European AGM Season 2022 Recap

While say-on-pay was already common in certain European markets (e.g. the UK), the implementation of the EU Shareholders Rights Directive (SRD II) has made the 2022 AGM season the first where remuneration policies and reports were put to shareholder vote around the region. Our analysis of voting outcomes and proxy agency feedback across Europe reveals continuing country-specific issues alongside emerging region-wide trends.

1. 01

   Advisory as well as binding votes can have consequences

   While the vote on the remuneration policy/system is binding in most countries, the vote on the remuneration report is typically advisory. Nevertheless, our analysis shows that no matter the type of vote, companies are generally expected to obtain voting support of at least 70%, with this threshold rising to 80% in some markets. Where support falls below the relevant threshold, companies are required to seek further feedback and demonstrate that they have taken account of shareholder concerns in the next reporting season (e.g. the UK IA Register). Where they do not meet this requirement and voting support continues to be low, we have seen investors consider more drastic measures such as voting against the appointment of remuneration committee chairs.

2. 02

   Average voting results are high across Europe, but local differences exist

   Average voting support for the remuneration policy/system ranges between 85% and 92% across Europe’s main indices. Results are similar for remuneration reports. Despite this overall picture, some companies failed their vote or received approval rates below 70%.

   Our analysis shows that the results for remuneration reports are usually lower than for remuneration policies/systems. This is very clearly the case in the Netherlands, Spain and Germany. Evidence suggests investors are less willing to vote negatively in the binding vote on policy/system but will more readily express their dissatisfaction in the advisory report vote. We have received feedback that some remuneration decisions may not be apparent to investors until they have been implemented and led to unwelcome outcomes disclosed via the remuneration report. We have particularly seen this patten in relation to high sign-on bonuses, severance payments, one-off bonuses, and incentive outcomes not aligned with falling share prices.

   Different patterns of voting support can be seen at the country level. For example, the relatively high levels of support seen in the UK reflect the more established say-on-pay structure in the country. Low approval rates on UK policies are usually only the case when material changes are made that are viewed as controversial by investors.

   In Belgium, on the other hand, voting results are in many cases still quite low compared to the rest of Europe, often due to what investors perceive as a relatively low level of transparency in disclosure.

   Ex ante vote on Remuneration Policy/System

   	AEX 25	BEL 20	CAC 40	DAX 40	FTSE 100	IBEX 35	MIB 30	SMI
   > 90%	86%	36%	50%	68%	70%	62%	60%	na
   70% - 90%	14%	55%	44%	32%	13%	33%	37%	na
   < 70%		9%	6%		17%	5%	3%	na

   
   

   Ex post vote on Remuneration Report

   	AEX 25	BEL 20	CAC 40	DAX 40	FTSE 100	IBEX 35	MIB 30	SMI
   > 90%	47%	35%	62%	49%	80%	47%	60%	59%
   70% - 90%	35%	53%	35%	38%	15%	29%	23%	41%
   < 70%	18%	12%	3%	13%	5%	24%	17%

3. 03

   ISS criticism of remuneration policies/systems focuses on three key issues

   ISS’s main points of criticism underpinning its ‘Against’ recommendations can differ by country, but we have identified a number of common topics emerging across Europe:

   1	Quantum and design of the remuneration package High payout opportunities of incentive schemes, at target and/or maximum level Restricted share grants, i.e. no performance conditions apply to long-term incentives (LTI) Combination of multiple LTI plan types leading to an increase of complexity
   2	Ability for remuneration committees to go outside the policy/system framework Possibility of (uncapped) exceptional remuneration Possibility of high discretionary adjustments to target achievement or payouts without adequate underlying framework for justification
   3	Lack of transparency about pay for performance relationship Insufficient disclosure in describing STI and /or LTI performance conditions Insufficient disclosure of incentive payout curves, especially caps Increasing push to prospectively disclose LTI targets (i.e. at the beginning of the period)

4. 04

   For remuneration reports, ISS’s negative recommendations focus on discretionary adjustments, excessive fixed pay and insufficient disclosure

   Very often a negative voting recommendation is based on the same critical points that are made with regard to the policy/system. In particular, the following points themes emerge in negative ISS recommendations on the remuneration report:

   1	Application of discretionary adjustments Partly connects with the missing underlying framework in the remuneration policy/system, as proxy advisors and investors are often surprised by the level of discretionary adjustment once payouts occur
   2	Focus on fixed pay Base salary increases that cannot be justified by role changes or changes in scope of responsibility “Excessive” pension contributions (e.g. 50% of base salary)
   3	Insufficient disclosure to demonstrate the link between pay and performance Retrospectively disclosed information on payout curves, target setting and achievement is not sufficient to assess the pay for performance relationship (i.e. disclosure after the period)

Conclusions

In summary, the majority of voting results show the support of proxy advisors and shareholders, and the criticism focuses on a small number of essential points. However, companies cannot sit back and relax – we’d draw attention to three points:

1. We expect investors will raise the bar: As evidenced in the UK, once a Say-on-Pay system is in place we expect that proxy advisors and investors will continue to raise their expectations after the first phase of implementation asking for greater transparency and focusing in on hot button topics each year.
2. Taking account of the economic context will be necessary: In the current economic environment, excessive salary increases, use of discretion and pay-for-performance demonstration are likely to be at the top of this list for investor scrutiny. Investors will want to understand how companies have considered the wider employee and stakeholder experience in decisions on executive pay.
3. Disclosure will be critical: Investors are asking companies to provide greater and greater levels of detail in their disclosure on executive remuneration. It is imperative that organisations use the remuneration report as a mechanism to rationalise pay decisions in the context of wider company performance and decisions.