The number of FTSE 100 companies receiving ‘low votes’ (less than 80% in favour) on the annual remuneration report halved in 2020 to 4%, according to a preview of Deloitte’s annual FTSE 100 executive remuneration report. Shareholders have been increasingly supportive of the annual remuneration report over the past two years, with low votes in 2019 at 7.5%, down from 13% in 2018.
2020 saw a quieter shareholder season in general, with median support of 96% votes in favour of the annual remuneration report. This can be attributed to commitments to make significant cuts to contractual pensions for existing executives, and greater use of discretion by remuneration committees to reduce formulaic bonus awards.
The median FTSE 100 CEO package for 2019 remained relatively stable at £3.7m (£3.65m for 20181) following a fall from £4m in 2017. However, 2019 packages are based on estimated values of share awards based on pre-COVID share prices, therefore actual values are expected to fall by up to 10% when re-stated next year.
Since publishing 2019 annual reports, over 50% of FTSE 100 companies have announced pay cuts – typically a temporary reduction in salary – and investors have issued clear guidance that decisions on executive pay in the coming year should reflect the workforce, investor and wider stakeholder experience.
Stephen Cahill, vice chairman at Deloitte, said: “Pensions have been the hot topic of the AGM season, and are an example of the growing investor focus on pay fairness across the entire workforce. While it has been a quieter AGM season, shareholders have demonstrated that they will hit hard where companies fall foul of expectations in this area. In the year ahead, executive pay will be under intense scrutiny to ensure that executives are not insulated from the wider economic and social impact of COVID-19.”
Over the last five years, there has been a gradual decline in the level of annual bonus pay-outs for executive directors – a median of 68% of maximum in 2019 compared to 78% of maximum in 2015. Remuneration committees are increasingly expected to use judgement and discretion to reduce formulaic bonuses, in the context of macroeconomic and financial uncertainty.
Under long-term incentive plans, vesting levels – the extent to which performance conditions are achieved – were slightly higher than in recent years, with a median pay out of 63% of the maximum award. These awards were typically based on three year performance from 2017 to 2019 and under the majority of plans no shares will be released to executives for a further two years. However, a significant number of ‘in flight’ long-term incentive awards are unlikely to pay-out in the future due to performance conditions set pre-COVID-19.
Cahill added: “Many remuneration committees face a tough year ahead and will be expected to use judgement and discretion to ensure that executive pay reflects the wider investor and workforce experience.