FTSE 100 shareholder support for annual remuneration report increases as companies cut executive pensions

• Fewer low votes on pay amid significant cuts to executive pensions;
• Median CEO pay packages for 2019 remained stable; 
• However half of FTSE 100 companies announce pay cut, including temporary salary reduction, in light of COVID-19.

The number of FTSE 100 companies receiving ‘low votes’ (less than 80% in favour) on the annual remuneration report halved in 2020 to 4%, according to a preview of Deloitte’s annual FTSE 100 executive remuneration report. Shareholders have been increasingly supportive of the annual remuneration report over the past two years, with low votes in 2019 at 7.5%, down from 13% in 2018.

2020 saw a quieter shareholder season in general, with median support of 96% votes in favour of the annual remuneration report. This can be attributed to commitments to make significant cuts to contractual pensions for existing executives, and greater use of discretion by remuneration committees to reduce formulaic bonus awards.

The median FTSE 100 CEO package for 2019 remained relatively stable at £3.7m (£3.65m for 20181¹) following a fall from £4m in 2017. However, 2019 packages are based on estimated values of share awards based on pre-COVID share prices, therefore actual values are expected to fall by up to 10% when re-stated next year.

Since publishing 2019 annual reports, over 50% of FTSE 100 companies have announced pay cuts – typically a temporary reduction in salary – and investors have issued clear guidance that decisions on executive pay in the coming year should reflect the workforce, investor and wider stakeholder experience.

Stephen Cahill, vice chairman at Deloitte, said: “Pensions have been the hot topic of the AGM season, and are an example of the growing investor focus on pay fairness across the entire workforce. While it has been a quieter AGM season, shareholders have demonstrated that they will hit hard where companies fall foul of expectations in this area. In the year ahead, executive pay will be under intense scrutiny to ensure that executives are not insulated from the wider economic and social impact of COVID-19.”

Incentive out-turns
Over the last five years, there has been a gradual decline in the level of annual bonus pay-outs for executive directors – a median of 68% of maximum in 2019 compared to 78% of maximum in 2015. Remuneration committees are increasingly expected to use judgement and discretion to reduce formulaic bonuses, in the context of macroeconomic and financial uncertainty.

Under long-term incentive plans, vesting levels – the extent to which performance conditions are achieved – were slightly higher than in recent years, with a median pay out of 63% of the maximum award. These awards were typically based on three year performance from 2017 to 2019 and under the majority of plans no shares will be released to executives for a further two years. However, a significant number of ‘in flight’ long-term incentive awards are unlikely to pay-out in the future due to performance conditions set pre-COVID-19.

Cahill added: “Many remuneration committees face a tough year ahead and will be expected to use judgement and discretion to ensure that executive pay reflects the wider investor and workforce experience.

“A careful balance is needed to attract and incentivise the leadership required to drive UK business recovery, in the context of a growing focus on building back a fairer society.”

Pension cuts and policy changes
Deloitte’s analysis also found that there has been a significant shift in market practice around executive pensions, following guidance from the Investment Association last year. Where executive pensions were not aligned with workforce rates, over 80% of FTSE 100 companies have so far committed to cut existing executive pensions, with the majority committing to align executive and workforce rates by the end of 2022.

Finally, the analysis found that of the companies that have held their AGMs in 2020 so far, nearly two-thirds put a new remuneration policy to a binding shareholder vote. Changes primarily included requirements for executives to hold shares post-leaving, and inclusion of ESG-related performance metrics. Three companies have introduced new restricted share plans - share awards subject to continued employment, with less onerous performance conditions. In general, shareholder support has been high, with a median of 96% of votes in favour of new remuneration policies.

End

Note to editors

¹ In accordance with UK reporting regulations, total CEO pay packages reported for 2019 include estimated values of long-term incentive awards based on pre COVID-19 share prices therefore these may fall when companies are required to re-state actual values next year. Total CEO pay packages for 2018 (median £3.65m) are based on the actual values re-stated by companies in 2019 (median package reported in 2018 was £3.4m based on estimated long-term incentive values).

Deloitte’s “Directors’ remuneration in FTSE 100 companies – October 2020” report includes data in respect of 96 companies with financial years ending up to and including 28 February 2020.

The analysis covers companies who have held their AGM in 2020. This includes companies with financial years ending on or after 30 September 2019 up to and including some, though not all, companies with a March 2020 year end.

Investment Association (IA) voting guidance issued in September 2019 was applicable to companies with a financial year end starting on or after 31 December 2019.

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