In this report we explore some of the current market responses to COVID-19, as well as providing our usual updates on market practice in the FTSE 250 to date. As expected, we have seen more changes to remuneration levels this year as the majority of companies are tabling a new policy for approval. Whilst AGMs are ongoing, we have also provided a summary of proxy agency recommendations and AGM voting out-turns.
Fixed pay
Aligning pensions for existing executive directors with the wider workforce has been a key area of investor scrutiny this year, with the Investment Association stating that this should be achieved by the end of 2022. Pension contributions for existing executive directors were already aligned with the wider workforce in 31% of companies. A further 30% of companies are committing to aligning levels by the end of 2022. Based on current disclosures, around 36% of companies are not compliant with the Investment Association’s guidance.
Of those companies making reductions, the most common approach is a phased reduction over a number of years.
Annual bonus
Thirteen per cent of companies have increased their annual bonus opportunity and 7% of companies have decreased it.
Of these, around a quarter of companies that increased the bonus opportunity did so for one or selected executive directors. Where bonus opportunity was increased, it was generally by 25% of salary.
The link between environmental, social and governance (ESG) measures and incentives has been a consistent theme in recent conversations with investors and will be a ‘hot topic’ this decade. The use of such measures is significantly more prevalent in the annual bonus than the long-term incentive plan (LTIP), with the most typical measures used being linked to ’social’ (e.g. an employee/HR/stakeholder measure).
Where used, the typical weighting of ESG measures in the annual bonus is 10-20% of the total.
Long-term incentive (LTI) plans
Changes to long-term incentive opportunity have been more frequent than last year. This is unsurprising, given that we are in a policy year. So far, we have seen 18% of companies increasing and 5% of companies decreasing LTI opportunity.
Of the companies increasing LTI opportunity, nearly half have also proposed an increase to annual bonus opportunity. Again, we have seen companies reduce LTI grant levels for 2020 due to an ongoing (pre-COVID) downward share price trajectory.
One company in the FTSE 250 has proposed a restricted share plan (RSP) so far this AGM season.
Around 15% of companies in the FTSE 250 now operate an incentive structure which is not a ‘typical’ annual bonus and/or performance share plan (PSP).
Pay out-turns
The median annual bonus pay-out as a percentage of maximum has decreased from 68% last year to 60% this year.
Discretion was applied by Remuneration Committees to reduce bonus payments in nine companies and increase payments in three companies.
Median LTI vesting has reduced slightly this year compared to last year, from 58% of maximum to 55%. Discretion was applied by Remuneration Committees to reduce LTI vesting in one company.
CEO pay ratio
70% of companies have published their CEO-to-worker pay ratio with the median ratio at 37:1
Approximately 70% of companies have published their CEO-to-worker pay ratio, with the median ratio at 37:1.
The highest median CEO pay ratio is 723:1 and the lowest median CEO pay ratio is 11:1.
Post-employment shareholding guidelines
- The UK Corporate Governance Code applies to companies with financial years starting on or after 1 January 2019. Of these, approximately 70% now have a post-employment shareholding guideline in place.
- Around half of these are compliant with the Investment Association’s guidance to hold the lower of the shareholding requirement immediately prior to departure or the actual shareholding on departure for two years post-cessation. Where companies are not Investment Association compliant, typically a smaller shareholding is required on cessation (e.g. 50% of the in-employment guideline) or a phased approach is taken to the time for which shares must be held.
2020 AGM voting out-turns
While proxy agency recommendations have been mixed, overall we have seen a general decline in negative recommendations in the FTSE 250. It is clear that there continue to be ‘red-line’ issues which are largely unchanged from previous years. As expected, we have seen more examples of negative recommendations due to a lack of pension alignment with the wider workforce for existing executive directors.
Aside from pension, the pay-for-performance link and large salary increases continue to be key areas of focus:
Incentive opportunity increases when not accompanied by a compelling rationale.
We have seen an increase in scrutiny around incentive targets over recent years, with concerns around the stretch of targets and increased disclosure expectations, particularly where adjustments have been applied.
Base pay levels and increases. Companies that award above inflationary/broader employee base salary increases without clear communication and compelling rationale continue to receive push-back.
Shareholder support at AGMs remains high, with median support of 96% for the remuneration report (consistent with last year). The median support for remuneration policies this year is 95%, compared to 97% last year.
We have seen twelve companies receive votes of less than 80% for the remuneration report, and five for the remuneration policy at AGMs this year. Cited issues include incentive increases, excessive quantum and application of discretion.
Three companies in the FTSE 250 have lost the vote this AGM season so far (<50%), one company for the remuneration policy and two for the remuneration report. One company lost the vote on their remuneration policy due to concerns about increases to both annual bonus and LTI quantum.
