2023: As you were or into the melting pot?
December 21, 2022
Looking back on a year of turmoil
2022 was supposed to be the year in which we started to get back to normal, or to embrace the “new” normal. In January, COVID was a declining force, inflation was 5.5%, investors anticipated a brighter outlook for the UK economy and the FTSE100 index closed above 7,500 on the first day of trading.
Then, Russia invaded Ukraine on 24 February. The FTSE, marching towards 7,700 earlier in February, had fallen back to 6,826 in October, as the conflict in Ukraine continued, before recovering to 7,370 at the time of writing. Inflation is currently 10.7%. Supply chain disruption, energy price rises and strikes by public sector workers (not to mention political turmoil) threaten economic stability, household budgets and business confidence.
At the time of the 2022 AGM season, companies and their remuneration committees faced, as usual, the constant challenges of attracting, retaining and motivating the talent needed to keep their businesses running successfully, unaware of the economic and political turmoil to come. There were high levels of shareholder votes in favour of both remuneration policies and remuneration reports. Where shareholders voiced opposition or dissent, it related principally to increases in variable pay, the exercise of discretion and the link between pay and performance.
What you were most interested in
Looking back at our monthly Newsletters over the past year, articles about the evolving role of NEDs and the increasing demands of their roles are among those attracting most attention from readers (https://mm-k.com/2022/02/09/who-would-want-to-be-a-ned/) and (https://mm-k.com/event/mmk-invited-to-speak-at-women-on-boards-networking-event/).
The Government is looking into the regulations governing NED pay to determine whether any unnecessary restrictions exist preventing NEDs from being paid in shares or share options (https://mm-k.com/2022/07/19/government-proposals-to-review-ned-pay-have-caused-shareholder-unrest-a-proportionate-approach-holds-the-key/). Through our connections with the Quoted Companies Alliance, we have participated in preliminary discussions with BEIS, who intend to consult further on this subject.
The role played by proxy advisers and their influence on voting decisions (https://mm-k.com/2022/04/19/the-increasing-influence-of-proxy-advisors-is-the-tail-wagging-the-dog/) also caught readers’ eyes. We were making the point that proxy advisers are not consistent with their guidance, do not vote but wield significant influence and yet are not regulated.
More and more companies are including ESG metrics in their executive incentive plans and there has been a significant amount of interest in how different types of company have approached this (https://mm-k.com/2022/06/29/life-in-the-boardroom-have-firms-of-differing-types-and-sizes-approached-esg/). The 2023 report of our global research into the adoption of ESG metrics by the world’s leading companies, carried out in conjunction with our partners in the GECN Group, has been published recently. A copy of the latest report, which contains some interesting and useful trend data, is available to download here.
As a final comment on 2022, our article in the June edition of our Newsletter, which considered how employee share schemes might have a role in mitigating the impact of inflation on remuneration packages also resonated with readers (https://mm-k.com/2022/06/29/share-schemes-and-the-impact-of-inflation/).
• The debate about NED pay is likely to continue. BEIS has indicated it will go out to consultation. This subject is controversial, however, and may prove too difficult for a government facing major challenges from a number of angles to confront, at least in the short term.
In the meantime, companies particularly early-stage and pre-IPO businesses must be able to attract the talent they need. A potential risk is that companies might choose to list where the regulatory regime is more benign than in the UK towards NEDs’ pay.
• 2023 will see more governance reform. The FRC will soon become ARGA with a wider and more potent array of powers. The UK Corporate Governance Code is being reviewed and the review might encompass proxy advisers. There will be a consultation process, in which MM&K will take the opportunity to participate. The reform is also likely to focus on remuneration disclosures. The direction of travel is for companies to focus on reporting outcomes, not aspirations (particularly relevant in relation to ESG) which we think should help to improve transparency about links between pay and performance – a concern of some shareholders in the 2022 AGM round.
• Institutional investor guidance encourages remuneration committees to exercise discretion (upwards and downwards) to avoid anomalies arising from formulaic incentive plan structures. 2023 is likely to be another year in which remuneration committees will be required to exercise their discretion in relation to bonus and long-term equity awards based on 2022 performance. Understanding participant and investor expectations through engagement will be key to the effective exercise of discretion.
• Employee share scheme reform is also planned for 2023. We have written about this in our November Newsletter (https://mm-k.com/2022/11/22/possible-reform-to-employee-share-ownership-coming-in-2023/). We see the changes as a positive step for companies and employees, particularly in times of high inflation, and hope that the Government will follow through with its proposals.
Five practical tips for remuneration committees in 2023
Whilst COVID did not adversely affect all companies or their employees, all are affected by the high energy costs, worker unrest and political turmoil experienced this year.
Our experience is that remuneration committees seek to do the best they can with a difficult brief and we hesitate to oversimplify the complexity of the role. That said, executive pay is likely to be subject to yet more scrutiny in 2023, so here are five suggestions for remuneration committees to take into the New Year:
1. Keep executive salary increases within increases for the workforce and consider adapting workforce benefits policies to provide support where needed most.
2. Keep executive pension contribution rates consistent with rates for the workforce. Corporate governance codes require this and most companies comply but there is a minority which does not.
3. Discount inflation in the calculation of executive bonuses and do not pay executive bonuses if they cannot be justified by performance or if there are no bonus awards for the workforce.
4. Disclose outcomes not aspirations or plans when describing ESG policies. What has been achieved and how has it been measured?
5. When making decisions about executive pay, remember that perception is often a greater determinant of investor/stakeholder/public reaction than the reality of what actually happened.
2022 promised much but that promise has been overtaken by the practical impact of geo-political events (and others closer to home).
So, 2023 is likely to start with the country and businesses back in the melting pot. That is not to say, however, there will be no opportunity or that no solutions will be found. There will be both opportunity and solutions. In the meantime, resilience and innovation will be required. We are looking forward to the challenge.
Please contact Paul Norris to discuss or comment on anything contained in this article.