What’s the Story?

Last week two of the main three UK proxy voting agencies recommended a vote against the proposed new CEO pay package for AstraZeneca’s CEO Pascal Soriot at the 11 April 2024 AGM.

ISS and Glass Lewis have dubbed the proposal “excessive” and dispute the company’s claim that the proposed package is necessary to increase competitiveness.

The proposed package combines base pay of c.£1.5m; STI (annual bonus) with a 300% maximum, and LTIP annual awards with an initial face value of 850% of base salary. So, the maximum incentive pay is 11.5x base salary, some £17.25m, which, plus base salary itself, gives a total package of c.£18.75m.

The prior AstraZeneca incentives were 250% for the STI and 600% for the LTIP, so in total an increase of 250% in incentive levels overall; a face value incentive rise at maximum of c.£3.75m, representing some 25% rise in the total package.

ISS is said to be concerned with “the scale of the increase” as Soriot’s compensation is already “competitive against European peers”. While the Glass Lewis viewpoint is that there is an “absence of compelling evidence that the CEO has been materially underpaid against peers in recent years”.

Both ISS and Glass Lewis recommended a vote against the 2021 proposed pay package, which resulted in some 40% of shares being voted against the then proposal at the AstraZeneca 2021 AGM.

Why Does it Matter?

The UK needs to be competitive globally. This involves company level pay competitiveness and structural competitiveness in areas such as governance, taxation and regulatory control.

In recent times, the London Stock Exchange has expressed concerns regarding the poverty of new IPOs on the London market; and importantly the apparent share price discount applying to major companies on the London market which reportedly may mean some leading companies such as Shell, Pearson and National Grid might be tempted to de-list in London and re-list in New York.

The “Big Tent” discussion on UK top pay was sparked last year by Julia Hoggett of the LSE who posited that UK pay governance restrictions were a strong dampening factor on UK pay quantum, structure and executive perceived value and that this was therefore part of a wider problem of UK global competitiveness.

While UK competitiveness against Europe is less acute as a problem, competitiveness with the USA in many dimensions, including executive compensation, is starkly real.

Earlier this year the FRC announced a fundamental review of the UK Stewardship Code. On the same day the Investment Association announced a fundamental review of their Principles of Remuneration guidelines, a revised version of which is now expected to be published later in 2024. Last year the FCA decided against many amendments then proposed to enhance the UK Corporate Governance Code. In the last budget, HMT announced PISCES, a new form of share trading platform for fast growth unlisted companies, with light touch governance constraints. CORPGRO has commented on many of these developments.

Indeed, in November last year CMIT, The Capital Markets Industry Taskforce issued an open letter on “Resetting the UK’s approach to corporate governance”. This well written document makes numerous telling points, including many on executive compensation.

Executive compensation should be set to be fair and offer an engaging and motivational upside on success. The design of pay quantum to be around average or conservatively less often fails that test. Executive compensation should be set to support the present and future needs of the business, not approached with an “amend only if market essential” mindset.

Newspoint view

Executive compensation makes extensive use of market data. Selecting their right comparator companies is essential, so too is the correct job match selection and the adjustments flowing from the job and the standard survey defined job. Third is selecting pay position against that market, not everyone should be average. And last the pay mix between fixed and incentive pay, and the design of the incentive pay plans.

And that’s the conventional approach. In every data set one company is at the top of the list. So how did that happen then? Maybe it relates to a different pay comparator companies; but often too it relates to a mindset switch in setting top pay. Viewed as an investment in talent, and a share of delivered growth in value, executive compensation levels become highly judgemental. These judgements relate to the role of a particular person in the context of delivering major value in a specific role within a specific company. The conventional “market rate” matters, but not as much as ensuring proven top talent remains engaged in delivery of ongoing shareholder value.

Companies know this very well, investors much less so. Retention of talent is often valued more by Remuneration Committees than by investors; whose stated preference is generally to ensure compensation design links strongly to delivered future performance, largely irrespective of retention factors.

When investors ask in response to a compensation change request, “how many top people have you lost recently?”, they are asking the wrong question. That’s like asking a farmer “how many cows have died recently?”, when they want to call a vet.

AstraZeneca is enhancing competitiveness. They do not want to find themselves in a losing battle to retain a proven CEO from unwelcome advances from competitors with deep pockets, and much freer governance norms. That means paying well, however defined, not just the bare minimum that can be defended as essential.

Executive Compensation and Incentive Design

Reward and Share Plans 

Remuneration Advisory and Support

ESG and Sustainability

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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