The first 50 UK annual general meetings (AGMs) of 2021 have now taken place and stakeholders are closely watching how companies have addressed Covid-19 disruptions in making decisions on executive pay.
As organisations sought to find a path to recovery out of the pandemic in 2020, many furloughed employees or accepted other government support.
Was this first group of companies to hold general meetings sensitive to concerns by employees and investors for more moderate positions on executive pay? Were they aligned?
By and large, they were.
Half paid no bonuses to executive directors: this included three-quarters of the companies that accepted external support. In addition, many executives took a temporary 20% pay cut for part of 2020. Overall, therefore, this first 50 group generally followed the recommendations of voting agencies and the Investment Association (the IA).
The proxy voting agencies’ guidance at the height of the pandemic was that executives should not be insulated from the impact of the pandemic and should “share the pain” with their employees and shareholders. In November, in its most recent Covid-19 guidance, the IA set out the following expectations:
When direct support was received through furloughing employees or raising capital, companies should pay no bonuses to executive directors other than in “exceptional circumstances”;
This report shows how the first 50 companies to hold AGMs in 2021 responded to this guidance. For any other companies that have not yet decided how to respond to this guidance or have not yet reported, explaining the context for decisions and providing adequate justifications for actions that deviated from guidance will be key.
First 50 AGM snapshot: Company responses to Covid-19 a key issue
This group represents the first 50 AGMs held in 2021. These companies had financial years ending between 29th August 2020 and 31 December 2020. Many had finalised key pay decisions before the vaccination programme was rolled out or the UK roadmap out of the Covid-19 crisis was unveiled.
Broadly a third (32%) of this first 50 took a new policy to shareholders at their 2021 AGM. Average shareholder support in this group is broadly similar to support among the first 50 AGMs held last year at 92.1% compared to 91.9% in 2020. Note that companies in the first 50 to hold AGMs each year appear to have slightly lower levels of support than companies generally, where the average vote for remuneration policies and remuneration reports tends to be in the mid-nineties. None of the companies taking a new policy to shareholders in this group received a significant (20% or more) vote against the proposed policy. This could be the result of companies continuing to take a cautious approach to policy changes in the context of the wider economic uncertainty.
Shareholder support for how these companies have operated, and intend to operate, their policy was similar to last year, with the average advisory vote in favour of the Directors’ Remuneration Report (DRR) at 90.0% compared to 90.8% for the first 50 in 2020.
Eighteen percent of these companies received a significant (20% or more) advisory vote against their DRR and have been placed on the IA register, but so far no companies have failed to get more than 50% in favour.
The influence of the investor and voting agencies on negative voting outcomes remains strong. The average vote for remuneration reports was 64.4% where ISS gave an AGAINST voting recommendation, and 76.8% where the IA gave a RED Top.
The key reasons why IVIS and ISS have issued negative reports have been where they have felt that the impact of Covid-19 on the wider business, employees and shareholders has not been adequately reflected in the executive directors’ remuneration or where remuneration committees have exercised their discretion in such a way as to allow awards to vest that would otherwise have not.
Overall Trends in FY2020
Addressing the impact of the ongoing pandemic required hard choices for some remuneration committees in FY2020. Many companies have had to factor in the impact of furloughs and other government support, and capital raises or dividend cancellations – actions that directly affected the workforce, taxpayers or investors. For example:
A closer look: Bonuses and LTIPs
Annual bonus and deferral
Remuneration committees’ approach to bonuses in 2020 shows that a great majority of companies demonstrated restraint:
As a result of salary waivers and lower bonus and LTIP outturns, the average CEO single figure of remuneration has fallen materially for FY2020 compared to FY2019, in 58% of companies in this group (where the incumbent CEO was unchanged). For those companies where the a single figure fell, the average fall was 36%.
In making decisions for 2021, remuneration committees have generally demonstrated a desire to take into account the pandemic’s impact on their stakeholders. Significantly more companies than usual have applied pay freezes for their executive directors for FY2021 in light of the ongoing pandemic, and almost none sought increases in variable pay opportunity in new policies submitted to shareholders at the 2021 AGM.
CEO salary increases
Other areas of focus
Voting agencies and shareholders continue to focus on whether the pension allowance levels of executive directors are aligned with those available to the wider workforce. For new executive director appointments, this is now market practice and in place for all of the companies in this first 50 group.
The focus is now on the alignment of pensions for incumbent executive directors. In the first 50 group:
The IA updated guidance is that where there is no credible plan to align incumbent directors’ pension levels to the workforce by the end of 2022, it will ”Red Top” those with a pension allowance set at or above 15% of base salary. Previously this threshold was 25% of base salary. The new guideline applies to companies with year ends falling on or after 31 December 2020.
In-employment and post-cessation shareholding requirements
All the companies in the first 50 have an in-employment shareholding requirement of at least 200% of salary, with a third of companies setting their requirement higher (the highest was 450% in this group of companies). Only one company had no formal in-employment shareholding requirement in place, but the executive directors already hold very significant shareholdings.
Every company in this group that took a new policy to a shareholder vote disclosed a formal post-cessation shareholding policy. In the first 50:
What companies can do going forward
Companies that have yet to finalise their DRRs should identify any pay issues that run contrary to the voting agency guidance or Corporate Governance Code requirements and consider disclosures. It is important to explain the context of decisions and to detail any underlying rationale for actions taken. Being prepared will help organisations put the best case to shareholders for any decisions that could be controversial.
Over the next year, we expect more companies to review executive pay policies and begin to think about making more radical changes to LTIPs. In addition, as was the case after previous crises, if there is significant shareholder dissent on remuneration resolutions in 2021, we may see voting agencies, regulators or legislators respond with tighter guidance or rules, which may further reduce remuneration committees’ scope for judgement and discretion.
How can A&M’s Executive Compensation team help?
A&M Executive Compensation Services is well-positioned to advise Remuneration Committees through this period. Engagements are led by a Managing Director who attends all meetings and is actively involved in all deliverables.
This ensures you always have access to the right level of advice, particularly when making critical decisions under time pressure. Our Managing Directors have a combined 80+ years of experience in advising on executive remuneration matters.
If you have any questions regarding the content in this report, please contact Nicolas Stratford or Amanda Stapleton.