How best to obtain shareholder approval for your new remuneration policy

Listed companies are required to put their directors’ remuneration policy to a shareholder resolution at least every three years. If a company wishes to make any changes to its remuneration policy, it must put the new policy to shareholders for approval at an annual general meeting (AGM).

Several listed companies are likely to be seeking shareholder approval for their new directors’ remuneration policies this year. As experts in the field, this article is written to help those companies and their remuneration committees with the process – looking back at the practices that caused most concern for shareholders at last year’s AGMs and to examine some of the approaches remuneration committees could consider to avoid a similar reaction this year. The consequences of losing a vote on remuneration policy are primarily reputational but being named and shamed is not a comfortable experience for remuneration committees. It is therefore important to scrutinise and engage with shareholders regarding any proposed changes before tabling them for approval.

COVID-19 had a huge impact and affected many businesses in different industries and sectors. What has been pleasantly surprising, is that many companies have recovered well from the impact of COVID-19, much quicker than anticipated. Unfortunately, the country and companies now find themselves facing new challenges, that could impact approvals of new remuneration policies going forward.

There are a number of areas which the shareholders are currently analysing before approving. We are going to focus on three:

1. executive director salary increases;
2. annual and long-term incentives; and
3. pension contribution alignment to the workforce.

The deteriorating economy which has affected the cost of living and inflation has placed many companies in a difficult position when determining salary increases for their workforce and executives alike. Many companies opted for a salary freeze during COVID-19 to manage costs. In 2022, many companies were unable to offer the workforce salary increases aligned to the increasing inflation rate, regardless of the mounting pressure and expectation.

Remuneration committees must therefore be careful when proposing salary increases for executives not to offer an increase above the rate offered to the wider workforce because any such salary adjustment made to executive directors will attract severe scrutiny and a negative vote.

During COVID-19, the Government offered a wide range of business financial support measures for UK companies. This assisted many companies to endure the pandemic. During the same period, performance measures and targets were set for annual bonuses and long-term incentive plans based on many unknown factors and uncertainties.

On the one side, many of the targets set during COVID-19 have been outperformed by numerous companies, which means that executives are due pay-outs. These companies are facing difficulties paying annual bonuses as there is pressure mounting where there is an expectation that annual bonuses should not be paid by companies where government aid was taken and not reimbursed.

On the other hand, in some cases targets have not been met by company executives. This too, is challenging for companies as during that time, it was not easy determining suitable performance measures and targets, particularly for long-term plans.

This year, remuneration committees must be cautious about how they table the short-term and long-term incentive plans review to the shareholders, in cases where targets have not been met. Good governance guidance encourages remuneration committees to use discretion, to avoid unwarranted formulaic outcomes. The use of (particularly upward) discretion and the introduction of unusual incentive structures without compelling rationale and consultation can raise concern with the shareholders, as can so-called “in flight” adjustments to LTI performance targets.

It is therefore very important to interrogate proposed plans, keeping in mind the following:

• Performance measures and targets must align with the company strategy, values, and culture.
• The use of restricted / deferred shares in long term incentive plans, which are not subject to performance conditions should be limited.
• Environmental, Social and Governance (ESG) measures should be included in most executive plans (where possible).

The UK Corporate Governance code requires companies to align Executive Director’s pension contributions with those of their wider workforce. Many companies have started this process and annually show the adjustments being made (for current and for newly appointed directors). With the pressure still increasing on companies to make this adjustment, remuneration committees, where this change has not been implemented, must be prepared to present valid reasons and a process for implementing the required adjustment in the future.

This will also show that the Committees are paying attention to people management issues such as culture, fair and proportionate workforce pay. Something the shareholders will favour and support.

As already mentioned, these are just some of the areas to take extra precaution on as the 2023 AGM season approaches. Should you wish to discuss this further or have someone help you explore more on this topic, please contact Yolanda Roach.

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