Deloitte FTSE 100 report: 2016 may be pivotal moment for executive pay

Business advisory firm publishes preview of annual FTSE 100 remuneration report

• Proportion of companies receiving less than 75% of votes in support of their remuneration has almost doubled since the ‘shareholder spring’ of 2012
• Median salary increases remain at 2%, but bonus payouts have gone up
• Standardised pay packages not necessarily best way to drive long-term strategy and success of companies

The number of FTSE 100 companies receiving less than three-quarters of votes in support of their remuneration report so far this year is already higher than in the ‘shareholder spring’ of 2012, according to Deloitte’s annual FTSE 100 remuneration report. Eight companies have received a vote below 75% in favour of their report, with two failing to secure a majority. Meanwhile just 26% of the top 30 companies had their remuneration report approved by 95% of shareholders or more, compared with 52% last year.

Stephen Cahill, partner in Deloitte’s remuneration team, said: “So far this year we have seen a higher proportion of companies receiving less than 75% of votes in support of their remuneration report. While we’re still talking about a relatively small number of companies this is rightly a cause for concern. The 2016 AGM season has been bruising for a number of companies, perhaps even more so than the shareholder spring of 2012.”

Concerns raised by shareholders include the lack of bonus target disclosure as well as a lack of transparency about the link between executive pay and the performance of the business*. Moreover, investors raised concerns over increases to pay packages, particularly where there was no clear justification provided.

Salaries, bonuses and long-term incentives

The report highlights that the new disclosure regulations**, alongside pressure from investors have, to some extent, put the brakes on board pay. The median salary increase remains at around 2%, as it has since 2012. The median annual bonus potential of 150% of salary has not increased since 2007 and the median potential Long Term Incentive Plan (LTIP) award has also remained steady for the past few years. The total pay received by chief executives in FTSE 100 companies has been broadly flat year on year.

The report also shows that remuneration structures are becoming simpler. Ten years ago more than half of FTSE 100 companies operated more than one long term plan whereas today this has decreased to one in five companies. Structures are also becoming more focused on longer term shareholding with higher shareholding requirements, longer performance periods and further holding periods for shares awarded. In 42% of companies participants in long term plans have to wait for five years or more before receiving any of the shares awarded, which increased from 26% two years ago.

Stephen Cahill said: “Remuneration committees are taking some very positive steps in the right direction but the downside is that remuneration structures are becoming more and more standardised. It seems unlikely that the same structure can support the diverse nature of our top 100 companies. We support a move towards greater flexibility, as proposed in the recent report from the Executive Remuneration Working Group, but also note that the right answer for some companies will not necessarily be the simplest. Where arrangements are non-standard and include a degree of complexity, the key is to ensure that they can be easily explained and justified and that the link between performance and reward is transparent.”

Actual bonus payouts in respect of performance in 2015 are higher than in the previous year. The median bonus payout as a percentage of the maximum possible is 77%, compared with 73% last year. Only four companies paid no bonus to executive directors while seven companies paid the maximum amount possible.

Payouts from long-term incentive plans have remained around the same level over the last two to three years. The median payout from long term plans as a percentage of the maximum possible is currently around 40%, with over a third of plans paying out nothing at all and less than one in ten companies receiving the maximum award.

Stephen Cahill commented: “The spread of payouts from long-term plans appears to demonstrate a stronger link to performance than payouts from annual bonus plans. Median bonus payouts have consistently been between 70% and 80% of the maximum every year for the last ten years. We believe there needs to be much more rigour in the way the targets for these plans are determined, more discretion used to ensure payouts reflect overall performance, and greater scrutiny by investors once the targets are disclosed.”

Employee representation

The report suggests that remuneration committees need to ensure that executive pay is considered in the context of the rest of the company and should be seen to be fair and equitable with general employee policies.

Stephen Cahill added: “We agree with the concept of the employee’s voice being heard by the remuneration committee. This could be achieved by the introduction of an internal employee forum which the remuneration committee would be required to consult with on a regular basis. Having to explain differences in policies and payments to a group of employee representatives would bring another dimension to remuneration committee discussions.

“Greater sharing of success may also be a helpful way to deal with the issue of inequality and we hope the government will look at this and consider ways in which companies can be encouraged to share a proportion of their profits with their employees.”

Shareholders

Cahill says that shareholders must also play their part in any attempted reforms of executive pay: “There may have been an increase in the number of companies receiving less than 75% of votes in support of the remuneration report. But since the vote was introduced back in 2003, 75% to 80% of companies have consistently got more than 90% of votes in favour of the remuneration report. Shareholders have had the power for over ten years to stop companies from implementing arrangements which they are uncomfortable with. They have, to a large extent, failed to use it yet continue to complain about the problems.

“It has been suggested to make the annual vote on the remuneration report binding. A vote against remuneration which has already been paid would cause some practical issues and we have concerns that this may actually make some shareholders even more reluctant to vote against. An alternative might be to introduce a ‘yellow card’ approach; for example if a company received less than 75% of votes in support a binding vote would be required in the following year, giving the company time to address the problem.”

Cahill concludes: “We believe that the issues of inequality and the wider considerations of good corporate governance and social responsibility need to be addressed but this will require a holistic approach from companies, investors and regulators. When we look back at 2016 it may turn out to be a pivotal moment for executive pay.”

End

Notes to editors

Deloitte’s 15th annual Guide to Directors remuneration in FTSE 100 companies, September 2016 will be published at the end of the month
*Deloitte analyses the company reports from two proxy voting agencies - IVIS (representing the Investment Association) and ISS (Institutional Shareholder Services)

**New legislation, which increased the level of disclosure and introduced a binding vote on remuneration policy, was introduced by the government in 2013.

About Deloitte
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