end companies are not obliged to report under the new Code yet. However, the majority of companies have chosen to make some changes on executive pensions.
72% of companies have disclosed the workforce pension contribution rate – the median workforce pension contribution rate for these companies is 8% of salary.
80% of companies have committed to align the pension contribution for new hires with the workforce rate. Another 16% of companies have aligned with another rate (e.g. managers/senior managers).
Only 28% of companies have set out an action plan for reducing rates for incumbent directors, with just 3 companies signalling an immediate reduction and not necessary to the workforce rate.
Mercer commentary: Shareholders expect companies to align the pension contribution rate for future hires with that applying to the workforce and the majority of September year-end companies have committed to do this (irrespective of whether the remuneration policy is being renewed or not).
Practice for incumbent directors is more mixed. Data from Mercer Kepler’s recent FTSE pensions survey indicates that, where the incumbent director pension is 25% of salary or above, just under two-thirds of companies surveyed (62%) are planning to make a reduction. However, where the incumbent pension is less than 25% of salary, only a quarter of companies surveyed have committed to make a reduction. Whilst few shareholders are planning to make incumbent director pensions a voting issue in 2020, there is strong pressure on companies to reduce executive pension contributions where they are perceived to be excessive. We expect to see a number of companies make reductions to incumbent director pensions in 2020, especially in the FTSE 100, where executive pensions tend to be highest.
The Code recommends Remuneration Committees should develop a formal policy for post-employment shareholding requirements. IA guidance goes further and recommends that executive directors should be required to hold shares to the value of the in-post shareholding requirement (or the actual shareholding on departure if lower), for a minimum of two years following departure. Shareholders expect requirements to be established as soon as possible and, at a minimum, by the company’s next policy vote.
48% of companies with September year ends have a formal post-exit shareholding requirement, with 24% of companies aligning with the IA recommendation. For those companies not complying with the IA recommendation, five companies (21%) permit a phased reduction to the post-employment holding with one company (3%) providing for a shorter time period.
A further 24% of companies reference their existing deferral and holding arrangements as providing a mechanism by which executives retain an interest in the company post-employment.
Mercer commentary: most companies with a policy review have introduced some form of post-exit shareholding requirement, with the majority of companies seeking to introduce a formal requirement. However, where this is being introduced, many companies are seeking to apply it to future share awards only and to exclude any shares purchased directly by the executive, thereby mitigating the immediate impact.
With many companies renewing their remuneration policies in 2020, a surprising number are proposing to increase incentive opportunities. Of the 13 September year-end companies renewing their remuneration policies in 2020:
1 company is increasing its annual bonus opportunity;
15% (2 companies) are increasing both the annual bonus opportunity and long-term incentive opportunity;
23% (3 companies) are increasing their long-term incentive opportunity;
1 company is reducing the annual bonus but increasing the long-term incentive;
No companies are introducing restricted stock plans.
Mercer commentary: strong justification is required for any increases to incentive opportunities, especially annual bonus and this may be an area of investor push-back in some cases.
Whilst the majority of companies continue to support the use of traditional long-term incentive plans, we anticipate that more will companies propose restricted stock plans in 2020. The absence of restricted share proposals from September year-end companies is perhaps partly because it is only comparatively recently that issuers have felt confident that they can obtain investor support for such a structure.
Actual pay outcomes and pay relativities
With the pressure for continued restraint on executive pay, overall reward outcomes remain broadly similar to previous years. Bonus pay-outs (as a percentage of the maximum opportunity) fell at 60% of companies and long-term incentive vesting levels were marginally lower. Median salary increases, where given, were aligned with the workforce rate (median 2.5%).
Mercer commentary: with subdued stock market performance over the period and pressure on Remuneration Committees to set tougher targets and apply discretion when considering reward outcomes, it is unsurprising that reward outcomes are slightly lower than previous years. What is surprising, however, is that few September year-end companies (only 6 companies) have voluntarily disclosed their CEO pay ratios. The disclosure of CEO pay ratios applies to accounting periods beginning on or after 1 January 2019 and will be mandatory for December year-ends.
Understanding the workforce voice
Where companies have chosen to disclose their approach to broader workforce engagement, the majority have chosen to nominate a designated Non-Executive Director to facilitate this process. Of the companies using a designated Non-Executive Director, around half have disclosed that they will be paying a separate fee for the additional duties involved (with fees ranging from £4,250 to £21,000).
Mercer commentary: whilst a small number of companies have appointed employee directors to the Board, the vast majority of companies are using a designated Non-Executive Director to facilitate engagement with employees and other stakeholders. If companies plan to pay an additional fee for this role, this will need to be provided for in the remuneration policy (if the current policy does not already provide such flexibility).
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.