The first 50 companies of the FTSE 150 have now released their FY2016 annual reports ('the First 50') and, as in previous years, in this issue we consider what companies can learn about the 2017 AGM season to date. For many companies of course, this is the first year they will put executive director remuneration policy back to shareholders since the remuneration reporting regulations were introduced in 2014, so the stakes are higher than in previous years.
2016 saw a number of high profile companies fall foul of shareholder activism with low votes in support (mostly advisory votes of course) and some votes lost. This year we expect more pressure in the context of the recent government papers on the topic of executive pay, and as shareholder and media pressure reaches a highpoint.
So, the First 50 are out – what can we learn from them?
Three key policy themes
Firstly it’s interesting to note that only 35 of the First 50 (70%) have put remuneration policy to vote, reflecting the significant minority that have gone to vote since 2014. Looking at those new proposed policies, three clear themes arise:
- More reductions to quantum than ever seen before
- Strong move towards increased long-term alignment in the form of more deferral, holding periods and higher shareholding guidelines
- Many moves to align pension contributions with those of the wider workforce
Of the 35 companies that have put policy to vote…
Cutting quantum – in particular long-term incentives
After government, shareholder and media pressure to curb excessive executive pay, we have seen more companies respond this year with quantum decreases than in prior AGM seasons. Most of these drops have focused on long-term rather than short-term incentives. The chart below outlines the number of STI and LTI increases and decreases in the First 50 last year (2016) compared to those seen this year (this includes changes proposed to policy and those made within implementation only). In summary:
- The number of companies reducing LTI levels has doubled (from 4 companies to 8), while the number increasing LTI has fallen almost by half (7 companies to only 4)
- STI has increased at slightly more organisations than last year but decreased at the same number (2 companies in each year)
However, there are some brave companies making the case for overall increases in quantum – but accompanied by significantly more ‘gives’ than we’ve seen in the past.
As executive pay quantum has become more of a hot button in its own right, where an increase is proposed (even where it is warranted by market positioning or changing responsibilities), companies seem to be working harder than ever before to get shareholders on side and adding two or more shareholder friendly features to policy seems to be the norm.
Of the eight companies in the First 50 looking to increase overall quantum in proposed policy (rather than doing so within existing policy), half suggest they will do so alongside two or more new shareholder friendly features.
We continue to see investors push for long-term alignment of executive pay with five years now becoming the norm. This is clearly reflected in proposed changes with:
- 14 of the 50 companies reporting increasing shareholding guidelines, and
- 17 companies introducing (or extending) a holding period on LTI.
Note: companies outlined below may be doing more than one of the following.
One key hot button this year appears to be pension, driven in part by Blackrock’s view (among others) that executive pensions should be aligned with those of the wider workforce.
11 of the 35 companies who have put their policy to vote this year (31%) propose reduced pension for executive directors with three reducing contributions for incumbents, and eight for new hires.
Voting guidance so far
Proxy agencies have so far noted more shareholder friendly changes that companies have been making and particularly applauded proposed increases to shareholding guidelines, increased bonus deferral, longer holding periods and reductions in overall quantum.
Concerns centre on some of the same themes seen in previous years but with more focus than ever on insufficient stretch in targets and any increases to quantum.
At this time, we only have policy voting recommendations from ISS in relation to 12 of the companies to put their policy to vote, but on a like-for-like basis interestingly, more companies have received a ‘For’ recommendation this year compared to the last major set of policy votes in 2014 (33% this year, 22% in 2014).
Willis Towers Watson View
It remains early days of course, with many more companies yet to release reports and AGM voting not yet really underway. However, the majority of proposed changes to policy we have seen so far have played it safe, opting to bring in features to align their pay better to the long-term or to reduce quantum. There has been little new, with no companies so far introducing restricted stock for example, despite a growing number of voices calling for it (witness the BEIS report released 5 April).
Where companies are proposing increased incentive opportunity, they are doing so alongside significant other, less contentious, changes. And it seems to be working. So far this year we have seen more vote ‘For’ recommendations from ISS and many of the positive changes proposed being acknowledged by the voting agencies.
So, what can we learn as we look towards the April / May run of AGMs? In our view, we should expect continued conservativism as remuneration committees respond to the threat of significant votes against. But that doesn’t mean you can’t obtain shareholder support for less standard changes that support achievement of strategy – far from it, many shareholders seem more open to tailoring, but only with strong accompanying business rationale. And we’d be amazed if we don’t see restricted stock come through somewhere (but don’t expect a glut!).
It’s a tough environment – arguably tougher than ever before – but as always, the best you can do is try to align pay with strategy and performance. And perhaps try higher shareholding guidelines…