Aside from the few companies with later year-ends, the last couple of AGMs of the FTSE 100 were held last week, so now would seem an opportune time to summarise the outcomes and trends from the 2016 season.
One hallmark of the season was that it appeared to be a re-run of the “shareholder spring” of 2012. This was no doubt fuelled by the continuing media clamour about the quantum of directors’ remuneration in these companies, presumably based mainly on the bald disclosures in the “single figure table”. Shareholders’ (non-binding) votes against the implementation of remuneration policy exceeded 20%, a rough approximation of the “significant” threshold, at nine AGMs. The issue seems not only to have been the size of rewards, but in several cases specific red rags, such as “golden goodbyes” in the form of retained LTIP awards for leaving directors.
And it wasn’t only the implementation vote on which some companies came a cropper. Virtually all FTSE 100 companies put in place their first remuneration policy at their AGMs in 2014, so the majority will have to renew these policies next year. However, 13 companies have asked shareholders to approve a new policy this year, taking pains to carry out prior consultation with major investors. Most of those companies had a smooth ride in the vote, but there were two whose new policies didn’t even get the simple majority required to pass. Another two had votes against of more than 20%.
It may be that shareholders were generally intending to mark companies’ cards in advance of the slew of new policies that will be put up next year. However, there was some bewilderment expressed by companies who had consulted but then had significant votes against, for example: “The fact is that many of our shareholders agreed with us on this [setting performance targets] – others didn’t. Attitudes towards what is appropriate remuneration constantly evolve and what is right one year isn’t necessarily right the next.”
On the plus side:
- there has been significant movement in the last year or so in disclosures with respect to the targets applying to annual bonuses. Although there is virtually blanket reliance on “commercial sensitivity” precluding disclosure of targets prospectively, the great majority of companies now disclose retrospectively;
- malus and clawback are now commonplace for share plans (slightly less so for cash bonuses); and
- the great majority of the FTSE 100 have by now adopted longer periods between award and release of shares under incentive arrangements. Only a few years ago the norm was for release after a three-year vesting/performance period. However, the approaches for imposing this longer period are many and various, some examples being a performance period of more than three years, a holding period after vesting at three years or the staged release of shares on the third, fourth and fifth anniversaries of an award.
So what can we say about the prospects for next year? As we reported in a previous post, the prime minister has pledged to make the vote on the implementation of a company’s remuneration policy binding. The final report of the Executive Remuneration Working Group (ERWG), set up under the auspices of the Investment Association (IA) and published last week, notes the “concerns over the legal and operational issues” arising from this proposal. It remains to be seen how this will pan out.
Companies’ sentiments about finding it difficult to satisfy shareholders are echoed in the ERWG report: “there is also a perception that investors are sometimes not being clear about their views to companies” and “companies also complain that they receive different views from the investment managers and governance teams within the same investment house”.
It is not clear how the size of directors’ pay packages is to be reined in. Although quantum was not part of its remit, the ERWG makes two recommendations on this front. First, remuneration committees and consultants should guard against the inflationary effect of “chasing the median” – this has always been an issue. Secondly, a company should justify the maximum pay-out under its remuneration policy by reference to both external “relativities” and internal ones, such as the multiple of the average employee’s pay represented by the remuneration of the CEO. This echoes the stated intention of Prime Minister Theresa May to require this ratio to be disclosed in a company’s accounts.
The ERWG’s recommendations will be incorporated at least in part into the IA principles of remuneration (formerly the ABI guidelines). Companies will have to consider whether they wish to take advantage of the greater flexibility recommended by the ERWG and submit a remuneration policy in 2017 that doesn’t include the near-ubiquitous LTIP, provided that approach would serve the company better. The group hopes that simpler remuneration structures without performance conditions will lead to more certain outcomes for executives and cause them to place more value on their rewards, which in turn “should then lead to a reduction in overall remuneration levels”. Given that companies that have submitted new policies this year after shareholder consultation have had mixed fortunes when it came to the AGM vote, one might be forgiven for thinking that it would be a brave remuneration committee that would formulate a new policy outside the tried-and-tested formula of salary/bonus/LTIP award ….