Ellason lens on… 2023 pay decisions (September year ends)

The 2023 AGM season is fast approaching, with FTSE companies soon to be putting their remuneration reports – and in many cases their remuneration policies – to a shareholder vote. With a recession looming and high inflation causing a ‘cost-of-living crisis’, much of this year’s focus will be on how decisions taken by remuneration committees around Executive Director pay align with the wider workforce context. Alongside the lingering effects of the pandemic, the current economic issues will have been at the top of remuneration committees’ decision-making process throughout the most recent financial year.

In this Lens we review the pay decisions for FY22 and FY23 for those (twenty) FTSE companies with September year ends who have published annual reports thus far, to determine any early trends for this AGM season.

Salary increases for Executive Directors are consistently lower than those for the wider workforce

Almost all companies in our sample have awarded salary increases to their Executive Directors for FY23; the exceptions being either where there is a newly-appointed director or an existing director is soon to be stepping down. This compares to the trend of recent years where we have consistently seen around a quarter of companies award no salary increase to their most senior executives.

Median salary increases have, so far, been marginally higher too – the median for Executive Directors is currently tracking at 4.0%, higher than the 3.0% awarded to CEOs and 3.4% awarded to CFOs for FY22. Reported workforce increases are higher still, with a median reported FY23 increase of 6.0% (upper quartile: 7.0%; lower quartile: 5.0%). The significant majority (around three-quarters) of companies in our sample have pitched at least one of their Executive Director salary increases below the workforce average for the forthcoming year, marking a notable change from recent market practice (where alignment has been the norm). This shift reflects messaging from shareholders and proxy advisers, with the Investment Association, for example, recently encouraging companies to ‘consider additional restraint’ around salary increases and to focus on ‘the retention and motivation of employees below executive level’, many of whom will be disproportionately impacted by the current inflationary environment.

More companies are paying annual bonuses, but the average pay-out remains the same

There has been a further increase in the number of companies landing in the bonus pay-out range for FY22, with all companies in our sample paying a least some annual bonus. Across these companies, the median CEO bonus pay out has increased to 72% of maximum (2021: 60%). Eight companies (40%) have paid lower bonuses than last year, whilst eleven companies (55%) have paid higher bonuses.

However, we expect this trend to moderate as we move through the FY22 reporting period; FY21 saw a notable spike in average annual bonus outcomes for December year-end companies (as compared to historical norms), driven in part by a stronger than expected recovery from the lows of the pandemic and with many committees having set wider performance ranges.

Across our sample, there were just two instances of downwards discretion being applied to annual bonuses this year, with the poor shareholder experience being used to justify the use of this discretion. This is lower than the 33% of these companies who applied downwards discretion in respect of FY21 bonus outcomes.

LTIP vesting is still muted

Of those companies reporting on an LTIP cycle based on performance over periods ending September 2022, c.60% report some vesting, broadly in line with the trend observed last year. The mean LTIP vesting outcome is also broadly in line with last year, at 34% of maximum (median: 20%). Year-on-year changes in LTIP outcomes are fairly mixed, with six companies (32%) reporting a higher vesting outcome in FY22, seven (37%) recording a lower outcome and six (32%) recording the same outcome (typically zero or full vesting).

Continued market uncertainty driven by the war in Ukraine, inflation and increasing interest rates has been the predominant reason for LTIPs not vesting this year. A small number of reports referenced committees having considered using upwards discretion to reflect unforeseen circumstances but, similar to last year, few companies in the sample made upward changes to their formulaic outcomes. Associated British Foods, for example, disclosed having established a framework for applying positive discretion to reflect significant achievements but ended up recording a nil-vesting outcome in light of the experience of wider stakeholders and the decline in share price over the 3-year performance period. ABF have from FY23 moved to a Restricted Share Plan, to reflect the inherent difficulty in setting long-term targets across their diverse sectors.

One notable example of upwards discretion was reported by Topps Tiles, where the impact of Covid-19 was removed from adjusted EPS for incentive purposes. This adjustment resulted in a formulaic vesting outcome of 35% of maximum (cf. 0% had no adjustment been applied), to which the Committee then applied downwards discretion to cap vesting at 25%.

Companies have adopted a variety of approaches to tackle the cost-of-living crisis

A number of institutional investors, including Aviva and Legal & General Investment Management (LGIM), have advocated that employers provide staff on the lowest pay with temporary cost-of-living support, in addition to focussing available salary increase budgets on these individuals.

Six of the twenty companies (30%) in the sample have explicitly disclosed cost-of-living payments to help with high inflation and energy prices, ranging between £750 and £1,500 and typically applied only to a (lower-paid) subset of the workforce. Other companies have opted against one-off payments, instead using tiered salary increases and in some cases an acceleration of the salary review date.

Ellason commentary: Stakeholder alignment has been a focus for shareholders for a number of years, and this year the experience of employees looks set to be a key consideration for investors in determining whether to support remuneration-related resolutions. In recent months there has been clear and consistent messaging around Executive Director salary inflation, and September year-end companies appear to have responded, with workforce salary increases being notably higher than those awarded to senior executives.

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