What's up in the world of executive pay?

To a large extent, this year's annual reporting round has been very much business as usual without there being any recent changes to the regulations which introduced the "say on pay" votes over ten years ago. There remain the usual annual media headlines regarding how many days in January need to pass before CEOs make more money than the typical worker makes all year. These have been supplemented with several highly publicised "votes against" executive pay and some high-profile instances of the operation of "malus and clawback", in particular where there have been actual repayments of sums received by CEOs.

This is against a backdrop of increased activism in executive pay in recent years including increased remuneration report disclosure requirements (in 2013, 2018 and 2019); the introduction of a requirement for a binding shareholder vote on directors' remuneration policies; and the adoption of various institutional investor and corporate governance requirements such as bonus deferrals, malus and clawback, post-vesting holding periods as well as in-post and post-cessation shareholding requirements.

As a result of the complexity of UK executive pay requirements and the perception (whether or not justified) that the rewards available are greater in the US, at least for the most senior executives, there is a body of thought that executive pay is one of the factors making the UK less competitive.  The future of executive pay in the UK therefore remains part of a wider discussion on ensuring the domestic governance landscape does not make the UK an unattractive place to do business.

Changes ahead?

Two developments may change the executive pay landscape in the UK over the near term, the first being the willingness of the Investment Association (IA) to relax its current prescriptive approach, the second being the increasing likelihood of a Labour government.

1. Investment Association's letter to Remuneration Committee (Remco) chairs

The IA's February 2024 letter advised Remco chairs that the IA's Principles of Remuneration will only be updated later in 2024, to take account of the feedback received from Remcos and companies during 2023. This "more fundamental review of the Principles" will reflect evolving member expectations on remuneration and feedback from companies.

By way of background, in September 2023 the IA met with nearly 100 companies in the FTSE 350 to discuss the IA's Principles of Remuneration and their views on the competitiveness of remuneration in the UK. Three themes were highlighted by companies:

• the need to increase pay opportunities through LTIP grant levels to address the challenge of attracting US executives and to be able to compete in the US market;
• the use of hybrid schemes which incorporate both performance and restricted shares (which are used by global companies in the US and elsewhere); and
• the perception of the disproportionate impact on the value of remuneration received by executives caused by UK Corporate Governance Code requirements such as increased holding periods, shareholding guidelines (including post-employment) and malus and clawback.

Potential simplification of the IA's Principles of Remuneration is to be welcomed if it really does result in a more competitive environment for listing in the UK.  However, it is perhaps unlikely that there will be revolutionary changes, particularly as the IA is just one player in the executive pay sphere, with proxy voting agencies such as Glass Lewis and ISS, as well as key institutional investors such as LGIM, being equally influential.  Indeed, the fact that so many proxy advisors and institutional investors have their own guidelines on executive pay will make it very difficult for the IA to influence change to the UK executive pay landscape unless there is consensus across such bodies.  The lack of consensus even within these bodies makes meaningful change more difficult since investment managers may support a proposed executive pay package, whilst governance colleagues in the same organisation often take issue with any deviation from UK market norms.

2. A Labour government

Other than vague statements about being a pro-business government, the Labour party has remained silent on what changes it might introduce to executive pay on taking office.

A revolution was proposed in 2018 in respect of executive pay in a report commissioned by the Labour Party^[1] which ruffled quite a few feathers at the time, with business leaders being quick to criticise a number of its recommendations. 

The report contained some elements that, had they been enacted, would have been truly revolutionary. Some of the headline-catching proposals included publishing names and number of employees (not just directors), by gender and ethnicity, earning more than £150,000 per annum in brackets of £10,000; company law being changed to give stakeholders the right to cap executive remuneration; executive remuneration being in cash, not shares; executive remuneration being subject to an annual binding "stakeholder" vote (including shareholders, employees and consumers), with incentive-based pay needing both a 50% turnout and support from at least 90% of all voting stakeholders; and a prohibition being introduced on golden handshakes, hellos, handcuffs, parachutes, goodbyes and severance.

With the General Election now set for 4 July, it will be interesting to see if any of these proposals, even in a watered-down form, are resurrected in the run-up to the election or whether the Labour party will seek to further distance itself from anything published under its Corbyn leadership.

Are there other potential areas for reform of executive pay?

Given that the majority of UK listed companies are advised by a small number of remuneration advisors, it is perhaps unsurprising that a "one size fits all" approach dominates the executive pay sphere.  According to a Willis Towers Watson article published in November 2023^[2], around 75% of the FTSE 100 has the same variable pay structure (i.e. annual bonus plus performance shares) for the most senior executives (up from 42% in 2013).

It is likely that executive pay will continue to be a significant (and very public) issue for the foreseeable future.  It remains to be seen however whether the more things change the more they stay the same or whether we are on the cusp of a sea change in this area.