01
The median target total direct compensation of European CEOs increased by 7% to almost four million Euros in 2022. This was driven primarily by an increase of 5% in median base salary – resulting in a median base salary of EUR 1.1 million in 2022 – and an increase of 14 percentage points in the median level of long-term incentive (LTI) awards to 150% of base salary. While target short-term incentive (STI) levels remained stable at a median of 100% of base salary, actual STI levels paid for 2022 performance decreased by 14 percentage points at median to 124% of base salary.
It must be noted that the top European indices typically cover between 20 and 40 companies. Only the FTSE 100 stands out, covering 100 companies. The addition of smaller companies beyond the top 20 to 40 considerably affects the median pay level. If only the largest 30 companies within the FTSE 100 were included in the European analysis, the median target total direct compensation across the region would be significantly higher, at EUR 4.45 million.
02
Overall, median target total direct compensation levels for CEOs increased by 15% between 2017 and 2022, corresponding to an average annual increase rate of 3%. However, the analysis below shows that the increase has not been linear. Instead, levels remained relatively stable between 2017 and 2020, even dropping slightly in two years, before increasing in the last two years.
This growth in target total direct compensation levels was primarily driven by increasing LTI grants: the median base salary ranged between EUR 1 and 1.1 million during the period analyzed, and target STI levels remained static at 100% of base salary, while median LTI expected values increased from 130% to 150% of base salary. We think it’s fair to say that this development is aligned with investor expectations, as the realization of the increased target compensation will depend heavily on the achievement of companies’ long-term performance.
This graph shows that the increase in CEO pay has not been linear. Levels remained relatively stable between 2017 and 2020, even dropping slightly in two years, before increasing in the last two years.
In many European countries, the CEO’s target total direct pay mix typically consisted of one-third base salary, one-third STI and one-third LTI. However, this has changed over the past three years to a typical pay mix of 25 – 30% base salary, 25 – 30% STI and 40 – 50% LTI. The typical CEO pay mix in the UK and Switzerland has been weighted towards LTI for some time, so this wider trend indicates that other countries in the region continue moving in the same direction.
03
There are no major regional shifts to be observed in incentive design. However, the introduction and increasing sophistication in implementing ESG metrics, especially in LTI plans, remains one of the prevailing trends among top European companies. In STI schemes, environment and sustainability metrics have made it into the top three most prevalent performance measure categories for the first time.
It is important to note that market practice around incentive design still tends to follow country-specific regulatory requirements and trends. The most obvious country-specific differences are:
04
While the increasing prevalence of share ownership guidelines (SOGs) has been one of the key trends in recent years, this plateaued in 2022. Currently, 72% of all companies in Europe’s top indices have SOGs in place. However, this statistic hides significant variation between countries. SOGs are market-standard in the UK and Switzerland, and prevalence has increased significantly in France, Germany, the Netherlands and Spain over recent years. In Belgium, Italy and the Nordic countries, however, they are still less prevalent. In addition, the required level of share ownership varies and is higher in those countries with either longstanding use of SOGs, a higher proportion of LTI within the pay mix, and/or where incentives schemes are typically settled in shares instead of cash. Consequently, the median required level is three times and five times base salary in the UK and Switzerland respectively, compared to two times base salary for most other European countries.
05
The voting results on remuneration report resolutions in 2023 show broad investor support, with acceptance levels of 84% to 93% on average and even higher rates at median, ranging from 87% to 97%. A similar level of acceptance can be observed for votes on remuneration policies but, as last year, the number of failed and low policy votes (between 50% and 70%) is much smaller to non-existent compared to those for remuneration reports. The main reason for this discrepancy is that the application of the policy and its possible outcomes become apparent in the report and thus might raise shareholder concerns.
The following chart shows the average and median voting results as well as the percentage of failed and low votes on the remuneration reports by index:
Voting results on remuneration report resolutions in 2023 show broad investor support.
The low or failed votes all have case-specific causes. A common pattern across Europe is that low voting results are either triggered by a serious single reason or by a combination of several factors. Our analysis shows that single reasons are often:
Other reasons more typically observed in combination are:
In addition, we looked at how often the eighteen largest and most active investors across the top European indices voted for or against remuneration reports during the period 2020 to 2023. Good news first: in countries with several years of experience with say-on-pay resolutions, investor voting outcomes are more positive than in those countries that have only put remuneration reports to vote since 2020 or 2021. We believe that adopting certain disclosure practices, already established by companies with several years of say-on-pay practice, could be one of the key drivers for more favourable voting results. Nevertheless, some investors are more critical across all countries, while others differ significantly according to the respective company-specific circumstances. It can be observed that UK investors, who vote according to detailed guidelines that are primarily focused on the UK market perspective, are very critical of individual topics that might not be relevant market practice in the majority of continental European countries, such as relative TSR hurdles requiring outperformance of median.
06
When preparing for the next AGM season, we recommend being aware of the detailed requirements of your company-specific investors, as well as their usual voting behaviour, but also to understand general “no gos”. We advise the following:
