Investors had sharper focus on executive pay in 2019 AGM season

Nov 15, 2019
Remuneration is an issue investors are increasingly taking seriously

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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, according to new analysis by Equiniti.

Remuneration was the second-most common reason for British companies to lose or come close to losing an AGM vote in 2019. Equiniti defines a close call as a vote with a victory margin of less than 10 percent. Six companies lost votes, while 11 companies faced close calls, as revealed in Equiniti’s AGM Trends 2019 report.

The Investment Association’s letter to remuneration committee chairs at the end of 2018 made it clear that investors were losing patience with companies not responding to shareholder concerns on remuneration, particularly the use of ‘exceptional circumstances’ to justify large remuneration outcomes and also not consulting with shareholders in any meaningful way on remuneration,’ the report authors note.Remuneration committees need to heed these warnings to avoid future difficulties in getting remuneration policies and remuneration reports approved.’

Remuneration policy approval

In the UK, it’s a requirement that companies have their remuneration policies signed off by investors at least once every three years. Since 2017, the percentage of companies receiving more than 90 percent support from their investors has fallen from 87 percent to 81 percent.

When looking at the share of companies that received more than 80 percent of investor support, however, it’s virtually flat over the last three years for 92 percent of companies.

Equiniti’s report also predicts 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 reapproval every three years, it’s likely there will be a spike in companies seeking approval next year.

With Brexit uncertainty and many economists predicting an economic downturn in 2020, it could pose an interesting challenge to some companies seeking approval of their remuneration policy. This is something on the minds of some remuneration committees already, writes Rob Burdett, senior client partner at Korn Ferry’s executive compensation and governance practice, in the Equiniti report.

‘Investors are urging remuneration committees to exercise discretion to avoid inappropriate bonus outturns or long-term investment plan (LTIP) vestings, and to reduce LTIP award levels if the share price has fallen,’ Burdett writes. ‘But there is much uncertainty within remuneration committees as to what actually is an inappropriate outturn and what adjustment should be made.

‘Similarly, if the share price has crashed, there is uncertainty as to by how much LTIP award levels should be reduced. But companies that have not been deemed to have exercised discretion sufficiently (or at all) have attracted significant votes against their pay resolutions.’

Approval of remuneration reports

For companies outside of the FTSE 250, there has also been a decline in support for annual remuneration reports, according to Equiniti’s report, with support falling from 97 percent to 93 percent. ‘This may be due to investors demanding a higher level of transparency and standard of reporting, which is sometimes lacking in smaller company reports,’ the report authors note.

For companies in the FTSE 100 and FTSE 250, the level of support is consistent with previous years, at 92 percent and 93 percent, respectively.

The other most noteworthy callout as it relates to the approval of remuneration reports is that there has been a decline in the number of companies that received more than 90 percent support from investors. In 2015 this stood at 87 percent, but it fell to 82 percent in 2018 and 77 percent in 2019.

The Equiniti report is available for download now.

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