MM&K – 50 not out

This year, MM&K celebrates 50 years in business as an independent firm specialising in executive remuneration, performance and remuneration governance.

In that time, we have seen 13 Prime Ministers come or go and endured at least one recession every decade. We have also witnessed and continue to witness, significant changes in executive remuneration, owing to a range of factors, including tax rates, US practice, political and societal pressures and corporate governance. 

In 1974/75, the top rate of tax on earned income was increased from 75% to 83%, where it remained until 1978/79. Margaret Thatcher’s Conservative Government reduced it to 60% in 1979/80, until 1988/89, when a 40% higher rate was adopted. All-change again in 2010/11, when an Additional Rate of 50% was introduced on taxable income over £150,000. The Additional Rate was reduced to 45% (where it remains, for now) in 2023/24.

Among the factors influencing executive pay over the past 50 years, we would give special mention to the following, which remain relevant today.

Tax-advantaged share plans. Tax advantages, for awards of up to 4-times relevant emoluments under approved executive share option and share incentive plans, were included in Finance Act 1972. They were withdrawn by Harold Wilson’s Labour Government in 1973, starting a period of greater focus on all-employee equity participation. Today’s CSOP, EMI, Sharesave and SIP have evolved from those beginnings. 

Share-based remuneration is a valuable tool – for all companies but especially for those in their early stages. The cost of it is borne largely by equity dilution, hence the need for careful design, performance alignment and investor engagement. But dilution need not be synonymous with reduced shareholder value. On the contrary, well-designed share-based incentives, for executives and the wider workforce, add value benefitting all stakeholders. They enable added value to be shared between investors and executives and the workforce, who help create it, thereby aligning their interests.

MM&K has since its inception designed and advised on share-based incentives, approved and unapproved, as part of our full-service advisory offering.

Differential rates of IT and CGT: Historically, the UK has taxed capital at lower rates than income. Excluding gains from residential property (24%) and carried interest (28%) the top rate of CGT is 20%, compared with a top rate of income tax of 45% (plus 2% NIC). 

The differential encourages entrepreneurship and enhances the attractiveness of tax-advantaged employee share plans. Both are essential elements of a productive and growing economy. Output growth on the back of falling interest rates, optimism about increased inward investment to the UK and better than expected news about the economy set the scene for growth and should encourage (measured) risk-taking. We would hope that the recently elected Government will retain differential rates of IT and CGT as part of their programme to build a sustainable, growing economy.

The emergence and growth of the alternative investment sector: This sector, referred to generally here as private equity, has emerged, grown and changed significantly in the past 50 years. MM&K has built a strong practice and reputation advising private equity firms on their remuneration, both for investment and non-investment professionals, including carried interest and co-investment plans. Our advisory work in this area is supported by data collected through our market-leading multi-national PE remuneration surveys, about which our Head of Research and Analysis, Margarita Skripina writes extensively in our newsletters. 

The taxation of carried interest has attracted most attention and will not be given more here, save to say that we are encouraged by the Government’s plan to consult on this subject and the Chancellor’s indication that gains from carry purchased with own funds should continue to be taxed as a capital gain.

Among the most significant changes we have seen in the sector are the:

1. breadth of situations in which PE firms will invest and their lengthening investment horizons; and
2. increased attention on executive remuneration in PE portfolio companies.

MM&K advises extensively on executive remuneration in portfolio companies, both pre- and post-exit (whether a trade sale or IPO). PE firms derive their value from the performance of their portfolio companies. MM&K can call upon the experience of 50 years consulting on executive remuneration structures designed to build value, based on our work within the PE sector and generally.

Remuneration governance: By this, we mean those provisions of the various corporate governance codes that have a bearing on executive remuneration. Here, we focus on two aspects:

1. comply or explain; and 
2. ESG.

MM&K supports a principles-based corporate governance regime, underpinned by comply or explain. We do not support the way that concept has come to be applied, as some clients would say, ‘comply or else’. It has been tripped by the line of least resistance, i.e., it has become easier for investors to look no deeper than compliance with the letter of the relevant code before making their voting decisions; owing partly to the amount of compliance and partly to a lack of engagement, either by issuers or investors.  

We were encouraged by proposed amendments to the Stewardship Code (and hope they will not be lost in the machinery of government) which should go some way to redress the balance of advantage. 

ESG factors have become embedded in executive incentives. But there is a lack of clarity and standardisation about ESG ratings. That might be hard to achieve but, provided comply or explain works, we support the Government’s proposal to introduce a Bill to standardise ESG ratings and to improve transparency about the criteria used to rate companies. For their part, companies should be clear about how their businesses affect ESG factors (particularly the environment and community) and the steps they are able to take to mitigate risk of harm.

Engagement is the key to compliance. As part of our remuneration advisory work, we help clients with their investor engagement programmes. 

Like the subject on which we advise and support our clients, MM&K has evolved over the past 50 years. We look forward to continuing to do so into the future.

For more information or to discuss any points arising from this article, please contact: paul.norris@mm-k.com

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