UK companies warned over remuneration practices

November 26, 2021

UK companies have been put on notice over aligning executive remuneration with stakeholder experience as the Investment Association (IA) updates its guidelines. This comes as the High Pay Centre questions the effectiveness of incentive pay.

The IA has warned remuneration committee chairs that consideration of the wider stakeholder experience when determining executive remuneration outcomes will continue to be a critical investor expectation in 2022. In particular, the IA expect remuneration committees to carefully review the appropriateness of a bonus payout if a company has taken and not repaid government support.

The coronavirus public health emergency catapulted environmental, social and governance (ESG) issues to the forefront of civic and financial debate and could prove to be a major turning point for the incorporation of ESG considerations. Minerva’s UK 2021 H1 Voting Review identified a number of companies that faced high shareholder dissent on executive remuneration in part due to perceptions of doing the wrong thing during the pandemic.

Further to the warning from the IA, concerns over the effectiveness of incentive pay have been questioned in a new report published by the High Pay Centre. The report examines annual bonus and LTIP payments at FTSE 100 companies and questions their value, as the analysis found that incentive plans almost always payout, and typically payout at a very high amount. The High Pay Centre suggest that incentive payments are attached to insufficiently flexible targets and that more demanding requirements would lead to fewer and lower pay-outs.

As the largest components of CEO remuneration, bonus and LTIPs have attracted significant public controversy. The High Pay Centre suggest this not only creates concerns about the impact of inequality on well-being and social cohesion but there is also a risk that a very high concentration of incomes amongst top earners has opportunity costs in terms of the pay of low and middle earners. The issue of pay fairness has been an area of focus for investors during the pandemic.

Minerva’s voting review found that there were 60 high dissent remuneration-related resolutions amongst the UK’s top 350 companies in the first half of the year, more than the 59 in the whole of 2020. The primary drivers appear to be remuneration complexity, base pay increases larger than the wider workforce, and the continuing impact of COVID-19 concerning the use of discretion and/or adjustments.

The IA’s new guidance recognises the importance of the incorporation of ESG factors for executive remuneration. The IA’s letter warns companies that have incorporated ESG risks and opportunities into their long-term strategy but have not yet incorporated ESG metrics into their remuneration structures to explain to shareholders how they intend to incorporate them in future.

The other key changes made by the IA include:

• Levels of Remuneration: The Principles have been updated to emphasise that Remuneration Committees should provide a clear rationale for an increase to any element of, or to the overall level, of remuneration.
• Value Creation Plans (VCPs): Given the increased adoption of VCPs over the last AGM season, the Principles have been updated to include a specific section on investor expectations on VCPs.
• Grant Size: The Principles have been updated to reflect investor preference for companies to reduce awards at grant where share prices have fallen rather than relying on discretion when awards vest.
• Pension Alignment: Executive pensions should be aligned with the majority of the workforce by the end of 2022.

Minerva keeps up to date on all the latest remuneration issues. Check out our article from earlier this year on remuneration transparency, published in collaboration with the Workforce Disclosure Initiative.