“May you live in interesting times”: Themes in Executive Remuneration following the UK AGM season
October 17, 2023
At MM&K we continue to see a number of pressure points that Boards are grappling with when seeking to execute against their business strategy:
- Institutional investors are demonstrating increased appetite for significant returns;
- Remuneration Committees are suddenly finding themselves dealing with ever-greater below-Board compensation issues;
- Executives are still pushing the envelope in terms of Total Reward outcomes; and
- Climate activism continues to be felt across the board.
Add to this the global geo-political instability in Ukraine and Israel, as well as the likely changing of the local political guard in the UK in 2024, and it may seem that peace and tranquillity have never been so far from our collective global reach.
We certainly are living in interesting times.
We have seen much of this external instability reflected in voting outcomes in 2023. The cost-of-living crisis in the UK in particular and the rapid increase in inflation has led to ever greater calls to consider the needs to the wider workforce alongside executives. It has proved a tricky balance for many, and indeed the share of remuneration reports that received over 20% opposition has continued to rise. It equated to one in five resolutions being contested during the 2023 round of AGMs in FTSE 100 firms. To put that into context, it is a 130% increase since 2022.
The Private Equity industry in particular finds itself in an unusual set of circumstances. Mergers and Acquisitions, the traditional preserve of value creation, have slowed significantly on these shores in recent years. Executives have felt resistance to growth from governing, shareholder and investor bodies and proxy voting agencies. The CMA’s approval of the Microsoft takeover of Activision Blizzard can, in broad terms, be seen as a positive step from both a governance and a growth perspective – but it remains the case that for many firms, the UK is no longer a ‘destination of choice’ when it comes to listings, divestments, mergers and acquisitions.
Similarly, the challenge for UK companies is in how to strike the balance between alleviating the weighty harness around executive pay (particularly the variable component of compensation with investor bodies keen to avoid a return to the times of windfall gains) and striking the right chord with the wider workforce. Matching pension contributions were a start. The malus and clawback proposals put forth in the FRC’s Public Consultation on the Corporate Governance Code have so far been well received by firms on the whole and are paving the way for an operating model that focusses on ex-post risk adjustment above and beyond the traditional measures of risk and liquidity underpins.
The role that climate and ESG is going to play has yet to be determined, despite climate protests at UK AGMs generating lots of press coverage. Even so, we have seen a reduction in the number of climate proposals being requisitioned and a reduction in the number of company proposals for their own climate policies. ESG measures continue to make up a relatively small proportion (usually between 7.5% and 12.5%) of an executive’s scorecard.
We do not expect to see a significant change to market conditions in the next three to six months. Indeed, as a Labour victory looks increasingly likely at the polls in the UK in 2024, there may be even more market upheaval before we start to see any real green shoots of recovery.
That said, executive pay has, on the whole, returned to pre-pandemic levels again, following a few years of compression in 2020 & 2021. The focus for the Remuneration Committee in the next 12 months should be on how to effectively quantify the challenges that it faces and to pay for performance accordingly.
Should you want someone to help you explore your thinking on this issue, please contact Oliver Hampel in the first instance.