The next two years will be pivotal for everyone involved in Executive Pay. By the time we meet in 2019, public companies will have reported on a series of significant new corporate governance measures for the first time. Introduced to increase transparency and fairness, the underlying threat from the government is that, if they don’t work and relationships between shareholders and companies don’t improve, binding votes on pay levels are next.
At Equiniti’s Employee Services Forum 2017, animated debates took place about the shifting sands of Executive Pay. Discussions revealed the varying, and at times polemic, views of people from law firms, management consultancies, organisations implementing the measures and, vitally, the businesses affected.
Some argued the changes are significant although Bill Cohen from Deloitte, commended the government “because politically they had to be seen to be doing something and in the circumstances they got the balance about right”. Even looking back at the most recent AGM season, there was a divergence of opinions on what had taken place.
So, what did happen in AGM season?
Broadly the same number of companies achieved 80% shareholder approval or higher for their plans between 2015 and 2016. In line with previous averages, only 8% of FTSE 100 and 12% of FTSE 250 received less than 80% support. Only two companies lost their vote.
This led some at the Forum to feel little has changed. “When you look at the voting patterns, you might wonder how necessary some of these measures are,” commented Matthew Findley from Norton Rose Fulbright. For others, it was evident consultation had taken place behind the scenes encouraging a number of companies to reduce their offers by 25 to 30% ahead of votes – a development which could have a knock-on effect on the wider market.
How different will the AGM season be over the coming year?
One thing is for sure, the spotlight is glaring. Few topics get business journalists as hot under the collar as Executive Pay or a tantalising shareholder revolt. Matched with significant public interest, the topic is – and will continue to be – a political hot potato.
To address concerns, new government measures this year aim to simplify the Executive Pay process and at the same time allow a bespoke approach considering each company’s business and reward strategies. This is a difficult-to-address dichotomy for many. The rules also try to ensure no excessive rewards are paid and encourage a longer-term view in organisations stuck in quarterly reporting cycles.
But will they work?
Described as a “Rogues’ Gallery” the register is a controversial measure; some fear it will be used by the media to name and shame companies failing to gain shareholder buy-in.
Whether it will affect the remunerations committees’ decision-making process remains to be seen. Attendees at the conference – which was made up of senior HR and reward specialists, company secretaries and share plan managers – were split. 59% thought it would make no difference, compared to 41% who believed it would create change.
The Gender Pay Gap
Currently, the publication of the gap is causing concerns because companies are finding issues not just in salaries but in bonuses too. For many, it is a case of wait and see: what will competitors reveal? How much commentary are they providing about why the situation is as it is and how they are closing the gap?
This was an area of passion for many at the conference. “Everyone is trying to do the right thing when it comes to diversity and progressing talented women, so what is getting in the way?” asked Lesley Brook from Brook Graham. Discussion focused on the organisational and career factors which can contribute to the gender pay gap, and on the ways companies can address the issues involved.
CEO Pay Ratio
79% of attendees told us they think it will be easy to produce the proposed CEO Pay Ratio, but the fact remains that this may trigger negativity publicity. This is especially true for companies in customer-facing industries where there is a big differential between the CEO and most employees, who receive minimum wage.
Labelled a “crude number” and a “blunt instrument” that will fluctuate based on performance, others were more positive describing it as “not a bad idea” which would force organisations to focus on employee reward.
And what of beyond 2017/18?
Many options for the future were discussed including restricted shares, long-term deferrals and share options. One executive commented, : “Increasingly, senior employees are having larger amounts of their bonus deferred into long-term stock. We see it as a way of senior people having skin in the game.”
Indeed, a handful of companies are thinking innovatively. Nearly a fifth (19%) of attendees believe there will be a move towards restricted shares. 15% even predict there could be significant simplification and a move towards paying in cash.
But, in general, more of the same is the order of the day on Executive Pay. Both panels and the overwhelming majority of attendees – 64% – think there will be a continuation of the status quo supported by ongoing “tweaks”. Rather than a wholesale rewriting of the rules, incremental improvements will be made, leading to notable changes over time. For many, it’s the only option when dealing with such complexity and increasingly divergent views from each of their stakeholder sets.
So, is it a new era for Executive Pay? Perhaps not entirely. However, one area where there was no disagreement, was the need to keep pushing forward. Robert Head from Neo Reward concluded:
We’ll be back here in a year's time, and the year after that, discussing similar things. The issues around executive pay aren't going away because there are many stakeholders involved with differing agendas. However, if the debate and some of the reforms also draw attention to pay levels and pay stagnation at the other end of the spectrum, then some progress will have been made.
Key Executive Pay milestones 2017/18
- Later in 2017 - Financial Reporting Council to start consultation on the Corporate Governance Code
- By the end of 2017 - The Public Register to be in place
- 4 April 2018 - All Gender Pay Gaps to have been published by this date
- June 2018 - CEO Pay Ratio to be introduced by now
Is there a future in LTIPs?
For most, LTIPs will continue their dominance, with 83% of attendees not even considering moving away from them. That’s despite questions over their effectiveness and a government push to abolish them earlier this year. Even here though, improvements are on the cards, with clearer explanations and longer-term thinking being key.
Critical success factors for 2017/18
- Use a framework to make pay decisions that cover all you need
- Own your story in a meaningful way
For help managing your remuneration policy, share plans and reports contact Phil Ainsley.