2024 AGM trends in Europe

In 2024, around half of the companies analysed made material changes to their remuneration policies – across Europe, the overall number of companies that put their remuneration policies to vote this year is similar to last year, although this does vary by country.

Key developments to date are:

Changes in KPIs and the use of ESG

• 2% of companies introduce ESG metrics in their STI plans and 12% in their LTI plans
• Further professionalization in the use of ESG metrics: 12% amend  their ESG criteria or their weightings in STI plans and 14% in LTI plans
• LTI plans: 20% of companies modify their financial as well as non-financial KPIs, 4% financial KPIs only and 12% non-financial KPIs only

Change in incentive levels

• 18% of companies increase STI target and/or maximum award levels
• 23% of companies increase LTI target and/or maximum award levels

New LTI plans

• 11% of companies implement new LTI plan designs and/or amend the mix of different LTI instruments

The changes in LTI plan design differ according to local country practice and stakeholder priorities. For example, companies in Belgium are introducing performance share plans alongside pre-existing stock option and restricted share plans. Companies in Germany are reducing complexity in the LTI design and those with backward-looking performance measurement still in place are replacing them with forward-looking performance periods. There is mixed practice in the UK, with some companies reverting to market-standard performance share plans and others adopting atypical structures to ensure they remain globally competitive.

As KPIs in short-term incentive (STI) plans frequently evolve from year to year, we focus on material changes to LTI performance metrics that are often only revised alongside policy reviews. Overall, we observe that, where companies are amending non-financial metrics in LTI, they are primarily changing the way in which ESG targets are selected, set and measured, e.g., increased weighting, changes in ESG categories, and modified or adjusted target measurement.

A more detailed analysis of design changes, that also compares ex-post disclosures in remuneration reports, will be provided later in the year.

Investors and proxy advisors have focused their critique of remuneration policies on LTI KPIs and target calibration as well as on the quality of disclosure

As of 30 May, the average approval rate for remuneration policies among European companies stands at 88%. The range of voting results, from 40.41% at the lowest point to 99.79% at the top end, is very broad. In total, 89% of approval rates are above 70%, 9% fall between 50% and 69%, and 2% are below 50%. Voting results on remuneration policies in Finland are notably lower than elsewhere, accompanied by a very high number of “against” recommendations from ISS. These recommendations are primarily driven by insufficient disclosure in the description of the remuneration policies in combination with one-off awards.

 
Based on an evaluation of the Institutional Shareholder Services (ISS) reports of 181 remuneration policies put to vote across the region, 27% of proposed policies received a negative voting recommendation. In a large proportion of positive voting recommendations, significant concerns were raised, leading to a further 41% of policies receiving “contentious for” recommendations. In line with subsequent voting results, a relatively large proportion of “against” recommendations are observed in Finland, but also in Belgium, Denmark, France and Italy. It is difficult to compare this with prior years, as the proportion of companies putting remuneration policies to vote each year fluctuates more in some countries than others. That said, this year’s AGM results in Belgium, Netherlands and Italy are somewhat more positive, while the results in Germany, the UK, Spain and Denmark are somewhat less positive, than in 2023.

Across Europe, the most prevalent categories of ISS concerns on remuneration policies are:

• “LTI KPIs and target calibration” (22% of reports): for example, grants of stock options or restricted shares without performance targets, performance / vesting periods of less than three years, discretionary performance measurement for non-financial KPIs, partial vesting at below peer median performance in the case of relative TSR measurement, and financial KPIs being almost identical to those measured under the STI.
• “Disclosure practice” (25% of reports): most commonly, a general lack of disclosure of LTI and STI metrics, the mix of different LTI instruments, vesting schedules, performance periods and / or missing details on performance scales. Also flagged are insufficient rationale for increased remuneration packages or caps, and a lack of disclosure on pensions and severance arrangements.
• “Other concerns” (31% of reports): for example, derogation clauses being too general in nature, excessive pay levels, a high level of discretion applied, as well as a lack of responsiveness to shareholder concerns.

