FTSE 100 – Companies respond to shareholder concerns

Deloitte publishes insights from its 2015 report on remuneration in FTSE 100 companies

• 82% of companies received more than 90% of votes in favour of their annual remuneration report;
• 51% of companies now expect executive directors to hold shares earned from long term plans for a further period of time
• Over 90% of companies now have clawback provisions in annual and longer term plans.

Far fewer FTSE 100 companies have made changes to their remuneration arrangements this year, according to a new report by the professional services firm Deloitte. Only 17% of companies have substantially changed their arrangements, compared to more than three quarters last year whilst just 11 FTSE 100 companies implemented new incentive arrangements, compared with 35 last year. 82% of companies gained more than 90% of votes in favour of their annual remuneration report up from 79% last year.

Stephen Cahill, partner in the remuneration team at Deloitte, comments: “This year’s report provides evidence that companies are listening to shareholders. This has led to the overall level of support for remuneration reports remaining steady and high, demonstrated by a median of 97% votes in favour. These positive results are due to an increased dialogue between companies and their shareholders as well as the new disclosure regime. We have seen a better quality of information disclosed and remuneration policies which incorporate many of the best practice features shareholders expect to see.”*

Shareholder support
Overall FTSE 100 companies have received a higher level of support for their remuneration report, with fewer companies receiving less than 80% of votes in favour this year, particularly in the larger companies. It is significant that the companies that have put an updated remuneration policy to a vote so far, have all received votes in favour of 90% or more.

Long term incentive plans
There has been a noticeable move to simplify remuneration arrangements. The number of companies operating more than one long term plan is decreasing and now 21% of FTSE 100 companies operate more than one long term plan compared with 29% last year. A number of companies no longer operate a bonus matching plan and a straightforward bonus deferral is now in place in 69% of FTSE 100 companies.

Cahill adds: “Shareholders have been encouraging companies to move towards clearer and simpler remuneration arrangements and we have seen a significant move in this direction in recent years. Companies are removing deferred bonus matching arrangements and moving to a simple bonus deferral alongside just one long term incentive plan. The Investment Association has put together a working group to come up with proposals for a ‘radical simplification’ of executive pay, on the basis that there is a strong body of opinion that pay structures have become too complex. We encourage companies to contribute to this review and we hope it will generate some interesting debate.”

Recruitment and termination payments
Where companies have received a lower vote, one of the key issues has been around recruitment arrangements. This highlights the challenges in justifying remuneration arrangements when people change roles. In four of the five companies that received less than 80% of votes in favour, recruitment arrangements were the main issue for shareholders.**

Cahill comments: “When an executive director is recruited externally it can raise a number of issues. Although companies now have an approved policy in place governing the remuneration arrangements on recruitment this has not always proved to be a safeguard. How the policy is implemented is what shareholders care about. Remuneration committees may find it helpful to have parameters in place to ensure some clarity ahead of any recruitment process and to help to avoid any negative shareholder reaction.

“The second issue it raises is that of succession planning. Appointing an external candidate may be the right thing for a company at a particular time but internal appointments can be less risky and are likely to cost less. Shareholders are increasingly expecting companies to be focused on long term stewardship and as part of this focus want to see evidence of good succession planning. The Financial Reporting Council has identified this as a key priority during 2016 and we expect a discussion paper in the near future.”

Salary changes
Companies are showing moderation with salaries and this restraint has been particularly apparent in larger companies where 44% of executive directors received no increase. Salary increases continue to be modest with a median increase of 2.2%, compared to 2.5% in 2014. ***

Incentive changes
The median maximum level of bonus opportunity remains at 150% of salary in FTSE 100 companies and at 180% of salary in the top 30 companies. Bonus payouts were higher than last year in the top 30 companies, a median of 72% of the maximum opportunity, but at a similar level in companies ranked between 31 and 100. ****

A key expectation of shareholders is that companies will be able to claw back incentive payments and share awards where they were clearly inappropriate. This is now becoming normal and accepted practice and provisions are now in place in relation to both annual and long term incentive plans in around 90% of companies.

Cahill concludes: “We believe that the new disclosures and the increased level of dialogue between companies and their shareholders have had a positive impact overall both on the quality of reporting and on the structure of remuneration policies. But the potential downside is a tendency towards conformity. It is important that the remuneration arrangements properly support the business strategy and sometimes this calls for something different. We hope that the trust between companies and their shareholders will continue to develop so that companies will have the confidence and support of shareholders to implement policies that are right for the business rather than those which tick all the boxes.”
 

End

Notes to editors

* This is the second AGM season since the new disclosure regulations, which require a binding vote on the Directors’ Remuneration Policy report every three years.

** Companies are now required to disclose their recruitment policy as part of the overall binding policy report, following the introduction of the new disclosure regulations last year.

The recruitment policy is binding and companies need to be sure that it allows for sufficient flexibility to allow the company to deal with unforeseen circumstances while being certain enough to gain shareholder approval in advance, for the range of provisions the company might expect to use when recruiting an executive director. During the 2014 AGM season a number of companies found it necessary to issue statements of clarification in relation to the recruitment policy where shareholders considered the policy allowed too much flexibility.

*** In some cases the finance director may also be included in the higher bracket.

**** There is a maximum bonus opportunity based on company performance. Depending on the extent to which the performance targets are met a proportion of the bonus will be paid, up the maximum for outstanding/exceptional performance.

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

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