Ellason lens on… 2022 pay decisions (September year-ends)

The 2022 AGM season is already underway, with a number of FTSE companies holding their shareholder meetings this week and next. In this Ellason lens we highlight emerging trends of note from an analysis of 28 FTSE companies with September year-ends who have so far reported on the 2021 financial year.

Companies have returned to awarding executive salary increases

The majority (76%) of the companies in the sample have returned to awarding salary increases to their Executive Directors for FY22. The median increase is 3.0% for Chief Executives and 3.4% for Finance Directors (where awarded), compared to a median workforce increase of 3.0%.

Nearly half of companies (48%) awarded the same increase to their Chief Executive as to the general workforce, with 24% awarding a higher increase than the workforce average (33% for Finance Directors). Following a period of stagnating salary levels and temporary reductions last year, a sizeable minority of companies have sought to make correctional increases to base salary levels this year, with six companies reporting increases in excess of 10% of salary. Following the Investment Association’s guidance for Remuneration Committees to justify increases to any element of pay, increases at, or above, the workforce rate will continue to attract close scrutiny from shareholders.

Annual bonus pay-outs are on the rise but there continues to be strong pressure on Remuneration Committees to moderate outcomes for the stakeholder context

As the economic situation has started to improve and companies have been able to reflect the likely impact of the pandemic in the target setting for FY21, there has been a significant increase in the number of companies getting into the bonus pay-out range this year. The median bonus outturn for FY21 has bounced back to 62% of maximum, with two-thirds of companies reporting a higher bonus than for FY20. Only 25% of companies report awarding no bonuses (compared to 67% companies for the same period last year).

However, there remains strong pressure on Remuneration Committees to ensure that bonus pay-outs are appropriate in the context of the wider stakeholder experience, and 33% of companies report the use of downwards discretion to reduce the bonus outcomes (either to zero (four companies) or to a lower level (five companies)). Two companies also report deferring the entire bonus payable into shares.

Whilst five September year-end companies took advantage of setting part-year targets for the FY21 bonus, all except one (Topps Tiles) indicate returning to annual target setting for FY22.

LTIP vesting outcomes remain muted, with the pandemic having a significant impact on 2019-2021 performance cycles

Whilst in-year performance has been strong for many, the pandemic continues to have a significant impact on the ability of companies to meet LTIP targets set pre-Covid. LTIP outcomes remain subdued, with a median vesting level of 11% of maximum and nearly half of companies (48%) reporting zero vesting. Only five companies (18%) report vesting at 50% of maximum or higher.

Whilst Committees are expected to justify the formulaic outturn on long-term incentive awards in the context of the broader stakeholder experience and company performance, no company reported its Committee exercising downwards discretion on the vesting outcome. However, two companies reporting using upwards discretion to increase the vesting outcome.

As an example of a company receiving support for applying discretion to the LTIP, at Associated British Foods the vesting outcome was increased from 0% (based on the formulaic assessment) to 40% of maximum following discretionary assessment by the Committee against a framework set at the start of the year. The framework considered performance for the different parts of the business, the successful delivery of the strategy and the wider stakeholder experience, and the Committee used this to determine what they considered to be a ‘fair’ outcome. Shareholders were consulted in advance about the proposed approach and a cap was put in place upfront as to the maximum number of shares that could vest (60% of maximum). Whilst upwards discretion was applied to the LTIP, the Committee exercised downwards discretion in relation to the annual bonus (reducing the pay-out from 97.5% to 52.5% of maximum). The company received 89% shareholder support for its remuneration report at its recent AGM, (which equates to c.75% support by its minority shareholders assuming the 58% controlling shareholder was supportive).

At another company, Britvic, the LTIP vesting outcome was increased from 0% to 33%. The performance condition was based solely on earnings per share, the threshold target for which had not been achieved. In exercising its judgement, the Committee took into account the company’s strong absolute and relative total shareholder return performance over the period, its ‘superior performance’ against the strategic objectives of the business plan and experience of stakeholders, including customers and employees. At the AGM, held on 27th January, only 68% of shareholders supported the DRR.

Ellason commentary: It is no surprise that salary increases appear to be returning to ‘normal’ inflationary levels for FY22, and bonuses are rebounding given the strength of the economic upturn being experienced in some sectors post lockdowns. However, the impact of Covid-19 on LTIP pay-outs will likely continue to be felt for some time, and the evidence from ABF and Britvic indicates the continued sensitivity of the governance community to the application of any discretion to incentive outcomes; even with careful explanation and a disciplined process, the use of discretion can have a material negative impact on voting outcomes at the AGM.

Please do not hesitate to contact any of the Ellason team should you wish to discuss this issue further.