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The impact of Brexit on executive pay

On 23 June 2016 the British people voted by a majority of 51.9% to leave the European Union. This somewhat unexpected decision to leave the EU is likely to cause a short-term period of economic uncertainty.

Setting the scene: remuneration post-Brexit

The markets reacted quickly to this decision with sterling, oil and the FTSE all-share falling and investors moving money to safe havens such as gold. In the medium to long term, however, this decision will undoubtedly present both risks and opportunities for businesses based in the UK.

In light of the new political and economic landscape, assessing the impact of Brexit on their business and their strategy for future growth is likely to be at the very top of the agenda for Boards across the UK for months to come.

Given the importance of the wider business issues, executive remuneration is unlikely to be at the top of the list of things to think about and rightly so.

The role of executive remuneration is to support companies in delivering their business strategy. If the business strategy is subject to change, this may well have a knock-on impact on the structure of executive remuneration and incentives. It will be important that companies consider changes to remuneration arrangements carefully to ensure that they are designed to fully support the go-forward strategy and that such changes are not rushed.

Having said this, there are some aspects of remuneration that companies will want to consider over the coming months which we have set out below.

 

Remuneration policy

Following the introduction of new legislation in 2013, companies are required to obtain shareholder approval for their policy at least once every three years. As many companies received shareholder approval for their current remuneration policy at the 2013 / 14 AGM, this will mean seeking shareholder approval for an updated remuneration policy at the next AGM.

Given the period of uncertainty facing businesses, now more than ever it will be important that remuneration policies are drafted with sufficient flexibility so that changes, for example, to performance measures / targets, can be made during the life of the policy.

 

Remuneration committee judgement

The uncertainty in the market may well have an impact on a company’s ability to meet targets for incentives based on performance in 2016 and other outstanding cycles. If the initial reaction continues, shareholders may be sitting on paper losses on their shareholdings, on the other hand companies with diverse international businesses may benefit from the weakening of sterling.

Remuneration committees will therefore need to exercise thoughtful judgement when determining incentive outcomes taking into account the overall business performance in circumstances which are generally outside of executives’ control as well as the underlying shareholder experience.

Careful communication of the decisions made and the rationale for these decisions will be critical in obtaining shareholder support.

 

Setting targets for incentives to be awarded in 2017

Setting targets for 2017 may well present challenges. The consensus from economists pre-Brexit was that a vote to leave would result in a lowering of growth rates over the next two years (2016 – 1.4% and 2017 – 0.7%) but not a full-fledged recession. Businesses themselves may well find it difficult to set long-term targets particularly whilst the UK re-negotiates its trade agreement with the EU.

Remuneration committees will therefore need to spend time to ensure that any targets set are sufficiently stretching and would represent ‘success’ for shareholders whilst at the same time being realistic for management.

The vote to leave the EU will clearly have an impact on both the economy and businesses alike. Boards and Committees will no doubt be spending considerable time in developing their strategy for long-term growth and as part of this, making decisions on remuneration to ensure that the arrangements support the delivery of the strategy.

The key to future success of the UK will be an economy which is as resilient, adaptable and flexible as it has been in the past. These are good principles to aim for in respect of executive remuneration structures as well.

 

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