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What’s the Story?
The FT reported last week that UK companies are preparing for battle with investors over executive pay.
Leading institutional shareholders and proxy advisory advisors such as ISS and The Investment Association are expecting restraint on directors pay in 2023.
One focus is on director base pay rises below those available to the general workforce. Another one is the incentive outcomes seen in 2023 which may contain windfall gains from low share price pandemic LTIP grants, or high 2022 bonus outcomes following the 2021 bonus outcome peak.
Why Does it Matter?
The cost of living crisis is very real for many employees and customers. Executive pay already attracts much criticism, big pay rises and large amounts of incentive pay delivered in 2023 may be seen as both insensitive and unjustifiable.
Investors are now on high alert to look at LTIPs vesting in 2023. These were granted in 2020, so may reflect "windfall gains" from low grant share prices.
In addition 2021 bonus results in the FTSE 100 were significantly high compared to the prior four years. Many believed this was due to soft target setting in 2020. As a result, the 2022 bonus outcomes seen in 2023 will be in the spotlight.
On the other hand, companies face ongoing talent pressure from private equity, competitors and international pay markets. Furthermore, not all companies have done poorly. Where performances is sound, it is right that well designed incentives should pay out their expected rewards.
All these things flow into the 2023 AGM votes on remuneration, which might impact both the regular advisory vote for the reporting year and, for many, the binding vote on Remuneration Policy renewal too.
News Point View
It is unsurprising that a pandemic caused once in 80 year economic dip has also caused waves within company incentives.
Some companies prosper and others do not as the world moves from the pandemic era into the poly- crisis of supply chain disruption, energy crisis, high inflation and rising interest rates.
The median 2021 bonus exceeded the upper quartile bonus outcomes for the four preceding years (in large part). So maybe some targets set in 2020 were downshifted too much.
A similar impact may apply to LTIP targets also set in 2020, which vest in 2023.
In addition, investors flagged in 2020 that they did not want LTIP “windfall gains’ from low share price LTIP grants. Some companies committed to a vesting review to identify suspected windfall gains.
There is, however, no definition of what a windfall gain looks like. Markets move up and down, and companies produce multi-year results. Unpicking a windfall gain from, well, a gain, is tricky.
The 2023 remuneration committee decisions will come under extreme examination. First for the sensitivity of the pay rise decision and second for possible distortions within incentive pay outcomes.
When delivering top pay is correct, the remuneration committee should not shy away from the correct decision and explain the results with strong reasoning. But nor should they shy away from outcome adjustment when the case for a downshift in headline outcome is clear.
Remuneration Committees are between a rock and a hard place for 2023. The due diligence they will need to ensure the outcome is sound is vital. So too is the clear and strong communication need for both shareholders and executives.
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