Companies lost the vote on the remuneration report due to (i) not addressing previous shareholder dissent and (ii) application of upwards discretion to the annual bonus resulting in challenge on the pay-for-performance link and concerns around leaving arrangements.
Response to COVID-19 and other governance developments
How companies and investors have responded to COVID-19
- Since our last update, proxy agencies have issued guidance on COVID-19 and executive pay. While the prescriptiveness of this guidance varies, it is clear that there is an expectation of transparent disclosure if any changes are made to pay in response to the current environment. Any adjustments to in-flight awards will generally not be supported. The overarching principle that executive pay shouldn’t be isolated where wider company action has been taken is also consistent. There does seem to be some acceptance that there may need to be a delay to target–setting, given the current uncertainty, and that judgment and discretion may need to be used in future years, particularly to ensure that pay is reflective of performance and that there are no windfall gains.
- It is clear that while market practice is of note, there are other considerations for companies to take into account when making decisions around how COVID-19 impacts the approach to pay. The key reference points that Remuneration Committees are considering are (i) the impact on the wider employee population, (ii) financial implications on the business, including the need to preserve cash and the take-up of Government aid, and (iii) the shareholder experience through share price performance and impact on dividends.
- Since mid-March, statements to the market and press releases have provided an incomplete picture of how companies have managed executive compensation during an unprecedented period of economic and social dislocation. Released over the last few weeks, the annual reports published by companies with March 2020 financial year-ends offer a first opportunity to more fully assess how companies have responded.
- Around 40% of companies have implemented temporary pay reductions for executive directors; however, most companies have halted forward-looking pay reviews and salary increases, regardless of business performance during the pandemic.
- Where alterations have been made to incentive out-turns, these have been focused on the annual bonus, with companies taking several different approaches including application of downwards discretion, making payments conditional on future dividend flows and paying the cash element in shares. Looking to incentives for 2020/21 onwards, again we have seen more disclosure around changes to the annual bonus, although some companies have disclosed that they are delaying target-setting for 2020 LTIP awards.
- The Government has announced changes to its COVID-19 Corporate Financing Facility (CCFF) to ensure that businesses which draw for a term extending beyond 19 May 2021 must provide a letter addressed to HM Treasury committing to showing restraint on payment of dividends and senior pay during the period the loan is outstanding. It has also been announced that businesses which draw from the Coronavirus Large Business Interruption Loan Scheme (CLBILS) will be subject to more prescriptive restrictions, including not making any dividend payments or share buybacks and not having the ability to pay cash bonuses or to award pay rises to senior management (including the board). Exceptions to this are where companies declared payments before taking out the CLBILS loan and there is no material negative impact on the ability to repay the loan.
ESG developments
- The Task Force on Climate-related Financial Disclosures (TCFD) has provided a framework for companies to develop more effective climate-related financial disclosures through their existing reporting process. They emphasise the criticality on companies to consider the impact of climate change and associated mitigation and adaption efforts on their strategies and operations, and disclose related material information. In March 2020, the Financial Conduct Authority announced a consultation on proposals which would require companies with a premium listing to make enhanced climate-related disclosures consistent with the TCFD approach, or to explain why they are not doing so.
- The Investment Association has released a report which outlines Investment Association member expectations for stewardship, with climate change and the employee voice featuring prominently. Executives should be fully versed on the impacts of climate change on their business. Companies are expected to have governance processes in place to oversee their response to climate change. This involves having clearly defined responsibilities for oversight, proactively identifying and taking action to manage climate-related risks to their business, and making necessary disclosures.
- Institutional Voting Information Service (IVIS) has introduced a new section to its ESG report, which highlights to investors whether a company has made climate change-related disclosures and if these are aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Response to COVID-19 – Our point of view
The UK is only a few months into disruption and it is not yet clear how long the economic impact will last – immediate and drastic action should be checked.
RemCo and HR governance policies and precedents should continue to apply to decision-making.
If wider business actions have had a negative impact on employees, investors may scrutinise decisions to treat executives more favourably.
Reward changes very much reflect the nature of operations, sector and geography – keep up-to-date with peers, as employees may check.
Some proxies and investors have already confirmed their expectations in light of COVID-19, and pay (particularly executive) should be cognisant of the investor perspective.
Continue to provide all necessary information to enable the RemCo to take immediate action.
In taking decisions on executive pay, distinguish between judgement (understood as interpreting performance) and discretion (changing actual performance outcomes in light of the current facts). Any use of discretion must be clearly disclosed and explained to investors.
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| Title | File Type | File Size |
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| FTSE 250 Executive Pay Trends Update 2020 | .2 MB |
