New legislation and the UK Corporate Governance Code are forcing companies to consider a much wider agenda in the upcoming AGM season. So far this year, executive pay has – unsurprisingly – remained a main area for revolt.
Investors in British public companies could be running out of patience with executive pay practices, after requesting better explanations of high pay packages and greater links between pay and performance.
Remuneration was the second-most common reason for British companies to lose or come close to losing an AGM vote in 2019. Six companies lost votes, while 11 companies faced close calls (defined as a vote with a victory margin of less than 10 percent).
The influence of Proxy Advisors
Boudicca’s work in 2019 with proxy advisers has revealed that their negative recommendations have resulted in a higher proportion of votes against the specific resolution. For example, in terms of Remuneration Reports, ISS’ negative recommendations can be linked to an average of 25.3% of the votes cast against this resolution compared to 23.8% during the same period in 2018. (Source ISS).
We have seen also a hardened stance, by ISS, on bonus outcomes that were considered disproportionate to the financial performance of the issuer in question:
- unsatisfactory financial performance around target levels does not justify the resulting bonus outturn being close to maximum due to significant non-financial elements (e.g. Paragon Banking Group; Foxtons); or
- a negative vote recommendation provided on an essentially unchanged Remuneration Policy which allowed for on-target bonus in excess of 50% of maximum (e.g. Sage Group, which had its initial negative ISS recommendation changed following publication of a corrective RNS);
- in some of these cases, similar structures were in place historically but had not resulted in negative vote recommendations from the Proxy Advisers at the time.
Principles on Executive Remuneration
Investors’ concerns on remuneration have also been reflected in the updated Principles on Executive Remuneration published in November 2018 by Legal & General Investment Management (LGIM) in its stance towards limits on the use of annual bonuses and non-financial criteria under variable pay plans.
LGIM encourages the reduction of short-term annual bonus opportunity and suggests that a bonus of 200% of salary should be reserved for only the largest global companies. As such, LGIM states that it will not support any increases to annual bonus opportunity going forward.
Given that non-financial, personal or strategic targets tend to be less readily measurable against pre-set targets, many Proxy Advisers and investors are requesting that such criteria make up a small proportion of bonus, with the majority of the award measured against financial KPIs. To this end, LGIM has stated that it expects the use of strategic /qualitative targets be limited to 25% of salary or less.
Parity with the wider workforce
Investors are also paying close attention to non-flexible remuneration in the form of salary increases and the contribution levels to Executive Directors’ pension provision compared to pension contributions made to the wider workforce.
The desire for fairness between the average for the wider workforce and Executive Director contributions is not a new concept but is likely to become a greater focus, notably during a potentially more political environment for corporate governance.
The enhanced Investment Association (‘IA’) Principles of Remuneration published in November 2018 have now provided an undisputable policy guideline for investors with policy-based colour tops provided by the Institutional Voting Information Service (IVIS).
IVIS will now ‘Amber Top’ Remuneration Report proposals at companies where incumbent directors receive pension contributions of 25% or above. IVIS will also ‘Red Top’ Remuneration Policies where pension contributions for new directors are not reduced to the wider employee level.
Finally, total pay levels have remained on the top of shareholders’ agenda and are often played out in the UK business and, increasingly news, media. To this end, the IA’s Principles of Remuneration note that: 'Undeserved and excessive remuneration sends a negative message to all stakeholders, including the Issuer’s workforce, and causes long term damage to the Issuer. Shareholders expect the Remuneration Committee to ensure that the remuneration structure is appropriate and to exercise relevant discretion to avoid these situations.'
Individual financial or operational performance aside, it is clear that an increasing number of commentators believe that there is likely to be an absolute limit on what is considered appropriate pay for a director in the UK. While no official thresholds are publicly provided for these limits in the UK, investors appear to expect director total pay to be around £2-5m with any payments above £10m deemed excessive.
Looking to 2020
We predict that there will be a significant number of remuneration policy votes during next year’s AGM season. This year 114 companies put their policy to a vote, compared with 169 companies in 2018 and 268 in 2017. Given the need to gain re-approval every three years, it’s likely there will be a spike in companies seeking approval.
With Brexit uncertainty and many economists predicting an economic downturn in 2020, it could pose an interesting challenge for these companies.
Author
Sheryl Cuisia, Managing Director
Boudicca (part of Equiniti Group plc)
Sheryl.Cuisia@boudiccaproxy.com
