As Andrew highlighted, the 2024 Annual General Meeting (AGM) season saw more engagement between companies and shareholders over varying proposals relating to remuneration structure and quantum. At an overarching level, the Principles are clearer and more concise than previous versions and they note the challenges companies with significant US operations face in attracting and retaining executives in a global talent market.
Notably, there’s a marked difference in tone compared to previous versions, with reduced focus on what remuneration committees should do and what shareholders will expect or want. There’s greater emphasis on the need for organizations to collaborate with shareholders in choosing a remuneration structure that’s the most appropriate for its business, while being sensitive to the expectations of shareholders and wider stakeholders.
Whilst the Principles have undergone substantive change, what hasn’t changed is that the Principles remain just that - principles - rather than a binding set of rules.
But what are the key changes impacting remuneration policy development and what were the views of our conference audience on their own remuneration policies?
The revised Principles recognise that some companies, particularly those with a significant US presence, have implemented hybrid plans (typically a combination of performance shares and restricted shares) and that such arrangements will be considered by shareholders on a case-by-case basis.
The Principles state that Committees should consider the size of restricted share awards compared to the equivalent grant of performance shares. Previously, the Principles stated that the discount rate between performance shares and restricted shares should be ‘at least 50%’; however, the revised Principles provide more openness to different discount rates being applied, provided they are explained.
Of the handful of U.K. organizations who have adopted hybrid at Director level, some have done so on the basis that they were already using hybrid below Board. In these cases, adopting hybrid at Board level was a matter of ensuring consistency between the executive cadre as a whole and this was part of the rationale communicated to shareholders. In other cases, it was to ensure competitiveness in design from a U.S. market perspective.
While more openness to hybrid plans in the Principles will no doubt be welcomed, the adoption of alternative long-term incentive plans (LTIPs), including hybrid models, requires thoughtful consideration. Any change in long-term incentive strategy should align with an organization’s business, talent and overarching remuneration philosophy.
Despite this change, the onus is on the Committee to consult with its shareholders on the need to deviate from established practice and explain why such arrangements are necessary for the business.
The tone around VCPs has been neutralized, however, caution is still advised, as well as early engagement with investors. The guidance also specifically states that a VCP must reward the creation of substantial value over at least a five-year period.
In a significant step to modernise the guidelines, the 5% in 10 years dilution on executive (discretionary) share schemes which has been longstanding feature of the UK governance landscape for many decades, has been removed entirely from the Principles.
The Principles state that appropriate dilution limits for the company should be adhered to and they now expressly envisage that Remuneration Committees may seek approval from shareholders for dilution limits higher than 10% in exceptional cases (such as a recently listed high-growth companies), if full rationale and a disclosure of timelines for realigning with standard dilution limits is provided.
The IA has confirmed that a multiple of one times the annual LTIP award is an appropriate benchmark for a minimum shareholding requirement. While not explicitly outlined in the Principles, for those organizations who operate restricted share plans with awards discounted, investors generally expect a proportionally higher shareholding guideline.
The revised Principles state that it may be appropriate for a reduction in the level of annual bonus deferral if the Director has already met the company’s shareholding requirement. This is on the basis that bonus deferral, where an individual already has a high shareholding, doesn’t create materially more shareholder alignment.
This revision is largely in response to the broader debate around the perceived value of the bonus compared to other markets where mandatory deferral into shares is less prevalent or non-existent. This AGM season we have observed a handful of FTSE 100 companies reducing deferral levels, typically doing so typically once the shareholding guidelines have been achieved, or at least partially achieved.
We expect more organizations in the years ahead to link levels of bonus deferral to the level of achievement of the shareholding guideline. That said, annual bonus deferral can be used as a ‘give’ to shareholders in return for support for more material asks such as significant structural changes or increased quantum. Thus, any changes to deferral levels should be considered alongside these more meaningful asks.
The revised Principles state that organizations should disclose the peer comparators for benchmarking purposes and engage with investors on their relevance, especially if the organization is proposing change which is material.
Truly global organizations, who are competing in the global talent market, are increasingly developing pay peer groups that may be global in nature, encompassing companies where talent is demonstrably recruited from or lost to, reflecting their ‘real world’ executive talent market. A clear, well-defined peer group, helps express to shareholders that change is needed and forms the foundation on which proposals are based. In WTW’s experience in supporting clients making bold changes this year, peer group selection should be data led to avoid accusations of cherry-picking individual companies .
We asked our audience what changes they anticipate making when they next review their remuneration policy:
Just under half of the audience who responded stated that they expect to make limited changes to their policy. This underscores that for many organizations their current remuneration policy aligned to U.K. norms may be working perfectly well and thus, there’s no fundamental need for radical change.
Just over a third stated that they plan to increase incentive opportunities and around one in five stated they plan to reduce mandatory bonus deferral levels. Only a minority of respondents stated they plan to amend LTIP vehicles, with c.11% stating they plan to move to or form restricted stock and an even smaller proportion (c.8%) planning to adopt hybrid arrangements.
Whilst Remuneration Committees may welcome the flexibility that the new Principles provide, more flexibility places increased importance on engagement and active dialogue with shareholders to understand their increasingly diverse perspectives on executive pay.
Organizations that propose remuneration arrangements that diverge from established U.K. norms must be able to provide a robust rationale for their chosen approach. By clearly explaining the strategic benefits of pay arrangements that depart from the norm, companies can increase their chances of success.
If you would like to discuss the changes to the IA Principles and what it means for your organization, please contact your local WTW representative or Paul and Martin from our UK ECBA practice.