The points of criticism vary significantly between countries, partly due to how long ago say-on-pay votes were introduced, but also simply due to different market practices. Regarding disclosure limitations, there is, for example, still room for improvement on the ex-ante disclosures of key LTI design features like vehicle mix, vesting schedules and metrics used in Belgium, whereas in Finland, concerns are raised over a more general lack of disclosure of key STI and LTI design parameters, as well as details of one-off and termination awards. In other countries, where disclosure practice is already very robust, concerns have nevertheless been raised regarding insufficient rationale for increases in remuneration packages / caps or details missing on payout scales. In the cases of France and Germany, the key concern this year has not been raised before: information required to quantify fixed remuneration levels is missing.

With respect to LTI KPI / target concerns, those in Germany primarily focus on partial vesting at below peer median performance for relative TSR measures while, in Belgium and Finland, the focus is on stock options / restricted share plans with no performance targets and vesting periods below three years. In Denmark, key concerns are the discretionary performance measurement of non-financial metrics and the grant of restricted shares, as well as excessive or missing LTI caps.

Approval rates on remuneration reports and concerns raised differ significantly across the region, but there are striking similarities in the reasons for negative voting recommendations

As of 30 May, the average approval rate on remuneration reports among European companies stands at 91%. Once again, there is a very broad range: 34.10% at the lowest point and 100% at the top end. In total, 94% of the approval rates are above 70%, 5% fall between 50% and 69%, and 1% are below 50%. Based on an evaluation of 336 ISS reports, 20% of the remuneration reports received a negative voting recommendation. Further, significant concerns were raised in a large proportion of positive voting recommendations, leading to a further 38% of “contentious for” recommendations. A relatively large proportion of “against” recommendations are observed in the same countries that also received a high proportion of concerns for proposed policies – Finland, Belgium, Italy, Denmark – as well as in Switzerland. Excluding Switzerland, these same countries also received a high level of “against” recommendations in 2023, relative to others. Compared to 2023, approval rates are more positive in seven of the twelve countries, but somewhat less positive in Italy, Switzerland, and Denmark.

For companies with robust disclosure in their remuneration reports, the reason for significant changes in approval rates on ex-post resolutions is usually related to company-specific circumstances. Nevertheless, it is repeatedly observed that a well-structured report, with an investor-friendly presentation of the core content and as detailed disclosure as possible on the key points around the topic of pay-for-performance, can lead to better voting results. Unsurprisingly therefore, shortcomings in disclosure are most frequently criticized by proxy advisors.

Across Europe, the most prevalent categories of concern raised by ISS on remuneration reports are:

• “Disclosure practice” (36% of reports): most commonly, lack of retrospective disclosure on non-financial / personal targets or performance metrics in general / level of target achievement. Also, insufficient rationale for base salary increases / sign-on bonuses / termination payments and limited disclosure on LTI plan design and discretion applied.
• “LTI KPIs and target calibration” (15% of reports): for example, the grant of stock options or restricted shares without performance targets, performance / vesting periods of less than 3 years or an annual assessment over 3 years, a disconnect between pay and performance due to a high payout based on non-financial performance, insufficiently stringent target setting, partial vesting at below peer median performance in the case of relative TSR measurement, and lack of non-financial / ESG performance criteria in the LTI.
• “Other elements” (13% of reports): for example, no response regarding last year’s shareholder dissent, high level of pay compared to peers, excessive pay package, high benefit payments, discretion to grant further share-based plans, and derogation clause too general in nature.

In some countries, particularly the Scandinavian region as well as Italy, Switzerland and Belgium, proxy advisors criticise the opaqueness of remuneration reporting that makes it difficult, or even impossible, to assess the link between pay and performance. In others, feedback relates more to a possible improvement in the disclosure of non-financial metrics, target achievement levels or rationale for one-off payments.

“New game, new feedback”

Although we have not yet reached the close of the AGM season, we can already draw some clear conclusions:

• Across Europe, we see proxy advisors being less hesitant about giving negative voting recommendations. This is especially true in cases where there is no response to prior low approval rates or where no significant improvement is observed in disclosure practices.
• Although the voting guidelines of major proxy advisors on remuneration matters have changed only marginally, if at all, new points of contention are nevertheless emerging that were not highlighted in previous years. This is reflected in the somewhat more restrained approval rates for remuneration policies.
• The main proxy advisor concerns are highly consistent across remuneration policies and reports: their strongest focus is on what they see as insufficient disclosure and on LTI KPIs and target calibration.

We look forward to seeing how the AGM season concludes and will provide another update at that point in time. If you would like advice or support on approaching your AGM, remuneration policy or disclosure practices, please contact us.