Response to governance and remuneration reporting requirement changes (April update)
Further to our update on September year-end companies back in February (see here), Mercer | Kepler has continued to monitor how companies have been responding to last year’s changes to the UK Corporate Governance Code and the introduction of new remuneration reporting requirements in late 2018. As a reminder, compliance at this stage should be considered ‘early-adoption’ – changes officially come into effect only for financial years commencing on or after 1 January 2019. Data is based on an analysis of just over 100 FTSE350 companies with December year-ends that have reported to date.
Remuneration reporting requirements Summary of requirements:
Summarise any discretion exercised by the Committee in relation to directors’ remuneration outcomes in the Remuneration Committee Chair’s Annual Statement.
Companies to disclose how much of a director’s variable pay for the year is attributable to share price appreciation, and any resulting discretion applied.
Scenario charts to illustrate maximum remuneration receivable assuming a 50% share price appreciation for long-term incentives.
Companies with an average of >250 UK employees during the financial year to calculate and disclose the ratio of CEO total pay to the total pay to the lower quartile, median and upper quartile employee.
Unsurprisingly, compliance to date has been highest amongst FTSE100 companies and generally for the less onerous reporting requirements (1-3 above). More surprising perhaps is that more than two-thirds of large cap companies have reported a CEO pay ratio so far this year (albeit this percentage drops off sharply for mid-cap companies).
For those reporting a CEO pay ratio, a significant majority have opted for Methodology A, which requires companies to use the same approach used to calculate the CEO single figure to calculate and rank the pay of their UK employees. Whilst this methodology is widely considered the most complex and time-consuming, it is the stated preference of both the Investment Association and LGIM – and this perhaps partially explains the significant proportion of companies following this approach:
An interactive model detailing pay ratio disclosures to date can be found on our website at: https://www.mercer-kepler.com/ceo-pay-ratio
Key UK Corporate Governance Code and investor principle changes Summary of requirements:
Pension contribution rates for Executive Directors should be aligned with the workforce.
Companies should develop a formal policy for post-employment shareholding requirements.
On pensions, compliance to date has differed markedly depending on two factors: whether the reduction is applied to incumbent Directors or to new appointees only, and whether the company is presenting a new remuneration policy this year. For incumbent Directors, perhaps reflecting the difficulty in altering contractual entitlements and concerns about pay competitiveness, only around a quarter of companies have made a reduction in pension contributions so far this year (or around 40% of companies presenting a new policy, see chart below). Companies implementing a reduction have tended to be those where existing pension contributions exceeds the Investment Association ‘amber top’ level of 25% of salary, with such reductions often being phased over a number of years (or through a capping of the pension contribution in monetary terms going forward).
In respect of new Directors, compliance is more widespread. Most notably, 86% of FTSE350 companies (and all FTSE100 companies) presenting a new remuneration policy so far this year have explicitly capped pension contributions for new appointees in line with the majority of other employees (and none we have analysed have left pension contributions deliberately misaligned, see chart below).
Even amongst companies not reverting to shareholders for a new policy this year, a significant number have made it clear that any new hires would have a reduced pension rate, ahead of formalising this in a future policy review. This would tend to suggest that companies are seeing this as area of particular interest for shareholders and investor bodies this year, and that non-compliance is becoming increasingly difficult to justify.
On post-employment shareholding guidelines, compliance has split more clearly along the lines of whether companies are submitting their policies for review.
Of those companies which have submitted a new policy to shareholders this year, around three-quarters have introduced some form of post-employment guideline - with a majority of these adopting the Investment Association’s preferred position (i.e. a requirement to hold the lesser of shareholding at the time of leaving the company and the in-post shareholding guideline, for a minimum of two years). This percentage has likely been helped by the recent clarification note from the IA confirming that companies not adopting their position would be given an ‘amber top’. Where companies have adopted an alternative post-employment guideline, most commonly this involves some form of ‘phase-down’, i.e. reducing the applicable guideline over time.
An interactive model detailing remuneration design changes to date can be found on our website at: https://www.mercer-kepler.com/remuneration-governance-trends
Mercer | Kepler commentary Whilst most of the emerging trends are to be expected, a couple stand out as particularly surprising – the widespread use of methodology A in calculating the CEO pay ratio and the rapid reduction in pension contributions for Executive Directors.
We will continue to update our website periodically to capture final December and March year-end reports, and the AGM section of our website will track how investors respond to compliance (or lack thereof). 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.